Middle East’s US$2 trillion wealth could be squandered by 2034, IMF report says

The Arab monarchies of the Persian Gulf face a budget reckoning and risk squandering their US$2 trillion in financial wealth within 15 years as oil demand nears peak levels, the IMF said in a report on Thursday.

Global oil demand might start falling sooner than expected, putting a strain on the finances of the six-member Gulf Cooperation Council (GCC), which accounts for one-fifth of the world’s crude production, the IMF said.

Without decisive economic reforms, the richest Middle Eastern states could exhaust their net financial wealth by 2034 as the region becomes a net debtor, the fund projected. Within another decade, their total non-oil wealth would also be exhausted, the IMF said in the report prepared by a team of its Middle East and Central Asia specialists, as well as its research department.

“Countries in the region need to think long-term and strategically, because the oil market is changing structurally both from the demand and the supply side,” IMF Middle East and Central Asia Department director Jihad Azour said in an interview, adding that economic reforms underway in some countries need to accelerate.

Development plans need to shift spending and job creation from governments to the private businesses, and develop more non-oil sources of income more quickly, he said.

GCC countries would have to be more aggressive in their pursuit of an economic transformation to preserve their current wealth.

“If we stop here, it’s not enough,” Azour said.

Global oil companies and producing states have come to recognize that alternative energy sources, alongside greater efficiency, are already eroding demand.

While Gulf producers such as Saudi Arabia and the United Arab Emirates are developing new industries in preparation for a post-oil era, they are not moving quickly enough to avoid running out of cash, the IMF said.

Gulf oil producers sharply increased budget spending from 2007 to 2014, when prices for crude oil plunged.

Despite patchy reforms, they have not fully offset the drop in oil revenue with spending cuts, leading to deficits that have eroded wealth, the report said.

Regional governments would likely need to cut spending further, save more and introduce broad-based taxation to make ends meet, the IMF said.

A further decline in oil prices this year, in the face of geopolitical tensions and threats the 2019 novel coronavirus outbreak poses to growth, is making the task even harder.

Should global demand trend downward before plans take root, the countries would need to cope with their longer-term economic problems sooner, the IMF said.

“The world’s demand for oil is expected to grow more slowly and eventually begin to decline in the next two decades,” it said.

Global oil demand is likely to peak by 2041 at about 115 million barrels a day and gradually decline from there, it added.

Saudi Arabian Oil Co, citing forecasts from consultant IHS Markit Ltd, said in its initial public offering prospectus last year that demand could peak by 2035.

Improved energy efficiency or the imposition of a carbon tax by governments worldwide could bring peak demand forward to as soon as 2030, the IMF said.

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