Last week, credit ratings agency Moody’s announced planned reviews to possibly downgrade four Gulf states; Saudi Arabia, The UAE, Qatar and Kuwait. This comes after 18 months of turmoil in the oil and gas industry and oil plummeting to less than $28 a barrel for Brent Crude. At its peak, crude hit highs of $140 a barrel and the region ran high on a combination of black gold and optimism. 2016 does not look so optimistic. The significance of this is far reaching, and its impact on politics and business in the region even more so.
In a region where oil signified power, the possibility of unstable markets has left many wondering what the next step is. The UAE has recently announced planned tax reforms – to add a 5% VAT to luxury goods Rumours suggest the House of Saud are planning welfare reforms and looking to diversify, a much needed step with an economy that relies solely on the oil and gas industry. However, the question remains what the continued flood of oil into an already low market means in terms of policy and business. If the Middle East looses its favourable image as a safe haven of investment and somewhat stability, how will that impact wider business? The UAE has long been aware that relying solely on one industry would not bode well, and has diversified its economy; a fact that Moody’s noted.
Looking further to the West, the downturn in the oil market could have two possible impacts on business. Domestically, we have seen a fall in Petroleum, and a more favourable economic climate due to decreased costs. Yet we cannot ignore the implications on the North Sea industry, which has become crippled with costs, as the price of extraction is greater than the current price of crude. Major oil companies such as BP, Shell, Total and Exxon Mobil have attempted to combat the falling prices and increased costs by cutting back on billions of pounds of investment, and thousands of jobs have been cut. Analysts have warned that many operating in the North Sea are already beginning to suffer and that there is no money for future investment left.
The most simplistic analysis of this development is this – it means a decrease in the cost of petrol, an increase in the amount of potential spending on other items, and a potential boom to Britain’s domestic economy. There has also been a negative impact on businesses that rely on overseas trade, and the oil and gas industry. Yet it could also fuel instability in the Middle East, a lack of foreign investment in Britain and signify the end of the North Sea oil and gas industry, which will be a further blow to British business.