Does oil price spike herald return of good times?

Wednesday’s dramatic jump in the price of Omani crude futures could potentially signal a return to an era of buoyant prices reminiscent of the “golden times” that prevailed before the 2014 global oil price collapse, according to a well-known economist.
Oman crude futures surged by unprecedented $6.43 to settle at $88.96 per barrel on the Dubai Mercantile Exchange — a spike described as “historic” by Dr Fabio Scacciavillani (pictured), Chief Strategy Officer at Oman Investment Fund (OIF), a sovereign wealth fund of the Sultanate of Oman.

Speaking to the Observer, the Muscat-based expert said the spike, as well as the strong uptrend in crude prices in the recent past, has immensely promising implications for Oman’s fiscal situation.
“The oil price increase, given the role of hydrocarbons as a major driver of the Omani economy, is significant for two reasons: firstly, it will have a positive impact on government finances, and secondly, it will help reinforce the confidence of entrepreneurs, bankers, employers, investors, financial markets and international creditors in the Omani economy. The sun is shining once again over the horizon because the clouds have dissipated!” Dr Scacciavillani commented.
Prices of the Oman Crude Oil Futures Contract (OQD), which represents the Asian crude oil benchmark on the DME, have climbed by over 20 per cent over the past fortnight on the back of a combination of factors — both short-term and long-term, according to the economist.
Short-term factors contributing to the strong rally in global oil prices, he said, include concerns stemming from the reintroduction of sanctions by the United States against Iran, the civil war in Libya which continues to flare erratically, and the collapse of the OPEC-member Venezuela’s economy, among other developments.
Adding to the mix were statements coming out of Saudi Arabia following Sunday’s OPEC meeting that it would not increase output to plug any shortfall in production once US sanctions constrain Iranian crude exports.
Also fuelling the spike has been the long-term impact caused by the imbalance between demand and supply globally, said Dr Scacciavillani. “Thus while demand has been increasingly strongly and steadily over the past few years, supply has not been keeping pace — the result of oil companies failing to invest in new exploration programmes and development of new oilfields when prices were low. It is this combination of factors that has led to this historic spike in the oil price.”
The windfall from surging oil prices will have positive portends for the Omani economy, the official said. “Although it’s still early days in terms of how this windfall will be spent, we can draw two implications from this latest news: One — that the good times are here to stay; and Two — that we can look to the future with confidence. With this upsurge in prices, we have a broader set of choices that can be contemplated. No doubt, 2019 will be a year in which a new positive cycle can commence.”
Buoyant oil prices also bode well for Oman’s already rapidly improving debt situation, Dr Scacciavillani noted. “The debt situation was already manageable because the 2018 budget was based on an oil price assumption of $55 per barrel. It was a prudent budget underpinned by wise fiscal policy. But the reality has proven much better than expectations or forecasts. This gives the government much larger room to manoeuvre and especially in launching new investment projects, or reviving projects kept on hold because of the constrained financial situation, and so on.”
He stressed nevertheless the importance of prudence in fiscal policy and spending at all times. “We must always remember that wise policy takes good news as temporary and bad news as permanent. So while we brace ourselves for good news on the economic front, let us not forget that the global economy could always experience some unforeseen shocks. It’s important not to get carried away because preparing for bad times is an activity that we must do in good times. Prudence must always be the pillar of any long-term policy.”