International Investing and Risk: Political and Economic

In addition, the trend toward fossil fuel divestment is gaining momentum, with recent high-profile moves—such as the announcement by the Rockefeller Brothers Fund last summer that it would divest from fossil fuels, and recent calls in England for members of Parliament’s pension fund to divest—boosting the movement’s visibility. That’s put a different kind of pressure on the industry.

George Masek, senior director, credit policy at Fitch Ratings, pointed out in a special report that the effects of low oil and gas prices reach far beyond the energy sector, and that many are positive. Consumer debt payments will be better off, since “most structured finance and covered bond issuance is concentrated in economies that are not highly dependent upon oil export revenues, there will be a positive impact on consumer default rates,” said Masek. “Performance of consumer asset classes—such as credit cards, auto loans, and residential mortgages—will benefit.

In addition, Masek said, increased consumer spending will “support improvement in asset performance trends.” However, “[c]ertain assets in securitizations and cover pools would be negatively impacted by a sustained period of low oil prices. This includes, for example, some commercial or residential mortgage loans in parts of Texas, Alberta, and Norway. Corporate obligors in some segments of the oil industry, such as exploration and drilling, would also be hurt.”

The upsurge in oil and gas production in the U.S. from fracking and other extractive technologies that became feasible when oil was over $100 per barrel, and the potential opening of the Arctic as a new field of exploration, have seemed to quiet those who fear the “peak oil’ phenomenon. However, one factor that may be particularly telling is the fact that the region of the world known best for oil and gas production is looking at alternative energy sources—and for ways to boost investment not just within that sector, but in other unrelated sectors in times to come.

The Arab world is exploring investment in alternative energy production and infrastructure, and working to reduce its dependence on oil as a source of revenue. A report by the University of Cambridge and PwC for the National Bank of Abu Dhabi that explores “the changing nature of the global energy system over the next decade, highlighting the growing demand for sustainable energy in the Gulf region,” makes the case for the Gulf’s financial services sector to support this demand by “providing products and services which will support the growth of the low carbon economy.”

From a purely practical standpoint, of course, diversified sources of income make sense. But for countries that have been so heavily dependent on oil for so long that it has contributed to their national identities, switching gears is a tough job.

Still, considering that low oil prices have caused Fitch Ratings to lower credit ratings for Oman and Bahrain, and to switch the outlook for Saudi Arabia to negative with the potential for its credit rating to fall if oil prices remain low, the Arab world has recognized the need to broaden its economic structure. This is something that the United Arab Emirates has done, according to the International Monetary Fund, thanks to Dubai’s move into exports of services and manufacturing that are not reliant on oil and its products.

Taking a page from Dubai’s book, other Gulf nations are pushing their citizens into launching their own businesses. The six countries that make up the Gulf Cooperation Council, Bahrain, Kuwait, Qatar, Oman, Saudi Arabia and the U.A.E., are providing incentives and regulatory changes to entice entrepreneurially minded Gulf citizens to go into business for themselves and create jobs that are dependent neither on the oil sector nor on the government—which employs as many as 75% of working people.

And therein may lie the key to diversification, since many of those entrepreneurs are launching tech businesses—including everything from e-commerce to gaming.