Effects of Low Oil Price in Gulf Countries - Research Proposal Example

• ABSTRACT

Since the year 1900s, the world has been experiencing an increase in the consumption of oil. Therefore it is acceptable globally that the consumption of oil is a crucial aspect to the growth of the global economy. It is true that the gulf countries that incorporate Saudi Arabia, Bahrain, Qatar, UAE, Oman as well as Kuwait produce approximately one third of the world oil. The gulf countries possess one third of the oil reserves that exists globally. In the year 2014, the gulf countries commenced experiencing some decline in the prices of their crude oil.

There was a steady fall in the prices of crude oil from approximately $116 per barrel to approximately $45 per barrel. This sharp decline of oil prices was experienced in the year 2015. A fall of world oil demand, new policies as well as objectives of OPEC, increment in the production of the U.S oil and a fall in the concerns of the geopolitics led to the decline of the oil prices. Due to the fall of oil prices, the gulf countries have highly struggled to maintain their standards of economy and also stabilize their politics. The purpose of this research is to determine the effects of reduction of the prices of oil on policy making and media in the region of gulf. The rate at which the effect of the reduction of the oil prices will be determined by the depth of the fall of the oil prices and the period it takes. Also the research was to determine the causes of the decline of the price of the oil.

Keyword

• OPEC- is well known as the Organization of the Petroleum Exporting Countries.
• WMP-is known as the World Market Price, a department that controls the prices of the global market.
• GDP-is referred to Gross Domestic Product that measures the revenue generated within a nation.
• Gulf countries- these are nations that are recognized globally with their high rate oil production. They incorporate nations such as Qatar, Bahrain, Oman, Kuwait, UAE and Saudi Arabia.
• UAE- is the Unite Arab Emirates.
• Current acc. Bal- means the current account balance.
• Crude oil- is the petroleum product that is unrefined and occur naturally composed of deposits of hydrocarbon and other materials that are organic.

• INTRODUCTION
• Background

Oil or rather petroleum is among the most utilized fossil fuels globally since it is a core combustion aspect that machines and vehicles utilize to be powered. 4000 million tons were estimated to be utilized globally in the year 2015. This consumption is enhanced by the extreme utilization of the oil as people heavily rely on the automobiles for transportation purposes. The generation of variety of households and goods from the industries utilize the products that are oil based as input units. It is evident that whenever the GDP of the world decreases, there also exists a decrease in the prices of oil. The vice versa is also true.

A drop in the prices of oil lowers the living cost in the gulf countries. The same drop in the oil price has enhanced the revenues or rather incomes for the customers who reside in the nations where decline in the prices was among the nation’s policies (Onour, 2007, p. 182). Firms from the gulf countries that utilize the products of oil in their manufacturing process have highly benefited due to the adequate inputs that are of low prices. This implies that these firms will produce goods at affordable prices due to the lowered marginal costs of the firms. The channel of demand has a critical role in the aspect of decline in the prices of oil. The channel of demand of oil relies greatly on the rate of real income of the concerned nations.

OPEC as well as the non OPEC suppliers of the crude oil are the two main categories that are recognized globally (Fayyad et al. 2011, p. 65). The gulf countries are categorized under OPEC. OPEC is well known as the Organization of the Petroleum Exporting Countries. This is an organization that is permanent and at the same time intergovernmental that incorporate the nations of gulf and other nations. Vienna is a state found in Austria and also is the headquarters of the organization. The main reason for the establishment of this organization was to unify and coordinate policies concerning the oil among the nations that are the members of this organization. By coordinating the policies, then a steady flow of revenue to the countries producing oil is enhanced. Also a regular, economic and efficient supply of oil is guaranteed to the countries that are the consumers. Individuals and companies that are investing in the field are also guaranteed a return that is fair and friendly. However due to the change of policies governing the OPEC organization, there was a decline in the prices of oil.

• Aims of the study

The aims of this research include:

• To identify the effects of reduction of the prices of oil on policy making and media in the region of gulf.
• To determine the factors that have led to the decline of prices of oil.
• Method used

Information was collected from open sources such as the academic journals and reports on oil sectors. This was the methodology that was used in this research. Also the use of country reports, current and historical media stories as well as the experts concerned in the sector of energy were very helpful in the completion of this research. This method of data collection provided relevant information that can be concealed by the written research and also it gave room to clarification as there existed the extension of the data. After the collection of the data from the various sources, it was followed by an analysis and development of an analytical framework.

