The fundamental and cyclical position of the GCC business cycle

We can see both the fundamental and cyclical changes to the business cycle of the Middle East most clearly by looking at places like Dubai and Doha where the changes are most pronounced. But this same exercise can be applied to the smallest village in the region.

If we go back 10 years then cities like Dubai and Doha have undergone a fundamental transformation. Dubai has quadrupled its GDP in that time and shifted from being a successful minor trading hub to becoming the world-city of Arabia with the kind of urban and logistical infrastructure typical of a big global city.

Doha has marshaled global capital and technical know-how to develop its immense gas reserves into a huge cash flow, and is now directing part of that money into creating a smaller version of Dubai with its own unique characteristics.

Fundamentals

These then are fundamental changes, albeit paid for by a cyclical upturn in oil and gas revenues and aided by the turmoil in alternative cities in the region, particularly post 9/11 and the 2003 invasion of Iraq. These are permanent additions to infrastructure that will remain whatever happens in the cyclical sectors.

On the other hand, the cyclical upturn in hydrocarbon prices that started back in 2000 and peaked last summer may have run its course, or be set for a brief spike due to geopolitical disturbances before resuming a downward course.

For the reason behind this cyclical downturn in oil and gas prices we have only to consider the global economic cycle. The era of low interest rates is over and the world is now adjusting to a more expensive cost of capital. This has caused a housing crash in the US and an economic slowdown.

Cyclical downturn

The problem is that cyclical downturns always have to be played through the cycle. That means the US slowdown becomes something near or actually a recession, and that will certainly put a damper on oil and gas prices as demand will fall both from the US and from the nations exporting to the US.

Whether this slowdown in hydrocarbon demand lasts for long is another issue. It could be that supply side constraints, vis-a-vis peak oil are now so critical that the world is facing a fundamental up shift in oil and gas prices. But that will not stop the cycle turning through a phase of lower prices as cyclical demand falls due to a US slowdown or recession.

This will then produce a testing situation for the fundamentals of the Gulf economy. Liquidity will dry up and projects will have to stand or fall on their own internal economics. In short, a cyclical downturn will provide a challenge to economic fundamentals.