If all of the GCC countries were to achieve the diversification levels of Dubai, the GCC could potentially become a $2.7 trillion economic bloc, behind only China among the BRIC countries, according to Goldman Sachs report on EMEA emerging markets.
“There are significant fuel subsidies in the domestic GCC markets which may steer resources towards more capital-intensive industries and as an unintended consequence reduce employment opportunity e.g. Saudi Arabia, by subsidizing the price of natural gas to US$0.75/mmBTU (among the lowest in the world), has become the largest player in the region in the capital-intensive petrochemical sector,” the report said.
Talking about the oil and gas sector’s role in the GDP of the region it said the oil and gas sector continues to be a significant component of the GCC GDP, ranging from 29% in Bahrain to 60% for Kuwait. Eight of the 12 Organization of Petroleum Exporting Countries (OPEC) members come from the MENA region: four of the six GCC countries (Saudi Arabia, UAE, Kuwait and Qatar), as well as Algeria, Iran, Iraq and Libya, are members of OPEC. Saudi Arabia, UAE and Kuwait are also among the few countries that have some spare oil capacity.
According to OPEC, the organization members control 81% of global oil reserves, highlighting that the evolution of the energy sector and its prices will continue to be a key driver of growth for the entire region.
“Current oil windfall more directed to infrastructure spending than sovereign wealth funds accumulation The GCC has historically directed oil windfall gains to its sovereign wealth funds (SWF) and to the development of the non-oil sector. The aggregated SWF assets under management currently exceed 100% of regional GDP. With the onset of regional political unrest, the GCC states have directed greater spending domestically. We estimate there are currently $2 trillion worth of ongoing planned projects spread across the infrastructure, real estate, utilities and energy sectors ($500billion for energy), in addition to a number of social measures announced. This additional spending is forecast by the World Bank to push the breakeven oil price (the oil price required for countries to reach a fiscal balance) for the GCC countries to US$72/barrel in 2011 from US$57/barrel in 2009, still below current prices. The new spending will be going towards current expenditure (social security) as well as domestic investment which may leaves fewer funds available for the SWF and pose some upside risk to inflation. The reconstruction of and large investments in the energy sector in Iraq (with the country aiming to increase oil production from the current 3mboe/day to 12mboe/day over the medium term, matching the current capacity of Saudi Arabia) and Qatar winning the 2022 World Cup bid (for which the country plans to invest $60 billion over the next 10 years) are also noteworthy. GS estimates an oil price of $120/bbl and $130/bbl in 2012 and 2013, respectively, which in our view represents upside risks to the IMF’s GCC GDP estimate, which assumes an oil price of $103 and $100 for 2012 and 2013, respectively,” the report added.