Economic Comparison of Oil-Based Countries and Non-Oil Based Countries - Case Study Example

Student’s Name Instructor Course Date Economic Comparison of Oil Based Countries and Non-Oil Based Countries The Gulf Cooperation Council, (GCC) member states economies in the recent years have attracted increasing attention. The (GCC) countries are six; the UAE, Saudi Arabia, Qatar, Oman, Kuwait and Bahrain. Since 2003 when oil prices soared and kept on rising, the region has become a center of global economic growth. Further, the states, have become fundamental as trade partners and global investors. The member states also play a key role within the global energy markets (Strum, et al., 4). Oil is one of the most relied on energy commodity in the world. Although countries in the world have invested in research for alternative sources of energy, the demand for oil and its products has remained at a higher level than any other source of energy. The economy of the world depends deeply on the performance of the world’s oil market. Different fluctuations in the oil market affect different countries different depending on whether they are oil importers or oil exporters. Oil supplies are never everlasting, and neither the demand for oil continuous and strong. This is so as in reality, oil resources globally are finite and from experiences the demand and prices for oil have recorded noticeable fluctuation. Further, in the gulf region, oil revenues do crowd out other forms of economic activities in the region. Oil extraction in the Gulf region is not actually another economic activity that adds to another sources of reliable production that forms a modern and viable activity, like the Scandinavian countries, Australia, Canada or Netherlands. Instead, the oil sector in the Gulf does dominate the economy as the primary source of wealth (Hvidt, 1). The GCC countries’ economies primarily depend on oil. However, since 2013, these countries have been negatively affected by the (-60%) oil price drop. This has caused, macro-economic instability which has subsequently slowed down growth and job creation. These crises, have negatively impacted the GCC public finances, more so the oil sector, and slowed the Foreign Direct Investment, with only the UAE country been able to go through the pre-crisis level successfully. In 2017, the GDP growth is forecasted at +2.3% in the GCC countries in reference to the previous growth. Oil prices, is foreseen to stagnate around $51 in 2017. This forecast, might be influenced by other factors such as global oil production increase, consumption patterns uncertainty and the oil industry investment. Thus, the GCC countries, in 2017 are forecast to remain in deficit and experience large fiscal adjustments within a non-flexible public expenses environment (Guastella & Menghi, 1). Currently, the governments among the GCC are focusing on building on the growth model, by adapting diversification policies likely to reduce the current oil dependence trend for their economic growth. In 2016 and 2015 the growth in GCC countries was projected at 3.7% and 3.4%. These rates although were high in comparison to other developing markets, they were still below the average growth rate in the region from 2000-2011; at 5.8%. The slowdown is as a result of oil prices decline from about USD 100-USD 50 in mid-2014 and in 2015 respectively. Further, the rising government expenditure did escalate the GCC economies although not in the same manner. This is so as countries in GCC region differ in reference to fiscal break-even prices, diversification degree, population and the economic size (COFACE, 2015) Therefore, no doubt that the oil producing countries in the GCC region face economics shocks due to the market instability following oil dependence. As such, this research will use economic theories to compare the GCC macroeconomic indicators with that of non-oil producing countries. The paper will compare macroeconomic on oil producing countries which are mostly found in the Gulf and non-oil producing countries. Oil is a means of economic benefit to a Nation since it earns foreign exchange boosting the countries revenue. The oil-producing countries in the Middle East are the United Arab Emirates and Saudi Arabia. Taking a case example of the Saudi Arabia the country is among the top fifteen nations in the world who spends heavily on the military. Other examples of oil-producing countries in the Gulf are Iran, Iraq, and Oman. AD-AS Model One of the economic theories that are useful in assessing how the economies of non-oil based countries and oil-based countries vary is AD/AS model Figure 1. The model evaluates how the supply and demand of oil in the market affects the economies of oil exporting and oil importing countries (Wells 31). It is useful for the identification of the short-run impacts as well as the long-run implications. Oil shocks have an impact on both importers and exporters. In the short run, the sudden reduction in oil supply in the global market emits various economic stimuli. Among the importers, there is reduced spending on the commodity. In the event the level of supply is low, and the demand level is constant, the equilibrium prices increases. As a result, there is reduced consumer purchasing power. For instance, when there is a low supply of oil, owners of automotive start using public