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May 21, 2015 at 09:20 PM
While low oil prices have been a boon to consumers, they’re taking a toll on the countries and industries that produce it—and thus on investors with money in various segments of the oil industry. But the effects go farther than the energy sector, into a range of other sectors the health of which depends on the flow of oil dollars. This includes everything from tourism to retail to real estate.
But of course other forces are also at play in those industries, making the outcome far from a sure thing, whether for good or ill. A negative pressure in one area could end up putting a positive force on another, with investors left trying to figure out how all the pieces fit together.
Here’s a look at how the effects of low oil prices are playing out in various sectors in the Middle East.
1. Saudi Arabia is burning through its foreign reserves.
Saudi Arabia’s foreign reserves are down, thanks to lower oil sales, but that’s not the only reason. The country’s been spending like crazy despite the falling price of oil, with some of its most conspicuous outflows occurring since King Salman bin Abdulaziz ascended the throne in January.
For instance, in just two months, the Saudi government has run through $36 billion of its central bank’s net foreign assets, which amounts to approximately 5% of its total foreign reserves. That’s the most the country’s foreign reserves have dropped in a two-month period on record. The next largest decreases were in 2008 and 2009, during the global financial crisis, but they paled in comparison.
Among the big-ticket items that foreign reserve money has gone for are a two-month bonus granted by the new king to pensioners and to government employees; expanded military action both at home and abroad—in 2014, military spending by the Saudi government jumped 17%, totaling more than $80 billion for the greatest such spending increase of any major power—and investments in oil field projects despite the current state of oil prices.
In addition, the country has maintained existing spending levels in many other areas, such as wages, public benefits and infrastructure projects.
2. Succession to Saudi throne seen as stabilizer to current oil policy.
Speaking of the new king, his recent overhaul of the succession plan has put younger members of the royal family in line for the throne. The move is seen not only as an indication of a tougher foreign policy in the future but as a predictor that the country’s current oil production levels will continue.
Some of the changes will affect the Saudi oil industry. Khalid al-Falih, who was president and CEO of Aramco, was named the country’s new health minister during the overhaul. In his place, Amin Nasser was named acting CEO, and a new supreme board to oversee Aramco’s affairs has already replaced the one put in place by the late King Abdullah. The board is headed by Deputy Crown Prince Mohammed bin Salman, the son of the current king and second in line to the throne as well as the chairman of the Council of Economic Affairs and Development.
While Aramco itself is being restructured, as well as being separated from the oil ministry, reportedly the change in leadership is expected to solidify the country’s oil policy.
3. Dubai’s shops are feeling the absence of customers.
Lower oil prices have meant that those dependent on oil for their income have less money to spend. That’s hit the luxury shops of Dubai hard, especially gold dealers.
