(MENAFN - Arab News) Last year, oil prices rose considerably in reaction to the Arab spring, reaching 126 per barrel in April at the peak of the Libyan crisis.
Since then, prices have not returned to the moderate levels of 2010, when the average price for the year was around 80 per barrel. Instead, oil prices remained around 110 per barrel throughout 2011, only to rise a further 15 percent in 2012, past the 125 dollar mark. Higher oil prices usually benefit the GCC (Gulf Cooperation Council) through increased revenues, but when prices rise too fast, or stay elevated for too long, the expensive product becomes less attractive and oil importers tend to reduce their consumption of oil. In such cases, less demand for oil translates into declining global growth, according to a weekly analysis prepared by Camille Accad, an economist at KCIC, an investment firm specializing in emerging Asia investments.
China, like many other countries, has already announced lower growth for 2012. Being a strong importer of oil, demand for the commodity should in theory come down. However, as opposed to India's currency, its domestic currency, the yuan (CNY), has already appreciated by about 5 percent since the beginning of last year. As such, China's purchasing power has strengthened in regards to buying US dollar-denominated assets, in this case oil, making it cheaper for China than for others to import it. Thus the increasing price of oil is well compensated by the strengthening purchasing power of the giant. As a result, China's volume of imports coming from the GCC members of the OPEC (Organization of Petroleum Exporting Countries) has increased.
Forty percent of global oil comes from OPEC, which is made up of just 12 countries, a third of which are members of the GCC. But together, Saudi Arabia, the UAE, Kuwait and Qatar make up about half of OPEC's total supply - 20 percent of global oil supplies. The four GCC countries have been steadily increasing their exports to China, from 4.6 billion a year ago to 7.8 billion worth of oil in February. This corresponds to a 68.8 percent increase in how much China imported from the four GCC countries in just one year.
This rise could be explained by the following reasons: (a) The increased value of oil (pushing the value of those imports), (b) a larger amount of crude oil barrels imported by China, as a result of a stronger CNY and (c) a stronger link between China and the GCC, as 40 percent of China's total oil imports comes from the GCC today in contrast to 34 percent last year.
As a share of its total imports, China imported 20 percent more from OPEC's GCC countries in just one year: As the graph suggests, 5.3 percent of China's total imports came from the four GCC countries in February, from 4.4 percent last year. The CNY has similarly strengthened against the US dollar. Thus China gained by buying oil at a relatively better price than the rest of the world, and OPEC'S GCC members benefited by seeing their export revenues rise considerably.
This should be seen as a reassuring sign. As the US dollar is likely to weaken in the medium term due to strong US monetary policy stimulus and as core-to-periphery trend is gradually returning to normality, China, along with other Asian tigers whose currencies could well be appreciating, can preserve demand for GCC's exports.
This year does not seem to hold too many risks for the GCC, despite significant uncertainties surrounding the European crisis, and many emerging economies anticipating lower growth ahead. If the global environment worsens, outflows away from emerging markets could depreciate emerging market currencies. However, the fact that the CNY is fully controlled by the Chinese government could act as an insurance policy to OPEC's four GCC members - it is already at its most appreciated rate since 1993.
Oil prices will also benefit GCC economies. So far this year, prices have been highly influenced by developments in Iran. With sanctions to affect Iran's balance of payments, we are already seeing major economies moving toward other oil markets, including both Saudi Arabia's and Kuwait's. This will surely increase demand for oil of OPEC's GCC countries. Also, speculative buying has been pushing oil prices to higher levels, increasing export receipts for the GCC. For 2012, GCC should continue to enjoy higher oil revenues, which could well compensate their lackluster domestic growth, and any major euro zone shocks.