How Do GCC Countries Benefit from Higher Energy Prices?

Just two years ago, the Gulf oil economies were issuing record debt to cope with the massive oil market downturn caused by the pandemic lockdowns. Now, the region is thriving with oil above $100 per barrel and is likely to remain there for the foreseeable future.

Bloomberg reported this week that initial public offerings in the Middle East had enjoyed their best first-half ever this year, with total proceeds at $11.4 billion over the first five months of 2022. Petrochemical company Borouge, which is listed on the Abu Dhabi exchange, raised $2 billion.

It appears that while it may not be trendy in Western Europe or North America, the oil and gas industry is still quite attractive in the biggest producing region in the world.

“IPOs have held up very well in the GCC due to high interest from international and regional investors in recent offerings and in the upcoming [equity capital markets] pipeline,” Rudi Saadi, head of MENA equity capital markets at Citi, told Bloomberg.

“We’ve seen continuous net foreign inflows across all GCC exchanges, even during the recent selloff, a sign that foreign investors are buying this market despite the global volatility,” Saadi added.

Meanwhile, in Europe and North America, inflation fears remain substantial, energy prices remain higher than any government would like them to be, and stock markets are not doing so well.

In the Gulf, Dubai’s biggest utility – Dubai Electricity and Water Authority – raised $6.1 billion when it went public earlier this year, becoming the largest company on the Dubai exchange. The IPO was well oversubscribed, too, with investors placing orders worth $86 billion in total.

The World Bank has estimated that the Gulf economies could expand by 5.2 percent this year, in large part thanks to higher oil and gas prices. The war in Ukraine is also helping to boost the Gulf economies’ GDPs.

“As major hydrocarbon exporters, GCC countries may also benefit from changes in the energy markets brought about by the war in Ukraine,” the World Bank said in a recent report. “These countries may see strong fiscal and external surpluses, which could help spur consumer confidence and investments.”

The WB’s regional director for GCC noted that despite these positive developments for the Gulf economies, they need to commit to net-zero and start reorienting their economies towards a less hydrocarbon-dependent model. According to him, if they fail to do so, they stand to lose oil revenues over the coming decades.

It seems, however, that the oil kingdoms are already diversifying. According to a report by Strategy & Middle East, a consultancy, the Gulf economies are expanding in the digital economy space and, with the right policies in place, they could see their combined GDP grow by $255 billion by 2030, with Saudi Arabia alone contributing $19 billion, Arab News reported this week.

“As the regional economy transitions to being led by digital disruptors, the digital economy could increase its contribution to regional GDP potentially by $30 billion over the next five years, from $169 billion to $204 billion,” Tarek El-Zein, partner at Strategy & Middle East told Arab News.

The last two oil market downturns seem to have taught the Gulf states an important lesson in diversification. However, they also seem determined to do as much as they with their oil and gas reserves while there is still quite strong demand for them. And the demand is there, although OPEC just cut its oil demand estimate for this year by 200,000 bpd to 3.4 million bpd. Because even if demand weakens, supply will remain tight, and will likely keep prices above $100 for quite a while.

Originally published on www.oilprice.com