• The outline

The first chapter provided the study’s overview as it outlined the background, the objectives of the study and also the methods used. The second chapter outlined the literature review. Chapter three is the methodology. The forth chapter provides the findings that are related to the effects of low oil prices on policy making and media in the region of gulf. Also the causes of reduction of oil prices are discussed in this chapter.

• LITERATURE REVIEW
• Introduction

The year 2014 was the year that the countries of gulf experienced a decline in the prices of oil that was at its lowest point. The drop in the prices affects the economy of the gulf country and the world as a whole. The countries that are depicted as the consumers of the oil benefit highly with the low prices of oil (Naufal et al. 2009, p. 191). Gasoline in the consumer nations has been cheaper as compared to other years. Consequently the gulf countries that are well recognized as the leading oil producers and these countries are reliant on selling the oil have being impacted the drop of prices of oil.

World market price well known as the WMP department controls the prices of the market. It is true that the effect of the decline of the prices of oil varies from one nation producer to another nation producer. The fact remains that due to the gulf nations depending on the incomes from the sales of oil to cater for their fiscal budgets, they have being affected economically. The low oil prices destabilized the gulf countries both politically and economically (Basher et al. 2013, p. 435). Also this destabilized economy can lead to crisis concerning security that in return affect the nation’s world interests. It is true that some other countries have already developed crisis in the process of confronting the turbulence of politics and economic woes due to the current decline in the price environment of oil.

• UAE, Oman and Bahrain resilient to lower prices of oil

The economies of these three gulf nations are highly diversifies so as to make them resilient to the drop of the prices of oil. Approximately 26 percent of these nations GDP is obtained from the revenues of the hydrocarbon. Also the sale of hydrocarbon accounts for approximately 22 percent of these nations’ total revenue obtained from export. The sectors that are private and non-oil have greatly stabilized themselves as they are enhanced by the demand that is domestic as well as the tourism sectors (Gately, 2001, p. 33). This is greatly witnessed in UAE. The UAE Airport in the initial quarter of 2016 experienced a shift in passenger traffic as the international airport shifted from 8 percent to approximately 20 million. In this same line, the tourist influx is generally expected to develop more.

The demand that is domestic is accelerated by the retail sales that are so powerful as well as the high confidence level. The gulf retail sales that has grown from approximately 9 percent in the year 2015 are expected to grow higher. This is true since there is the existence of an increase in the number of tourists in the gulf region. In the case of UAE, burgeoning is its real estate market. This is evident through the investment that is done by the foreigners and also the wealth accumulated by the neighboring nation well known as the Abu Dhabi. Below is a macro indicator for UAE from a source known as the Official Statistics, IMF and BMI.

2014

2015

2016

GDP (%)

4.6%

4.0%

3.8%

Current acc. Bal. (1)

12.1%

5.3%

7.2%

Budget balance (1)

4.4%

-2.0%

-1.9%

Government debt (1)

12.1%

14.7%

15.1%

• Saudi Arabia, Kuwait and Qatar speeding up the diversification process

These three gulf countries are speeding up the process of diversification so as to act as an immediate alternative of low prices of oil. This enhances the growth of the economy for these three countries. Despite the fact that these countries obtain approximately 79 percent of their revenue due to exports and approximately 86 percent of their budget revenues from the sales of oil, they also need to accelerate their process of diversification (Atalay et al. 2016, p. 214). Diversification is crucial since it will assist the countries to stabilize further their economic and political sectors. They are adopting the criteria of their government expenditure directed to the fuelling of the private sectors. This is the most critical factors or rather drivers of enhancing the growth of the economy. The governments for these three countries are focused in developing both transportation and communication infrastructures, utilities, energy as well as housing.