means, such as travelling by bus and train, since it is cheaper. During the event, there is reduced sales of cars. There is reduced importation level of the commodity among the countries that do not own oil reservoirs. The aggregate demand factors vary when there is a sudden increase in demand (Wells 35). In this case, there is improved exportation of oil. However, the oil owners are unable to produce the required level of the commodity due to the inability to change some production factors suddenly such as the introduction of new technologies. The exporters do not have adequate time to construct new factories, hence cannot increase the level of production. The capital level remains fixed, and therefore the exporters only focus on optimization of the available resources. Nonetheless, there is improved private investment and reduced government spending, which aid to optimize the production factors, such as the distribution cost. The long run scenarios have different impacts. In consideration of the event the supply level increases within a considerable time, the importers have more consumer purchasing power. There is increased expenditure on the commodity. For instance, people purchase more vehicles and thus there is a shift from the use of public travelling means to private ones. Moreover, there is an expansion of other industries that are reliant on oil. The exporters, on the other hand, experience reduced demand. The high supply may be a result of increment in the number of suppliers. Since it is a long run event, the oil owners have an opportunity of adjusting the production factors. For example, they can embrace new technology that could help improve the quality standards of the product, hence improved competitiveness. The organizations can cut down on the expenses (Erlich). For instance, there could be a reduction of the idle resources, such as the number of unskilled workers. The withdrawal of private investors could result in the reinvestment of returns and diversification through the entry of other industries. Short macroeconomic occurs when the demand for the quantity is equal to supply, and the price level adjusts so that the equilibrium can be attained. On the other hand long- term macroeconomic occurs when the real GDP is equal to the potential GDP and equilibrium is established it is a long term effect. Of late the price of the oil has been changing and the economy of the countries depending on the oil has been affected. Although it is a short-term effect some of the workers have been laid off due to crises and reduction of the wages has been witnessed. Another one is the use of technology which is being employed by non-oil producing countries year after year the level of production is increasing due to efficiency. Other factors that cause the change in demand are population level, foreign exchange which shifts the equilibrium to the right. By the use of AD-AS, the economy of the countries studied can be divided into sections one is the demand side and the other is the offer. AD-AS MODEL Figure 1: AD-AS Model From the expert opinions countries depending on oil of late are experiencing difficulties due to constant changes in the oil prices in the country and how it has impacted to the nation. For example, a country like Saudi Arabia economy backbone is oil, and it boosts the countries budget in a big way. About 70% of the country’s budget depends on oil in 2012 one barrel of oil was costing $100 which dropped to below $30 per barrel in early 2016. This affected the rate of the unemployment and country budget in which they were forced to reduce the allocation of funds in some fields. However, citizens believe it is a short-term problem, and their economy is going back to where it was. In comparison to a country like Bahrain which has invested heavily in the tourism and banking sector and is ranked number 48 in the world regarding development. The economy of the country is not affected by either and economic stability is achieved. The countries producing oil their economy is stagnating at the moment the price of one barrel of oil goes at $60. Application According to the AD/AS model, a change in the demand for oil leads to a change in the prices of oil. For example, a change in the demand for oil in the year 2008 affected the prices of oil as is demonstrated in Figure 2. During this year, the demand for oil decreased due to the economic recession. Most of the countries could not afford the oil, which led to a reduction in the demand for oil. This created a surplus in the market thus a decrease in the prices of oil. The change in prices affects countries different depending on whether the country is an oil supplier or an oil importer. The same trend is recorded in the change in prices in the years 2014-2015 as shown in Figure 3. Increased supply of oil in the market in 2014 led to the decrease in the prices of oil globally. Figure 2: Showing change in oil prices from the year 2000-2011 (Ftiti, Guesmi and Teulon 8) Figure 3: Showing change in oil prices in January 2014 - April 2015. (Husain, et al. 11) One of the economic aspects that is affected by the change in prices is the rate of inflation. A decrease in the oil prices leads to a decline in the inflation rates in the countries that import oil. For example, the inflation rates in the UK dropped to 0% in December 2014, which can