Falling oil prices may prove the best medicine for economies in the Arab world, rebalancing growth towards countries struggling to recover from the Arab Spring uprisings without doing major damage to the oil exporters of the Gulf.
The price of Brent crude has sunk by nearly $20 from its June peak to as low as $96 a barrel in recent weeks, its lowest level since mid-2012. Behind the drop is soft economic data from top consumers such as China; a plentiful supply outlook points to further price declines in the next two years.
It is potentially the biggest shift for the Gulf Arab economies since the global financial crisis five years ago. But the huge financial reserves that they have built since then mean they are likely to cope fairly comfortably with cheaper oil.
"The recent sharp drop in oil prices is unlikely to be a major headache for the Gulf economies," said Jason Tuvey, Middle East economist at Capital Economics in London.
"Large savings and low debt levels mean that fiscal policy won't have to be tightened in most countries," he added, predicting oil prices would fall to around $85 per barrel by the end of 2016.
Meanwhile, cheaper oil would be very good news for weak Arab economies that are still struggling to recover from the political fallout of the region's 2011 revolutions and the economic slump in Europe, which widened their external deficits.
Tuvey estimated that Egypt, Morocco, Tunisia, Jordan and Lebanon would enjoy a $4 billion annual reduction in their combined import bills for every $10 fall in the oil price on a sustained basis.
Since 2011, the Gulf Arab countries have scrambled to protect geopolitical stability in the region by providing tens of billions of dollars of aid to keep the weak economies afloat, particularly Egypt.
An era of cheaper oil could reduce the need for the Gulf to provide this aid - in effect, the oil market would be transferring wealth to the poorer countries through lower prices, rather than Gulf governments transferring it through loans and grants.
Gulf growth rates, oil price http://r.reuters.com/xan93s
A long period of lower oil prices is by no means certain; Brent crude dropped as low as $88 in mid-2012 before quickly bouncing back above $100.
If the current price drop is sustained, Gulf economies are in one way more vulnerable than they have ever been; rapid rises in state spending to ease social tensions since the Arab Spring have raised the oil prices which those countries need to balance their government budgets.
But for the big Gulf economies, those break-even points are still far from current oil prices; Saudi Arabia will have a break-even price of $90.70 a barrel in 2015, up from $73.60 in 2009, the International Monetary Fund estimates. The United Arab Emirates will face a break-even price of $73.30, Kuwait $53.30 and Qatar $77.60.
This implies oil prices could drop another 10 percent or so from current levels to $90 or slightly below, and stay there, without causing serious damage to the finances of most of the six-nation Gulf Cooperation Council - most would simply rake in smaller surpluses than they have enjoyed in recent years.
The exceptions are two small states with less ample oil reserves than the others. Bahrain, with an estimated break-even price of $116.40 per barrel next year, is already running budget deficits and would see these swell.
Oman is expected to face a break-even price of $107.50, which could push it back to the international debt market next year for the first time since 1997.
These economies are tiny, however, and for geopolitical reasons can count on strong financial support from the rest of the GCC if needed. So they are not flashpoints for a crisis.
Fabio Scacciavillani, chief economist at Oman Investment Fund, a sovereign wealth fund, said he expected no major adjustment in GCC budgets because of cheap oil in 2015.
"If this weakness was to persist we probably might see some prudence in the 2016 budget. But we are not talking about drastic drops in investment."
Only if oil prices fell to around $80 on a sustained basis would the rich Gulf nations have to start cutting the spending that underpins their economic growth rates of around 4 percent, many economists believe.
Even then, they would not face disaster. High oil prices over the past four years have allowed the GCC to build up massive financial reserves; the GCC states held some $881 billion in official foreign reserves in 2013, according to the IMF, while their sovereign wealth funds and other state investment vehicles add $1.7 trillion to the cushion, the Sovereign Wealth Fund Institute estimates.
This means governments of the big GCC members could avoid deep spending reductions for years even if current revenues fell well below expenditures. Saudi Arabia's foreign reserves are worth about three times its annual government spending.
"A sustained price of $80 would impact fiscal policy across the region, most likely by cutting the level of capital spending," said Paul Gamble, director of the sovereign group at Fitch Ratings.
"However, a lot of Saudi Arabia's big capital spending plans are to be financed by drawing down deposits at local banks, so they would not be affected."
Because of low debt levels - Saudi Arabia's public debt was 2.7 percent of gross domestic product last year - GCC states could also start funding moderate budget deficits in the debt markets, something which most other countries already do.
The plunge of the oil price below $40 in 2008 was very damaging to the Gulf economies, pushing the UAE and Kuwait into recession and nearly doing the same to Saudi Arabia. But that drop was in the context of the worst global financial crisis in generations; few people expect a repeat.
The extent to which financial markets in the Gulf are unconcerned by the prospect of lower oil prices can be seen in one-year U.S. dollar/Saudi riyal forwards, often used as a way to hedge risk in the region.
The forwards soared as oil prices plunged in 2008 and rose sharply after the Arab Spring uprisings in 2011, showing some investors feared pressure on the riyal's currency peg to the dollar. This year, they have barely moved.
For international investors looking across the Middle East, a moderate drop of economic growth in the Gulf due to lower oil prices could be more than offset by an improvement in prospects for weak economies in North Africa and the Levant.
That is because stronger growth in the poorer countries would help to stabilize them politically, easing transitions towards democratic rule that began with the Arab Spring. Foreign investors may pour billions of dollars into those countries if they are convinced political risks are easing.
Tuvey at Capital Economics estimated that if oil prices remained at their current reduced levels over the next year, it would shrink the combined energy import bill of Egypt, Morocco, Tunisia, Jordan and Lebanon by around 1 percent of GDP.
The resulting boost to growth could help to create hundreds of thousands of new jobs. Egypt's GDP grew 3.5 percent from a year earlier in the April-June quarter and Tunisia's economy is officially forecast to expand no more than 2.5 percent in 2014.
An acceleration of 1 or 2 percentage points due to falling oil prices could bring growth to the levels of 5 percent or more which analysts believe are needed to cut the sky-high youth unemployment which fueled the Arab Spring unrest.
A risk which many economists see in lower oil prices, however, is that they could reduce pressure on governments to reform the wasteful and expensive subsidy systems for fuel and food that distort their economies.
Morocco, Tunisia and Egypt, which projects a huge budget deficit of 11 percent of GDP this fiscal year, have all begun to reform their subsidy systems. If cheaper oil makes the systems easier to run, the impetus for reform could fade.
"Lower oil prices will help the region's importers, but not to the extent that they mitigate the need for subsidy reform," said Gamble at Fitch. (Editing by Andrew Torchia)