Oil prices have been oscillating in the last 50 years. But the current drop in oil prices seems to be the worst crisis around the world today, especially for oil-producing countries such as Kuwait, which depends on oil as the main source of income. It makes us all wonder if the oil era is about to end. What should be the solutions or alternatives to confront this issue and its possible implications?
Although it is not the first decline in oil prices – the world saw several declines in the ’80s and ’90s – today’s oil crisis does not look transient or simple. We in Kuwait are confronting a new reality that we have not seen before that requires new government measures and policies to avoid serious economic and social consequences in the future.
The oil crisis of today is different from the past for political and economic reasons, especially since the price of oil today is subject to the variables of economics and political considerations and market demand, so it is not surprising to witness a continuing decline in oil prices this year.
The decline this time may continue for a longer period due to a couple of reasons, such as the regression of the global economy, presence of US shale oil and the shift from total reliance on oil as a sole source of income to alternative energies to increase the state’s income, and this is evident in new Gulf states’ policies such as in Saudi Arabia and the United Arab Emirates. I believe these measures are great lessons to be learned by us in Kuwait.
The obvious tensions in relations between Saudi Arabia and Iran, two of the largest oil producers, will push prices to further declines. Some may wonder why we feel today we are facing a real crisis, especially as the drop in oil prices is not new. The increase in population in Kuwait means the need for more services related to infrastructure as well as the expansion of public spending, and these are main reasons for concern.
The Economic Development Committee of the Supreme Council for Planning in Kuwait officially announced in January that estimated income in the 2016/2017 budget amounted to KD 7.4 billion, a decline of KD 4.8 billion from the estimated revenue in the 2015/2016 budget. Also, estimated oil revenues declined in the 2017/2016 budget by 46.3 percent. The estimated budget deficit in 2017/2016 reached KD 12.2 billion.
It also stated that the overall revenues estimated in 2016/2017 budget only cover about 71.2 percent of total spending on salaries, which means that the state needs to deduct funds from the general reserve to spend on salaries. Also, costs of oil production are rising steadily in light of a fall in global demand for oil. The state is trying to deal with a new phase in the state economy. It is normal to feel concerned about the economy and its social repercussions, especially with regards to the problems of unemployment, education, health and housing. These problems are affecting people’s daily lives and needs.
The situation is not gloomy and I believe there are some options. One tough solution is cuts in incomes, raising prices of goods and services including fuel, and this is what just happened in Kuwait. There have been some angry responses by the public. But people here have been accustomed to cheap prices for many years and I agree with the increase because it is justified and reasonable. Fuel prices had been the cheapest in the Gulf.
The oil market is passing through large transformations, and volatility in prices is expected. There is no doubt that reform measures are essential. The oil era may not be over yet, but the era of only relying on oil should be.
By Muna Al-Fuzai