What the Oil Price Slump Means for the GCC’s Economic Diversification
With an oil price collapse and now an all too likely recession, is the GCC well equipped to weather the storm? Will petrochemicals investments and economic diversification help buoy the region’s growth?
Arabian Gulf economies are faced with major challenges in the face of an oil price collapse, global demand slowdown, particularly in key export markets such as China, and an economic recession which the IMF has now warned could be worse than the 2008 global financial crisis. Earlier in March, oil prices plunged to a multi-year low after OPEC and Russia could not reach a production cut agreement.
The economic outlook and oil demand have only been exacerbated by the coronavirus pandemic, with prices falling even further to their lowest level in 17 years, as demand for fuel continues to be hard hit by work and travel lockdowns introduced in some of the world’s largest economies as part of efforts to contain the spread of the virus.
The International Energy Agency estimates that global oil demand will fall to 99.9 million barrels per day (bpd) in 2020, about 90,000 bpd lower than in 2019, but in its more pessimistic scenario – demand could plunge by 730,000 bpd. As the virus wipes out demand and producers continue to raise production, the market could see a record supply surplus in April, creating a global glut and threatening to push prices down further.
GCC economies are largely dependent on the production and export of oil and countries in the region – despite being among the lowest cost producers in the world – are likely to feel the strain over 2020 and beyond. The chemical industry will be significantly affected too as chemicals demand is closely linked to economic activity and petrochemical prices – to oil and feedstock prices. However, when compared to the likely decline in upstream commodities, chemicals – due to their higher margins, economic contribution and value-added – remain a beacon of growth for the region and an essential driver of economic diversification and sustainable, long-term growth.
“GCC economies are largely dependent on the production and export of oil and countries in the region – despite being among the lowest cost producers in the world – are likely to feel the strain over 2020 and beyond.”
““As new investment into deepening supply chains, building capacity and enhancing higher value-added chemical output occurs across each GCC country (i.e. closing off leakage through import substitution), multipliers should generally increase.”
Economic impact of the chemical industry
According to a recent GPCA report entitled ‘Beyond Petroleum: The Impact of the Chemical Industry on the Arabian Gulf Economy’, the chemical industry generated USD 98.3 billion worth of output and over USD 46.4 billion in value added across the six GCC states. The industry’s economic contribution through its direct operations as well as indirect and induced impact is significant. The sector stimulates economic activity and employment through other parts of the regional economy, e.g. with the procurement spending of its local operations through its network of direct suppliers, etc. In total, we estimate that the chemical sector’s operations in the GCC region contributed USD 81.6 billion in gross value added in 2018, underscoring the essential role that the chemical industry plays in driving economic growth and diversification in the region.
Country focus
Saudi Arabia is the world’s leading oil producer and exporter, with its 267 billion barrels of proven reserves. The oil sector accounts for around 40% of GDP, 90% of government revenue, and over 80% of exports. The Kingdom is also the largest producer of chemicals in the region, and over the years has effectively used oil revenue to develop other manufacturing sectors, including iron and steel, construction materials, food processing, engineering, and chemicals.
In line with its efforts to diversify the economy away from oil, Saudi Arabia is aggressively pursuing a diversification strategy as part of Vision 2030. Budget spending will be complemented by the private sector stimulus running until 2021, with funds allocated to residential housing loans, economic projects, SME support, infrastructure development and investment, and export financing. This will be supportive of non-oil growth in the near and medium term.
In total, we find that the industry sustained a USD 46.0 billion in GVA (5.8% of the country’s GDP) in 2018, comprised of USD 25.0 billion direct contribution, stemming from operational expenditure at its sites across the country; USD 16.3 billion indirect contribution stimulated by the sector’s domestic procurement of inputs of goods and services from suppliers; and an induced contribution of USD 4.7 billion, which captures the wider economic benefits that arise from the payments of wages by the Saudi chemical industry and the firms in its supply chain to their own employees, who spend their earnings in retail, leisure and other outlets.
It is important to note that multipliers can vary dramatically across different industry sectors and regions, based on the mix of labor needs, other production inputs and the propensity for industry sectors to buy goods and services from within a regional economy. (See Fig. 25) Thus some countries are characterized by larger multipliers than others.