In the year 2015, the General Investment Authority of Saudi Arabia stated the unification plan by the Kingdom of investing across the four factors. They incorporate the infrastructure, utilities, energy and also housing. Also these three gulf countries have concentrated in developing the mining sector, education to promote the nations’ competitiveness, energy sector being integrated and also promoting tourism (Yamani, 1991, p. 49). The healthcare has being put into consideration. In the nation of Saudi Arabia, the government has decided to enhance the power of purchase or rather the power of consumer spending by making available a bonus salary that is of two months. Electricity is also considered in these gulf countries. Therefore these countries objectives is to boost consumption power, enhance the sales of retails and also somehow compensate the effect of the declined prices of oil on the general income. Below is the macro indicators of Saudi Arabia from a source known as the Official Statistics, IMF and BMI.

2014

2015

2016

GDP (%)

3.5%

2.5%

3.0%

Current acc. Bal. (1)

14.1%

-1.0%

3.7%

Budget balance (1)

-2.3%

-15.0%

-9.0%

Government debt (1)

1.6%

1.8%

1.7%

• The current cash situation

Kuwait, Saudi Arabia, Oman, United Arab Emirates well known as the UAE as well as the Qatar are the large gulf countries that produce the hydrocarbons. These countries have witnessed a slight fiscal surpluses in early 2016 due to the slight increase of the prices of oil though the prices are still below the standard measure (Said, 2014, p. 8). It is only Bahrain that has witnessed a slight deficit the starting of this year. The IMF approximates that the break-even is still on top of the prices of oil for gulf countries such as the Oman, Bahrain, the UAE and Saudi Arabia. The current oil prices for gulf countries such as Qatar and also Kuwait touch the break-even line. Below is the break-even prices of oil for the countries of gulf from a source known as the IMF.

• METHODOLOGY

This is the section that focuses on the methods of research and the theoretical framework that was applied in this research. Collecting information from open sources such as the academic journals and reports on oil sectors was the methodology that was used in this research (Archibald et al. 2015, p. 24). Also the use of country reports, current and historical media stories as well as the experts concerned in the sector of energy were very helpful in the completion of this research. After the collection of the data from the various sources, analysis was done and then an analytical framework was developed. This type of study is basically qualitative. However quantitative studies supplement this research. The research focused on the effects of low oil prices as well as the factors that encourage the low prices. The conditions and indicators were formulated with respect to the findings from the historical concept of the gulf countries. The findings were based on the trends that were recurring. The recurring trends on main effects of low prices of oil in the gulf countries formulated the findings.

This project was conducted within a period of three months. This time was enough for the collection of the relevant information and an accurate analysis as well as the findings. The research was divided into two major parts that is, to examine the causes of low prices of oil and to determine the effects of low prices of oil. The gulf countries were utilized to examine the effects of the low prices of oil and their causes. The research analyzed both the contemporary and historical cases of the gulf nations. The research developed the findings since there existed the recurring of this findings in both the present and past environment of the low prices of oil.

Also the research conceptualized some of the findings. The researcher for the case study examined deeply the whole season of low prices of oil and also focused on the six gulf nations recognized by the world as the best oil producers. The six gulf nations were examined so as to extract the nature that was chronicled of the specific conditions that led to objectives of this research. The research acknowledged that a drop in the prices of oil leads to a decline in the overall GDP. Also an increase in the prices of oil leads to an increment in the overall GDP. Through the research, an agreement was reached that reduction of the prices of oil affects greatly the decisions or rather the policy making process of a nation.

• FINDINGS
• Introduction

It was found that a decline in the price of oil result in a decrease in the general GDP. The increase in the oil price increases the general GDP. A fall of world oil demand, new policies as well as objectives of OPEC, increment in the production of the U.S oil and a fall in the concerns of the geopolitics led to the decline of the oil prices as per the analysis the this research. Due to the fall of oil prices, the gulf countries have highly struggled to maintain their standards of economy and also stabilize their politics.

A fall of world oil demand led to the decline of the prices of oil. At that time the oil prices were high so a good number of people opted to utilize renewable sources of power such as the sunlight and charcoal. This move forced the gulf nations to lower the prices so as attract the demand of world. New objectives for the organization of OPEC whose role was to oversee the production of the global crude oil (Iledare et al. 2004, p. 107). The main reason for the establishment of this organization was to unify and coordinate policies concerning the oil among the nations that are the members of this organization. For it to unify the world price and also to increase the demand, it had to lower the prices of the oil. The increment in the production of the U.S oil led to a stiff competition that resulted into low prices of oil by the oil production nations so as to maintain their customers. At long last, the stiff competition led to the decline of the prices of oil. A fall in the concerns of the geopolitics in the gulf nations resulted in the fall of prices of oil.

