The 2016 oil crisis

The price of oil has dropped significantly during the past few weeks. It went down to below $30 a barrel very quickly, and this is surely terrifying for us all. Now the question is how to react, and what effect will lower oil prices have in a highly volatile region like the Middle East? Can Gulf countries be impacted by this sharp decline?

Most OPEC countries have set their current financial budgets on the basis of oil at a minimum of $80 a barrel, while some of them have set the price at more than $100 in their budgets. It seems that the recent decline in world oil prices has created a state of confusion, which is normal. Many Middle East countries lack future strategies for the post-oil era or totally rely on oil and are not even prepared for lower demand and not necessarily the end of the oil era.

Some economists believe that Gulf states may not experience financial problems in the short term because of good financial assets that could be sold to cover the deficit in the budget. However, a continued decline in oil prices in the long term may reduce the typical government support to some key sectors such as healthcare, education and housing, which may affect the standard of living in these countries and thus the needs of the people.

The most important internal political challenges that are likely to face the governments of oil-producing countries that have created revenue systems dependent on oil are to meet their populations’ needs and lifestyles, such as the large salaries and benefits that everyone believes is the country’s duty to provide no matter the status of oil. For example, a hike now in fuel prices does not seemed justified to some people, even if is necessary and required .

It is unlikely that the current low price of oil will lead to a destabilization of the systems, especially in the Gulf states, that have relatively small populations and large financial reserves, and most reports indicate them to be the least affected. This is good to know.

Today, it is strange that oil prices are falling despite the conditions of security and threats in the Middle East, when usually oil prices rise due to disorder. What we see today is just the opposite, as Iraq and Libya, two main producers of oil, are confronting internal conflicts, but oil prices are collapsing at the same time.

Iraqi forces have been fighting a bloody military war against IS for several months now, which costs the Iraqi treasury a large financial burden. This is really a crisis that threatens the Middle East, especially Iraq’s neighbors. The positive thing about this crisis is that the difficult conditions experienced by all oil-exporting countries may lead to a reduction of tensions between them in order to support the price of oil and raise the prices, so all international parties should sit down at the negotiating table to discuss their issues. Any agreement they reach would support to reduce geopolitical tensions and sectarianism in the Middle East.

A rally in oil prices needs clear international work and a lot of seriousness. Perhaps holding a mini-summit in Egypt, for example, to study the outcomes on the short and long term can be a good strategy. Egypt could be the right location to host such an initiative between the concerned parties.

This is a major crisis, but it can be temporary and controlled.

By Muna Al-Fuzai
[email protected]

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