Saudi Arabia and the UAE are characterized by the lowest employment multipliers in the region. Through all impact channels (direct, indirect and induced), the Saudi chemical industry supported 340,300 jobs (2.9% of the country’s employment). However, as new investment into deepening supply chains, building capacity and enhancing higher value-added chemical output occurs across each GCC country (i.e. closing off leakage through import substitution), multipliers should generally increase. This increase will likely become more evident as new investments in domestic production come online—especially production that is destined for export.
UAE
The UAE was the 4th largest crude oil producer in OPEC in 2018, with output averaging close to 2.95 million b/d (according to IEA figures). The non-oil economy has lost momentum through 2019 but looking ahead there are reasons to be positive; Expo 2020 is expected to provide a boost to non-oil activities, with an estimated contribution of up to 1.5% of UAE’s GDP.
Through all impact channels (direct, indirect and induced), the chemical industry in the UAE supported 95,200 jobs (1.5% of the country’s employment). In total, we find that the industry sustained a USD 10.9 billion in GVA (2.6% of the country’s GDP) in 2018. This comprised a direct USD 5.9 billion contribution; a USD 4.3 billion indirect contribution and an induced contribution of USD 0.7 billion.
The sector’s economic footprint is expected to expand further over the medium run, as the Abu Dhabi National Oil Company (ADNOC) is making progress in the planning of its Ruwais refinery and petrochemical complex, with construction starting after 2021. The UAE plans to triple their chemical capacity by 2025, with a planned investment of USD 45 billion by ADNOC on the world’s largest integrated refining and chemical complex.
“The chemical industry in the UAE sustained a USD 10.9 billion in GVA (2.6% of the country’s GDP) in 2018.”
“Every USD 1 of gross value added created directly by this chemical industry in Oman supported an additional USD 0.87 contribution elsewhere in the domestic economy in 2018.”
Oman
Oman possesses much smaller oil resources than most of its Gulf neighbors, with proven reserves of 5.2 billion barrels, and its oil fields are smaller, less productive and more costly to exploit than other Gulf countries. Oman’s GDP growth is forecast at 1.7% in 2020, amid continuing oil output constraints. The outlook for the non-oil sector also looks far from promising. Tourism remains the bright spot, although it will now likely be affected by a slump in the hospitality industry and travel restrictions due to the coronavirus outbreak.
Oman stands out as the country with greatest GVA and employment multiplier impacts. Every USD 1 of gross value added created directly by this chemical industry in Oman supported an additional USD 0.87 contribution elsewhere in the domestic economy in 2018. This is larger than the USD 0.76 contribution supported by the industry across the entire GCC region for every USD 1 of direct GVA.
Similar to the GVA multiplier, the Omani chemical sector is also characterized by the highest employment multiplier. For every employee in the Omani chemical industry, 9 jobs are supported elsewhere in the country’s economy. This is a larger employment multiplier than the three jobs created on average in the GCC chemicals industry for every direct employee.
Through all impact channels (direct, indirect and induced), the chemical industry in Oman helped to support 81,600 jobs (3.7% of the country’s employment). In total, we find that the industry sustained USD 7.5 billion in GVA (9.4% of the country’s GDP) in 2018. This comprised direct USD 4.0 billion contribution, a USD 3.0 billion indirect contribution; and an induced contribution of USD 0.5 billion.
Key petrochemical investment that could bolster economic performance is the Liwa Plastics Industries Complex (LPIC), which will significantly boost Oman’s polymer production capacity. Additional domestic buildout through partnerships and FDI, such as ZL EOR Chemicals and Oman Development Petroleum Company to establish the country’s first polymer production factory, illustrate a value-added deepening of the country’s chemical capital and subsequent labor productivity. This, in turn, will drive a larger economic footprint for the chemical sector in Oman.
Bahrain
Bahrain’s oil reserves are expected to last only 10–15 years, though further exploration could extend this, and its gas reserves should last about 50 years at present rates of consumption. Looking ahead, GDP growth is forecast to slow from 1.8% last year to just 1.6% this year — the lowest in almost 25 years — weighted down by sizeable multi-year fiscal consolidation measures. This means the kingdom should become serious about downstream development and economic diversification in order to diversify its revenue streams and boost the government coffers.
Bahrain also has the smallest GVA multiplier. Through all impact channels (direct, indirect and induced), the chemical sector in Bahrain helped to support 8,900 jobs (1.1% of the country’s employment). In total, we find that the industry sustained a USD 1.3 billion in GVA (3.3% of the country’s GDP) in 2018. This comprised direct USD 0.9 billion contribution, a USD 0.2 billion indirect contribution, and an induced contribution of USD 0.1 billion.
