How to face fears of falling oil prices

The price of Brent crude fell yesterday below $72 a barrel, dragging down the GCC stock markets. Oil experts predicted that the prices would drop to below $60 a barrel in the coming few months.

It is normal to feel a sudden sense of uneasiness. Everyone will ask: What will our situation be like when we practically rely almost exclusively on oil revenues?

I will not be tackling solutions of the medium or long-term nature or any other economic or state-level administrative fixes; what is important now is to deal with the market and people in a civilized manner, rather than leave them in the dark where fear dictates their choices as we saw happen to the stock market that was severely damaged.

Need for transparency

Why aren’t officials being transparent and honest? Why aren’t they talking more about this issue and what could happen in the next few days? What does the government intend to do? Is a serious crisis looming on the horizon due to the drop in oil revenues? What would that mean for the more than 2 million employees, the 10 million family members who rely on them, and the 10 million on state incomes, which are in fact also based on oil revenues? What about the 10 million people earning their living from their employers?

What would happen if the oil price drops below $60, $50 or even $30 a barrel?

Why aren’t we hearing what we ought to be hearing, even if it is bad news? We are the ones who will have to cope with the final result of the oil market. Things should be straightforward and transparent. What is the estimated price of the oil barrel next year? This should not be confidential as the truth will help the government and not vice versa. What are the financial capabilities of the government in light of the deficit of its foreign reserves and savings? These should not be kept a secret. Everybody wants to get their house in order: owners of companies as well as heads of households, and not just the government.

Ambiguity not helping

In my opinion, the inherited policy of ambiguity is not justified, because even if it was not harmful in days of prosperity, it will cause the spread of rumors in times of distress, which, as well as fear, will lead the market to the worst performances.
Also, in my opinion the stock market reactions, despite being overstated, reveal in fact the mental state of the people: fear in the light of ambiguity. Over the last few days, the market was suffering from diarrhea, for fear that the price would drop even more and the government would start tightening the belt.

In fact, the government’s situation today is perhaps less critical than what it was during previous crises: The price of an oil barrel dropped to $12 in 1986. The situation remained dire until the 1990s when it witnessed limited improvement but ended dropping back to the same price in 1998. These were difficult years that were overcome after the unprecedented boom in oil prices. We seem to be on the verge of a new chapter and another waning chart.

Here, we assume that the government will tell the people that a storm is looming on the horizon, explaining its dimensions and solutions. The government’s budget in times of prosperity was almost more than $250 billion. The worst-case scenario would be for the government to lose two-thirds of the budget income. It would still be able to operate thanks to the savings it accumulated over the past few years for perhaps five to 10 years. If my estimation is accurate then the fear is unjustified.

If the government can finance from its foreign sovereign funds half of its annual budget every year for the next five years, and maybe even more, it would have then enough time to get its act together.

Abdulrahman al-Rashed

 

If the government can finance from its foreign sovereign funds half of its annual budget every year for the next five years, and maybe even more, it would have then enough time to get its act together and reconsider its avoidable spending policies, without having to modify its support for key commodities, the salaries of its employees or its planned development projects.

The worst-case scenario would be for the government to lose two-thirds of the budget income.

Abdulrahman al-Rashed

 

Nevertheless, it can cut its subsidies on barley and dates and gradually raise the price of gasoline. Most importantly, it can improve the situation of the market; the amount of money stacked in banks is massive and is not used for internal investments; the people’s money alone is capable of improving the overall economic situation. But before anything else, we need to insist on openness because we are headed to a situation that may not be as bad as we might think. Perhaps the situation would not require these measures, which would be the product of fear leading to negative erroneous sentiment.

This article was first published in Asharq al-Awsat on Friday, Nov. 28, 2014.

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Abdulrahman al-Rashed is the former General Manager of Al Arabiya News Channel. A veteran and internationally acclaimed journalist, he is a former editor-in-chief of the London-based leading Arab daily Asharq al-Awsat, where he still regularly writes a political column. He has also served as the editor of Asharq al-Awsat’s sister publication, al-Majalla. Throughout his career, Rashed has interviewed several world leaders, with his articles garnering worldwide recognition, and he has successfully led Al Arabiya to the highly regarded, thriving and influential position it is in today.

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Last Update: 10:07 KSA 13:07 - GMT 10:07
Disclaimer: Views expressed by writers in this section are their own and do not reflect Al Arabiya English's point-of-view.
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