be traced back to the falling oil prices (Inflation.eu). A decrease in the inflation rates in a country increases the purchasing power of consumers thus a drop in prices of oil is an advantage to oil importers. The inflation rates in the oil exporting countries on the other hand increase with a drop in the prices. The citizens of these countries, therefore, have to spend more thus lower consumer purchasing power. For example, the United Arab Emirates recorded a 0.69% inflation increase by the end of 2014 (GCC-Stat). The consumers in the country, therefore, had to pay more to meet their financial needs, Table 1. Table 1: Showing the change in monthly inflation rates in the UK (Inflation.eu) The change in oil prices as well affects the unemployment rates and employment growth rates in both oil importing countries and oil exporting countries. In the cases of oil importing countries, the drop in oil prices leads to a decrease in the rates of unemployment. For example in the US, the unemployment rates fell from 7% to 5.6% from January 2014 to December 2014 (Hartley). The employment growth rate increased tremendously in the country since approximately 242,000 jobs were created in the period. A decrease in the oil prices, however, has a different effect in GCC. The employment growth rates drop in GCC when oil prices reduce. In the end, the unemployment rates in these countries increase. For example, the job growth rates in GCC decreased in the years 2014-2015 as is shown in Figure 5. The unemployment growth rates kick in later on. For example, in Oman, the increase in unemployment was recorded in 2015, which is a little more than one year after the oil prices began dropping (Erlich). The country has to cut down on its spending. This has resulted to the consistent sacking of employees in government institutions. The speed that the impact of oil price drop is felt in a country is dependent on the amount of money it has in its reserve. For example, Oman has less wealth as compared to Saudi Arabia. Therefore, Saudi Arabia has not yet recorded an increase in unemployment (Pettinger). Figure 5: showing the change in employment growth rates in GCC (Colacelli and Garcia-Martinez 22) Oil is not nowadays a means to be targeted as a source of countries income due to constant changes in the oil prices that have resulted from an increase in the production of the oil. A change in the price causes a shift in the equilibrium of the economy. Many foreign people have migrated to gulf countries in search of employment especially those from developing countries resulting to a lower GDP. Conclusion Evidently, the economies of oil exporting and oil importing countries are affected differently by changes in oil prices, supply, and demand. An increase in demand for oil in the market leads to a deficiency in supply and thereby causes an increase in prices. A demand decline, in contrast, causes a surplus in the market, which in turn cause a decrease in prices. These changes affect unemployment and inflation rates in countries differently in the world. Work Cited COFACE. How Gulf Cooperation Council Countries (GCC) Are Dealing With Oil Falling Prices. Coface Press Release. Dubai/Paris. 2015. Print. Colacelli, Mariana and Garcia-Martinez, Pilar. Economic prospects and policy challenges for the GCC countries. Riyadh: International Monetary Fund, 2016. Erlich, Reese. Continuing low oil prices cause crisis in Oman. July 17, 2015. http://www.dw.com/en/continuing-low-oil-prices-cause-crisis-in-oman/a-18584787 Accessed May 19, 2017. Ftiti, Ftiti, Guesmi, Khaled and Teulon, Frederic. Oil shocks and economic growth in OPEC countries. Working Paper, 064, 2014, 1-17. GCC-Stat. GCC inflation rates between 0.4% and 3.67% by end of January 2015. May 4, 2015. https://gccstat.org/en/about/news/january-inflation-2015 Accessed May 19, 2017. Guastella, Armando & Menghi, Alex. GCC Market Overview and Economic Outlook 2017. A Challenging Transformation Ahead to Achieve Desirable Growth. Perspective December 2016. Value Partners Management Consulting, 2016. Print. Hartley, Jon. The economic impact of falling oil prices: ‘Expansionary disinflation’. January 12, 2015. https://www.forbes.com/sites/jonhartley/2015/01/12/the-economic-impact-of-declining-oil-prices-expansionary-disinflation/#494f4acc18cc Accessed May 19, 2017. Sturm, Michael et al. The Gulf Cooperation Council Countries Economic Structures, Recent Developments and Role in the Global Economy. Occasional paper series, no92/july 2008. European central bank publishers. 2008. Husain, Aasim et al. Global implications of lower oil prices. 2015. https://www.imf.org/external/pubs/ft/sdn/2015/sdn1515.pdf Accessed May 19, 2017. Hvidt, Martin. Economic Diversification in GCC Countries: Past Record and Future Trends. Research Paper, Kuwait Programme on Development, Governance and Globalization in the Gulf States. July, 2013. Print. Inflation.eu. Inflation Great Britain 2014. 2017. http://www.inflation.eu/inflation-rates/great-britain/historic-inflation/cpi-inflation-great-britain-2014.aspx Accessed May 19, 2017. Pettinger, Tejvan. Impact of falling oil prices. September 17, 2015. http://www.economicshelp.org/blog/11738/oil/impact-of-falling-oil-prices/ Accessed May 19, 2017. Wells, Graeme. Teaching aggregate demand and supply models. The Journal of Economic Education, 41(1), 2010, 31-40. Read More