Oil inflation might be a boon to the Middle East, but leaves other countries to deal with social unrest

Energy costs have risen faster than projected, and certain supply chain disruptions caused by the pandemic were expected to last until 2022. The Russian invasion of Ukraine in February shook Middle Eastern and North African stock markets and oil sectors. All these factors pose a particular problem for largely import-dependent countries like the Gulf states – inflation.

Oil prices skyrocketed, seeing a record high of 10 years at $125 per barrel. As crude oil is a major economic input, an increase in its price contributes to inflation, which gauges the overall rate of price increases throughout the economy.

High oil prices present an opportunity for some countries. Experts in oil and energy say that, for others, it will likely imply increased costs for basic items and severe inflation, a possibility that most countries are not enthusiastic about.

The Gulf countries, which are among the world’s largest hydrocarbon producers, are seeing billions of dollars added to their coffers as a result of an oil price increase fueled by the Ukraine conflict. Following an eight-year oil slump exacerbated by a pandemic-related downturn, they are poised to post their first budget surpluses. Iraq, Iran, Saudi Arabia, and the United Arab Emirates (UAE) will be in the first group, as would some other countries with better relations with Russia. They’re all members of Opec+, a powerful group of 23 oil-producing countries.

The Gulf Cooperation Council (GCC)consists of Saudi Arabia, Oman, United Arab Emirates (UAE), Kuwait, Qatar and Bahrain. According to research that was released in February by Mitsubishi UFJ Financial Group (MUFG), the GCC countries are expected to have a 6.1 percent gain in GDP in 2022 due to higher oil prices and fiscal surpluses for the first time since 2014. The GDP gain will lead to an aggregate fiscal surplus of $27 billion.

High oil prices would fund additional development projects and infuse cash into state coffers for the Opec+ countries. Other non-oil-producing countries will suffer the consequences of high oil prices in the form of higher living costs and greater inflation rates. Each country’s situation is different when it comes to dealing with high oil costs.

Inflation rates in the Middle East

According to a report by the PwC, in December, inflation rates in Qatar ranged from 6.5 percent, the highest since 2008, to -0.4 percent deflation in Bahrain. When evaluated using 2020 non-oil GDP, the regional average was 2.2 percent in November, the final month for which data was available at the time of writing for Oman and Kuwait. This is the highest rate since 2018, yet it is still low by historical standards, and much below the inflationary peak in 2008 when the GCC’s annual average rate was 11%. Inflation in the United States reached a 40-year high of 7% in January, while the IMF’s World Economic Outlook forecasted 3.9 percent inflation in advanced economies in 2022, roughly double what it had predicted only three months before.

Inflation in the Middle East is expected to decrease in 2022, according to economists. It is expected to fall to 2.4 percent, according to the IMF’s October predictions, which are now slightly out of date, and even lower at 2.1 percent according to the Arab Monetary Fund’s November forecast. But, recent projections also similarly predict low inflation, with the median of economists polled by Reuters in January ranging from 2.0 percent in Saudi Arabia and the United Arab Emirates to 2.8 percent in Qatar.

Development because of the inflation

During previous oil booms, Gulf states prioritized public sector salary increases and large gifts to citizens, ignoring diversification and reinvestment. According to Omar Al-Ubaydli, Director of Research at the Bahrain Center for Strategic, International, and Energy Studies, this is unlikely to happen this time.

The Gulf’s current thinking is that economies must prepare for future crude price drops and minimize their reliance on oil revenue. They’re leveraging the present oil price to fund initiatives and diversification strategies that will aid them when the price falls. The GCC’s confidence in demand for their major commodity and their capacity to recover has been strengthened by global oil demand, according to analysts.

Because of the turmoil in Europe regarding their dependence on Russia for energy, OPEC members like Saudi Arabia and the United Arab Emirates are expected to benefit even more. Even Bahrain, the region’s smallest economy, may be able to balance its budget for the first time since 2008 if crude prices continue remaining high. The price increase will instill confidence, restock balance sheets, and facilitate the Gulf countries’ economic recovery.

Effect on the non-oil-producing countries

Oil prices have historically had a greater impact on the Producer Price Index (PPI), which measures the wholesale price of goods, than on the Consumer Price Index (CPI), which measures the retail price of goods and services.

Inflation is fueled by higher oil prices, both directly and indirectly through increased input costs. Higher oil prices have an indirect influence on inflation because crude oil is a key element in petrochemicals used to create plastic, therefore more expensive oil will tend to raise the pricing of many things made with plastic. Similarly, transportation costs, such as fuel prices, are factored into consumer prices, with oil accounting for about half of the retail price of gasoline.

Asia is very vulnerable to the oil price surge produced by Russia’s invasion of Ukraine since it is a net energy importer. The effect on the biggest economies of Asia is detailed below. The energy deficit and constant hikes in oil prices are serious enough to generate widespread discontent and social upheaval.

China, the world’s top oil importer, is seeing a squeeze on earnings and consumer spending power, as well as decreased export demand, challenging Beijing’s efforts to stabilize a faltering economy. The increase in oil prices raises the risk of Japan’s inflation quickening, but it’s unlikely to cause the Bank of Japan to reduce its stimulus. This is due to the fact that economic growth continues to underperform despite several measures by the government.

The rise in food and crude oil prices is certain to flow into headline inflation, which has already beyond the Reserve Bank of India’s 2 percent -6 percent goal range’s upper tolerance level. Increased prices are eating into consumers’ disposable earnings, the economy’s backbone, which has yet to fully resume spending following the pandemic.

South Korea is concerned that rising energy costs may harm its export earnings as a result of the war. The country’s manufacturing industries rely significantly on imported energy, and the country’s trade surplus was only recently restored in February following a two-month deficit caused by high oil costs.