The Impact of the Fall of Oil Prices in Qatar - Essay Example

The Impact of the fall of oil Prices on GDP Growth Rate and Fiscal Policy in Qatar Insert (s) Submission Abstract In the last three decades, the last fall in oil price (2014) was the one most significant out of them all. In countries using oil as a major source of production, their GDP halved. For the case of Qatar the situation is slightly different. This paper seeks to find out the effect of the latest price fall to the GDP of Qatar and its fiscal policy. An extensive literature is done to realize the background causes of drop in oil prices and impacts of the same to economies. Some of the major effects revealed in the study include reduced, fiscal revenue, lower hydrocarbon experts and attempts by the government to reduce its overreliance on hydrocarbon sector by diversifying its economy. However, the impact of the falling prices of oil on the GDP growth rate and fiscal policy of Qatar has been minimal due to the conservative budgeting system used in Qatar. The Impact of the fall of oil Prices on GDP Growth Rate and Fiscal Policy in Qatar Introduction  The price of oil is one of the critical influencers of the GDP growth rate and Fiscal policy of in many of the oil rich Middle Eastern countries. In Qatar, oil currently accounts for up to 70% of the government revenues. The fall in oil prices in late 2014 was the most significant in the last thirty years. Out of the last major drops in the last three decades, the fall in 1984 was the most similar to the one in 2014. Before the oil drop in 1980’s the 1970’s were coupled with major technological developments which shifted ever reliance on oil as a source of fuel. The drop in price was 61% within six months (Erbil, 2011, p. 12). According to many experts, a fall in oil drop prices is caused by change in demand and supply of the commodity, changes in OPEC objectives, geopolitical concerns in oil producing areas and appreciation in the US dollar. On the other hand, the growth of non oil sector was experienced by 6.3% and is expected to grow to about 7% this year (Berument, 2014, p. 149). The fall in prices has caused contractionary fiscal policy measures. Fiscal break even prices go to a maximum of $184 and a minimum of $50 (Lopez-Murphy & Villafuerte, 2010, p. 20). This pressure has made Qatar to make changes in its fiscal policy. Research Objectives and Research Questions The primary objective of the current research is to find out the effect of the latest price fall to the GDP of Qatar and its fiscal policy. The main research questions include: i. What are the potential causes of the current sharp drop in oil prices? ii. What has been the cycle of oil prices prior to the recent drop? iii. How has the falling oil prices impacted on the GDP Growth Rate as well as the fiscal policy of the State of Qatar? Literature review Cycle of oil price before the drop In the last three decades oil prices have not remained constant but the drops in those years have not been as significant as the one in 2014. However there have been other five major drops since 1984 which led to a thirty per cent fall in oil prices. The fall in 2013 coincided with global economic recession, change in OPEC policy and an increase in oil supply. Major oil prices occurred between 1985 and 1986, 1990 and 2001, 1997 and 1998 and before the one in 2014 is the 2007 to 2009 (Devarajan, 2015, p. 230). The fall in oil price which was experienced in the latter months of 2014 is slightly similar to the one in 1985 to 1986. Before the 1985 to 1986 episode oil prices were high in the 1970s and technological developments were on the rise. With improve technology in the 1980’s oil consumption became less and less and alternative sources of energy were being discovered and utilized. During this time Saudi Arabia changed its policy on its market share specifically in December 1985. Price of oil fell by 61% reflecting from $24.68 to $9.62 per barrel within a span of six months (Allegret, 2014, p. 200). Oil prices remained lower for more than ten years after that episode. Potential Causes of the sharp drop in oil prices Oil has a long shelf life compared to other types of commodities and is expected to be less affected by demand and supply but this has not always been the case. Broadcasted new in televisions and other media sometimes give a shock to oil prices and they may fall before an actual occasion occurs (Erbil, 2011, p. 15). For example in 2014, OPEC announced possible geopolitical conflicts in oil producing regions. It was also predicted that this would affect the rise of US dollar in these regions. This information was part of the reason for the fall in oil price. Intensity of oil GDP was reported to have halved due to increased efficiency in energy and reduction in oil consumption. Global oil markets have had greater supply than anticipated and a demand lower than expected. From 2011 to 2014 production of oil has been surprisingly as high as 0.9 million barrels a day (Erbil, 2011, p. 12). During the same time, demand in oil has fallen due to economic recession coupled with high cost of living. OPEC objectives changes have played a big role in oil prices. Saudi Arabia has been seen as the country which changes the direction of oil prices in the world. Saudi Arabia has a high production and can change the market structure by using their surplus production. In 2014 OPEC maintained their supply while Saudi Arabia changed their policy to market share maintenance. Macroeconomic impacts to Qatar Qatar is a gas producing country and this fall in oil price was expected to affect its export as a source of GDP. Instead the impact on the economy was not significant. Quatdr decided to grow their non oil sectors further, to prevent over reliance on oil. The non oil sector was only slightly affected by the lower hydrocarbon. The growth of the non oil sector in 2014 was 6.3% and a rise even higher is expected this year (Berument, 2014, p. 149). Industries contributing to the growth are tourism, construction, business services, agriculture, manufacturing among others. Oil exporting countries such as Qatar could have an output reduction between 0.8-2.5percent in 2015 due to the average 10% reduction in oil prices. Fiscal revenue losses are likely to compound in countries like Qatar. Fiscal break even prices range between $50 and $184. In Qatar the fiscal revenue pressure is being reduced