• Petrol and gas economic

It was found that petrol and gas influences highly the global economic. The petrol and gas are utilized in the industries to manufacture goods. These goods are later on sold as finished products hence generating income to the concerned nations. Also the gulf nations’ sale the petrol and gas products to other nations. This develops healthy trade among the trading nations. The selling of the petrol and gas generates income to gulf nations. The impact of the generated revenue is not only felt by the gulf nations but the world as a whole. It was found that the low prices of oil in the gulf nation result in higher spending since the oil becomes affordable.

The spending that is higher enhances the global growth. The rate of the impact to be felt highly relies on the underlying factors or rather drivers for the decline of the oil prices. The policy responses also attribute to the rate of impact to be felt. It was also found from the analysis that the losses and gains of the price of the oil across the consumer and the producer always sums up to zero. Despite the sum being zero, the net impact on the world remains to be positive. This is true since the low oil prices attracts more consumers and high rate of supply of oil as an input will be recorded hence enhancing the growth of the global economy.

• Effects of low oil price on the policy making and media

Policy making always depends on certain aspects like the impact of trade terms, external and fiscal vulnerability as well as the low oil price shock persistence. After the low price of oil affected the political and economic stability, the nations of the gulf had to come up with policies so as to mitigate the low oil price effects. This implies that the exporters of the oil need to have some fiscal adjustments. The policies are adjusted in a low pace depending on the type of buffers. Therefore policies cannot be applied well and if applied, they have to operate in a low manner due to low oil profits. They policies are handled carefully such that they cannot trigger national crisis. During this time, the national media operates under sub-standards conditions since the government utilized its expenditure on maintaining the standard of the nation. Therefore media is not considered at that particular time.

• Employing sector

Due to the low oil price, the gulf nations generate less income to develop more employment opportunities. Also some people lose jobs at the oil exploitation sites due to less revenue generated. At this moment, the employing sector faces hard times. It was found that the national revenue usually is directed to the maintenance of the national standards hence less monetary available to cater for full employment.

• Electricity consumption and prices

Low prices of oil calls for low prices of electricity. This implies that more consumption of electricity is recorded as compared to the past. Oil is utilized in the production of electricity. Therefore the existence of low price of oil will imply the less expensive input is utilized. Consequently the output will be also less expensive. Electricity becomes now affordable to a good number of residents hence high consumption of electricity is recorded. A critical reform was to transform the available subsidies into electricity or rather energy to be utilized domestically. Due to the low oil prices, then prices for energy are also low globally. This calls for a large scale over utilization of the energy. Below is an estimated gulf energy subsidies as a percentage of GDP from a source known as the IMF.

• Price effects on social aspect

It was found that low price of oil leads to a higher purchase of the oil. Declined oil price implies that the oil is readily available and affordable to a good number of people. In other words, people spend high on the oil consumption because it is cheap. Therefore people become socially spenders when oil consumption is concerned. The society also becomes negatively affected as the rate of unemployment increases due to low price of oil. The standards of living also declines as low oil prices leads to adverse effects on the nation’s economy.

Contribution to knowledge

A slight increase in the prices of oil leads to an increase in the cost of renewable energy. Renewable sources such as water, wind and so on depends highly on the provision of oil to generate power or rather energy such as electricity. This implies that an increase in the price of oil will automatically increase the cost of renewable energy. For instance, some years back the gulf countries particularly Kuwait experienced a slight increase of electricity consumption per unit. This is evident by also a slight increase of prices in the production of oil and since the provision of electricity depends highly on the prices of oil, the cost per unit consumption had to increase. Therefore the reverse is also true in that a decrease in the oil prices will automatically lower the cost of renewable energy per unit. Consequently lower cost of electricity per unit leads to high consumption by the people and high cost of electricity or rather renewable energy leads to people consuming it at a lower rate.