Reports that oil is falling through the $30 threshold and may even fall to $20 per barrel does not bode well for Middle Eastern economies. The situation in Saudi Arabia is so tenuous that the Kingdom is considering an IPO for Saudi Aramco, its national oil company. Governments in Qatar, the UAE and other oil producing states, set state budgets based on $60-$80 oil and now face massive deficits and an inability to maintain governmental services without incurring additional debt. Saudi Arabia has been reported to have burned through $100Bn of its reserves.
This brings up a great question. If the allegations of government subsidies to the Gulf Three airlines made by US and European competitors are true, then given the current economic situation, those subsidies (if they exist) will dramatically drop. But if there are no subsidies (which the ME3 claim), apart from a decline in oil business traffic as industry spending tightens, the impact shouldn’t be too significant.
Current events will soon tell us which side of the story to believe.
There will also be an impact from low oil prices on aircraft deliveries. While we don’t foresee a rush in order cancellations, we do foresee a significant delivery deferrals, as the ME3 airlines reconsider whether they really need those new fuel saving aircraft that come at a higher capital cost. The ME3 have huge aircraft orders in line with their unmatched growth plans.
There are two sides to lower oil prices. If airlines pass fuel savings on to customers, there should be a stimulative impact on demand, and a corresponding need for additional lift. But if airlines fail to rollback fares, despite dramatically lower fuel costs (which currently seems to be the case) traffic growth and the need for new aircraft should be muted.
We believe the latter scenario could result in lower demand just as Airbus and Boeing ramp-up their supply chains for higher production levels, causing difficulties as suppliers invest in additional capacity that may now be unnecessary.
Could lower fuel prices be the weapon that bursts a few bubbles? Time will tell how large the impact will be.