Current investments under GPIC (e.g. urea plant expansion and an ammonia plant expansion) and NOGA (naphtha cracking refinery and polyethylene & polypropylene plants) will help to deepen supply chains and build additional export capacity within the petrochemical sector—likely expanding both the jobs and GVA footprint (and multipliers) within Bahrain.
“Bahrain has the smallest GVA multiplier. Through all impact channels (direct, indirect and induced), the chemical sector in Bahrain helped to support 8,900 jobs (1.1% of the country’s employment).”
“Through all impact channels (direct, indirect and induced), the chemical industry in Qatar helped to support 45,000 jobs (2.2% of the country’s employment).”
Qatar
Qatar remains the world’s largest LNG exporter. There is also heavy investment in gas-to-liquids, petrochemicals, a gas export pipeline, infrastructure and tourism. The pace of growth should improve in the medium term, amid ongoing investment ahead of World Cup 2022 and a ramp up in gas production.
Qatar is the country with the largest value added-to-output ratio within the chemical sector, implying that the industry is less reliant on intermediate consumption than all of the other GCC countries. This smaller supply chain translates into lower indirect impacts and in turn a lower GVA multiplier.
Through all impact channels (direct, indirect and induced), the chemical industry in Qatar helped to support 45,000 jobs (2.2% of the country’s employment). In total, we find that the industry sustained a USD 11.5 billion in GVA (6.0% of the country’s GDP) in 2018. This comprised a direct USD 7.8 billion contribution; a USD 3.1 billion indirect contribution and an induced contribution of USD 0.6 billion.
Qatar’s petrochemical sector has recently secured its first major investment in over five years, with state-owned energy firm QP signing a deal with US petrochemical company CPChem to develop an ethane cracker in Ras Laffan, a major industrial hub in Qatar. This investment is expected to further boost domestic polyethylene production and exports and, in turn, the economic footprint of the industry in the near future.
Kuwait
Kuwait has a relatively undiversified economy, dominated by the oil industry and government sector, with oil accounting typically for over 50% of GDP, and more than 90% of both government and export revenues. However, further structural and institutional reform is needed to encourage diversification and modernization and support non-oil growth.
The country displays a large employment multiplier, with every job in the chemical industry supporting nearly six elsewhere in the domestic economy. Through all impact channels (direct, indirect and induced), the chemical industry in Kuwait supported 46,800 jobs (1.6% of the country’s employment). In total, we find that the industry sustained a USD 4.5 billion in GVA (3.0% of the country’s GDP) in 2018. This comprised a direct USD 2.8 billion contribution; a USD 1.4 billion indirect contribution; and an induced contribution of USD 0.3 billion.
Investments in the Al-Zour refinery project and the refinery’s subsequent sulphur and naphtha feedstock output will help in developing Kuwait’s value-added petrochemical sector. The complex is expected to come online in 2020 with full operation capacity in 2024.
“Bahrain has the smallest GVA multiplier. Through all impact channels (direct, indirect and induced), the chemical sector in Bahrain helped to support 8,900 jobs (1.1% of the country’s employment).”
“The GCC chemical sector must be recognized as a valuable asset for the regional economy, especially in light of its diversification efforts to move the economy away from oil.”
More needs to be done
All of the above demonstrates that the chemical industry has a large positive economic footprint in the GCC region. As such, the sector must be recognized as a valuable asset for the regional economy, especially in light of its diversification efforts to move the economy away from oil. With major disruptions already taking place across business and trade, now is the time for governments and the industry to work together and develop the chemical sector across the region.
A focus on diversifying the industry’s product portfolio and moving towards the production of more specialized and finished products will be particularly important. This in turn will help drive higher margins, insulate the industry’s profitability from future oil price shocks, generate greater in country value, and produce a higher multiplier effect across the economy. To this end, closing off leakage through import substitution and deepening the industry’s supply chain will also be important. With new projects due to come on stream in 2020 and beyond, the production of higher value-added products will open doors to new export markets and end-use sectors. The introduction of the right government policies and business stimulus will be key in attracting investment and supporting the industry’s competitiveness.
This article is based on a recent GPCA report entitled ‘Beyond Petroleum: The Impact of the Chemical Industry on the Arabian Gulf Economy’. GPCA members can access all our reports on the members portal. The report’s executive summary is available for free. Learn more