through large funding of reserve assets (Lopez-Murphy & Villafuerte, 2010, p. 20). Qatar being an oil exporter was affected in its GDP when the fall in oil prices begun but has latter developed methods to balance the economy (Devarajan, 2015, p. 230). , As Qatar continues to increase its spending on domestic real estate and infrastructural projects, there have been growing concerns to reduce the gulf nation’s overall fiscal expenditure due to falling oil prices. Consequently, the country has begun shifting its attention to non oil industries such as tourism, agriculture, financial business among others to reduce over reliance on oil. However, although petroleum and natural gas accounts for a relatively high percentage of the total government revenue, the current falling oil prices have not significantly impacted on the country’s GDP and overall fiscal expenditure. According tom many experts, this is largely attributed to the cushion provided by the current conservative system of budget that is operated by Qatar. For example, unlike most of the hydrocarbon economies in the region, the country normally takes into consideration the oil prices when making is annual budget. This has often resulted in revenues coming into the country much higher than normally predicted, thereby cushioning the country’s economy against variations in oil prices. Nevertheless, adjustments in the macroeconomics of Qatar have been a necessary step and major changes in financial policies are in order. Fig 1: The Impact of the falling oil prices on the Fiscal Spending in Qatar Research Design (Methods and Methodology) The research primarily used a case study approach to investigate the potential impact of the fall of oil prices on GDP growth rate and fiscal policy in Qatar. Case study methodology was particularly chosen as it offers the best tools to effectively study fiscal issues. In addition, the research approach provided a god choice for analyzing the various why and how research questions. The first part of the research entailed carrying out an extensive literature review in order to provide the background causes of drop in oil prices and impacts of the same to economies. A comparison has been used to the 1980’s which is the closest related price drop to the one in 2015. Qatar has been used as the centre for the research to answer the research question. On the other hand, interviews, focus groups and questionnaires were used to collect secondary data from a selected team of participants mainly comprising of economic experts, oil dealers and fiscal policy analysts. The findings of the case study were then statistically analyzed in order to provide important insights regarding the topic of the study. Discussion The results of the study reveals that the impact of the falling prices of oil on the GDP growth rate and fiscal policy of Qatar has been minimal since late 2014 when the global oil prices began to decline. First and foremost, the findings of the literature review suggest that although oil accounts for up to70% of the total government revenue, conservative system of budget that is operated by Qatar has provided a safe cushion for the economy of the gulf nation against the current falling oil prices. Many authors particularly attribute this to the cushion provided by the current. For example, unlike most of the hydrocarbon economies in the region, the country normally takes into consideration the oil prices when making is annual budget. Some of the potential impacts of the declining global oil prices on the economy of Qatar include the country’s hydrocarbon exports. For example, earlier this year, the government of Qatar rescheduled up to 15% of its development projects due to the rising costs and low revenue attributed to the falling oil prices. On the other hand, Qatar has increasingly begun to shift its attention to non oil industries such as tourism, agriculture, financial business among others to reduce over reliance on oil. The growth of non oil sector was experienced by 6.3% and is expected to grow to about 7% this year (Berument, 2014, p. 149). In addition, the fall in prices has caused contractionary fiscal policy measures. Fiscal break even prices go to a maximum of $184 and a minimum of $50 (Lopez-Murphy & Villafuerte, 2010, p. 20). Consequently, this pressure has made Qatar to make changes in its fiscal policy. However, the case study has revealed that while the reducing oil prices have inevitably resulted in a significant reduction of the country’s hydrocarbon exports and low fiscal revenues, the government has been able to sustain and finance its aggressive investments particularly as the country prepare to host the 2022 World Cup. As a result, the non-hydrocarbon GDP growth has continued to accelerate amid continued attempts by the government to reduce its overreliance on hydrocarbon sector by diversifying its economy. Conclusion In conclusion, the result of the study indicates that the current falling oil prices have not significantly impacted on the country’s GDP and overall fiscal expenditure. Nevertheless, some of the major effects that have been highlighted include reduced, fiscal revenue, lower hydrocarbon experts and attempts by the government to reduce its overreliance on hydrocarbon sector by diversifying its economy. In my opinion, oil prices should not be controlled by a single country like Saudi Arabia but OPEC should play a greater role in regulating the industry. As a result, countries should device other sources of fuel just like Qatar. It is also expected that price instability in oil may continue even in 2015 due to continued technological developments. References Allegret, J. P., Couharde, C., Coulibaly, D., & Mignon, V. 2014. Current accounts and oil price fluctuations in oil-exporting countries: the role of financial development. Journal of International Money and Finance, 47, 185-201. Berument, H., Ceylan, N. B., & Dogan, N. 2014. The impact of oil price shocks on the economic growth of selected MENA countries. Energy Journal, 31(1), 149. Devarajan, S. 2015. Middle East and North Africa Quarterly Economic Brief, January 2015: Plunging Oil Prices. World Bank Publications. Erbil, N. 2011. Is fiscal policy procyclical in developing oil-producing countries? IMF Working Papers, 1-32. Lopez-Murphy, P., & Villafuerte, M. 2010. Fiscal policy in oil producing countries during the recent oil price cycle. IMF Working Papers, 1-23. Read More