Rising energy prices fuel economic growth in Mena

Hydrocarbon revenues help fuel region’s move to diversify income base

A Saudi Aramco refinery coomplex. - KT file

Somshankar Bandyopadhyay

Published: Sat 18 Feb 2023, 3:26 PM

Last updated: Sat 18 Feb 2023, 9:58 PM

The global oil and gas market has remained resilient in the face of increased uncertainty due to the ongoing Russia-Ukraine conflict, rising interest rates and a host of other factors.

For oil-producing countries in the Middle East and North Africa, the rise in oil and gas prices is helping fuel economic growth. Although oil revenues have shaped these countries’ economies for the past seventy years, financial markets’ experts and analysts agree that, this time, the recent rise in oil prices will impact local economies in a more sustainable way, as GCC countries will be using their revenues in financing their economic diversification efforts, leading to more self-sufficient nations.

“Middle East producers, and specifically those in the Gulf region, have embarked on ambitious plans to diversify their economies away from oil,” says Ritu Singh, Regional Director of Stone X Group Inc. She adds: “These countries are using the windfalls of the currently high oil prices to reshape their economies, and with it, the region.”

According to an International Energy Agency (IEA) report earlier this month, global oil demand is set to rise by 2 million barrels per day (bpd) this year to 101.9 bpd. The Asia-Pacific region, with a projected growth in demand of 1.6 million bpd, fuelled by a resurgent China, dominates the growth outlook.

A report by Deloitte showed that the global upstream industry is projected to generate its highest-ever free cash flows of $1.4 trillion by the end of 2022.

The International Monetary Fund (IMF) had earlier projected that Gulf economies will receive up to $1.4 trillion in additional revenues in the next four to five years, as oil prices remain high.

Ritu Singh, Regional Director of Stone X Group Inc. - Supplied photo

The Economist Intelligence Unit predicted that GCC states and Iraq will benefit the most from international energy market developments in 2023, with GCC states seeing high oil and gas revenue spill over and help to drive business activity in non-energy sectors — especially through state-backed investment in economic diversification projects. “Inflation will be contained across the GCC in 2023 by exchange-rate pegs to the US dollar and fuel subsidy regimes,” the EIU said in a report.

Singh said: “Increased demand and persisting geopolitical tensions are changing the landscape of the energy supply chain. Oil and gas prices are likely to remain high, and oil and natural gas producers and exporters in the Mena region stand to be the biggest winners.”

In addition to economic diversification, oil-rich Mena countries are raising the profile of their financial markets by launching more regional crude oil benchmarks, such as the Abu Dhabi Murban Crude contract. They’re also taking many of the state-owned companies public in their own stock markets, leading to deeper liquidity and higher appeal for foreign investors.

Moreover, oil-producing countries have started to develop mega projects, including NEOM in Saudi Arabia, while seeking to gain more global weight through international investments such as Mubadala’s investment exploring clean fuel projects in Pakistan, and Qatar Investment Authority’s €2.4 billion investment in German power company RWE and $1.5 billionn investment in Bodhi, James Murdoch’s media venture in India.