Will the Middle East Default on its Sovereign Debt?

The price of oil peaked in 2009 at $140 per barrel but hovers around $105 per barrel today.

middle-east-default-debtMiddle Eastern countries are still wealthy, but in the long-term, the relatively low oil price will create budget deficits, which can destabilize the region.

The darkness ahead is big and scary. Middle Eastern countries need high oil prices to sustain economic growth, and this is the way it used to work.

The high GDP growth rate can create jobs, wealth and sometimes legitimacy. But the average GDP growth rate of Middle Eastern countries has slowed down from 14 percent to less than 3 percent in 2013.

According to a United Nations report, oil prices need to be higher than $130 per barrel for some countries in the Middle East such as Bahrain to strike a balance.

But oil price outlook seems pale; the oil prices might stay low in the short-term because of the potential global economic slowdown and challenges from the international market.

First arrived the Asian economic slowdown. China is the engine of the Asian economy. China’s economy was built on labor-intensive industries, which need more energy than other industries. Lacking oil, China imports more than half of the oil it needs. In 2011, the share of oil imported by China from Middle Eastern countries was 51 percent.

Moreover, the Chinese economy has strong ties with the United States economy. The US might increase interest rates and further decrease its quantitative easing in 2015. To save Middle East countries from an economic storm requires high oil prices, but all these would doom the outlook of the Asian economy for the next two years, and further hinder the oil price from increasing.

Another reason preventing rising oil prices is the competition from the West.

Some investors may be more comfortable funding oil development in the United States than the Middle East, where it seems unstable. As a result, some countries are postponing investments in the region, which in turn will cause Middle Eastern countries to lose jobs.

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But United States is not the only competitor. Canada is emerging as an energy superpower. In the past, Canada is losing out on about $35 million a day because crude oil reserves are landlocked. But now with the Northern Gateway pipeline, their oil and gas could be sent to every corner in the world. Northern Gateway pipelines in Asia could bring as much as 525,000 barrels per day(bpd) to a British Columbia port for export.

Middle Eastern countries are still wealthy enough, but they need to come up with other ways to accumulate the money. Some Middle Eastern countries use oil-based funds for alternatives.

Will Middle Eastern countries face a sovereign default? The chance is slim. But the situation did not look good this year. The foreign direct investment (FDI) is lukewarm in the Middle East. Even though Middle Eastern countries tried to attract more and diversified FDI.

The FDI from China, for example, remains concentrated in the energy sector. If the oil price became stuck around $100 per barrel, Middle eastern countries can think about reforming the government spending by cutting down social welfare and subsidies.

We may not know what the oil price will be in five years. But as long as oil is a precious commodity, it would seem foolish to ignore the oil price and Middle East.

Chia-an Chan is a Taiwanese focusing on International production and trade, and its relations with law and governments. He is a NYU Master’s student in International Relations. Before coming to the United States,Chia-an studied political theory in Taiwan. After his graduation in 2012, he went to military service for a year serving as a member of the tactical unit.