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Thursday, June 20, 2019

Lower oil prices a blessing, not a curse

by Khalaf Ahmad Al Habtoor

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Global stock markets are experiencing a bumpy ride. Investor confidence is shaken. Analysts largely blame falling oil prices - which have hit five-year lows at US$ 62 a barrel due to a glut in the market combined with reduced demand from countries undergoing a reduction in growth. This market slide is based on wrong thinking. The time to be cautious is when oil prices go sky high, as they have in the past, triggering inflation.

The fact is that cheaper oil is an absolute benefit to humanity but unfortunately, investors are falling for warnings from scaremongering pundits, who speak from a purely academic perspective, and are negatively reacting to what should be good news. My advice is to quit heeding doom and gloom merchants, whose ill thought-out warnings are behind the current volatility – and instead rely on good old-fashioned common sense.

Lowered oil prices are a boon for manufacturers (especially those using oil-related products), export/importers, airlines, cruise lines, road transporters and, of course, tourists who benefit from reduced airfares, as well as anyone who owns a vehicle. In many countries, including the United States, prices are coming down at the pump. Corporations, small businesses and home owners will reap rewards in terms of cheaper electricity. This translates to consumers having more disposable income to spend elsewhere, which, in turn, fuels the economy increasing employment opportunities. Furthermore, lower oil prices help keep down inflation – and, therefore, interest rates, which is good for business, ordinary borrowers and mortgagees.

While it’s true to say that the shortterm winners here are non-oil producing states, certainly in the case of oil producing countries in the Arabian Gulf are well-placed to withstand this temporary blip. As one magazine correctly points out, “Huge fiscal reserves that they [Saudi Arabia and the United Arab Emirates] have built-up over the last several years mean they will easily be able to keep spending high.” Put simply, there is no need whatsoever to press the panic button.

Thanks to less expensive oil, the economies of countries that haven’t been looking too healthy are beginning to recover. Take Turkey, for example. An official from BNP Paribas Investment partners says it’s “the best thing that can happen to Turkey. Every US$ 10 drop in the oil price improves the current account deficit by US$ 4.5 billion.” Lower bills for crude oil imports have greatly benefited Asian economies with at least three Asian states seizing the opportunity to end fuel and diesel subsidies that have weighed heavily on their fiscal purses. Once faltering economies begin to bloom again, the global demand for oil will blossom pushing up prices. Let’s not forget that our world is a global village; when one part of town sneezes everywhere else catches cold. So if lowered oil prices contribute to the lifting of struggling economies, in the long run, the entire planet is the beneficiary.

There is also an ethical/humanitarian component to this topic. Poorer countries, even in our Middle East region, are being made poorer by high energy bills. The higher the oil prices, the higher the fiscal debt, which is impacting ordinary folk who suffer from regular power cuts. Those states deserve a break!

Investors in the Gulf shouldn’t listen to negative sentiment. This area is one of the World’s wealthiest. It is politically stable and our leaders have their hands firmly on the rudder. They know how to steer us through choppy waters especially after learning lessons from the 2008 global downturn which occurred through no fault of our own. Credit must go to Saudi Arabia, the United Arab Emirates and other GCC countries, which stood firm against various OPEC member states keen to diminish oil production in order to generate a hike in prices in response to political or economic pressures.

Gulf leaderships are not reactive in a kneejerk fashion; they carefully study the big picture and weigh pros and cons over the long term, which is why our area has enjoyed phenomenal economic success.

Our company results remain positive, whether government, private or family-owned. In recent years, our economic health has gone from strength to strength. Our infrastructure is second-to-none and our per-capita earnings are some of the highest anywhere.

Keep in mind that even if share prices take a hit, business goes on as usual. Companies are unaffected by market losses and gain, which are merely normal fluctuations based on transactions between sellers and buyers, usually driven by profit-taking. What goes down will go up. And, moreover, shareholders very often benefit from higher dividends when share prices are depressed because companies often issue higher dividends and share buybacks to keep investors interested.

To quote Stephen Moore, the former director of fiscal policy studies at the CATO Institute, now chief economist at the Heritage Foundation, “Some people are just genetically incapable of accepting good news. In recent weeks the media have inundated us with stories of the latest crisis in America: low oil prices…It seems only yesterday that the doomsayers were warning that high oil prices were a harbinger of economic collapse. Now it is bargain-basement prices that are the curse... More cheap oil means greater prosperity. Moore wrote those words as long ago as March, 1999 and history proved him right. If the past is a strong predication of the future, then so am I. So sit tight and enjoy the ride. The only storm clouds on the horizon are figments of imagination within our own minds.

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