For the Gulf region, the last four weeks could not be more economically costly. Gulf states are facing not one but two challenging events causing great economic and fiscal instability in the region. The first challenge is the global pandemic of novel coronavirus (COVID-19) that has lowered the demand for oil and gas to unprecedented levels at a time when the oil market is already facing low demands and oversupply. Second is the disagreement between Saudi Arabia and Russia regarding the extension of the OPEC+ agreement, which led to the eruption of an oil price war between Riyadh and Moscow. Consequently, nearly all of the Gulf states now expect slow economic growth and another year of budget deficit.
The impact of the global pandemic has led to great losses in the stock markets, including those of the Gulf.[1] [2] This downturn began when many Asian economies were put on lockdown as the coronavirus outbreak started there, and then gradually reached Europe and the Gulf region. The global economic slowdown threatens to lead to a global economic recession as the industrial, tourism, and energy sectors have been impacted the most by these two crises. Nearly all of the Gulf economies are major investors in the global energy sector, and many of them have been increasing their investments in tourism for nearly a decade now.[3] These striking effects will probably continue into at least the summer of 2020.
Just when Gulf rulers thought it could not get any worse for their economies, the coronavirus outbreak was immediately followed by an oil price war between Russia, one of the largest oil producers in the world, and Saudi Arabia, the world’s largest oil exporter. This war has ended more than three years of agreement, widely-known as OPEC+, and has brought oil prices to below $30 per barrel.[4] On March 9, the price of oil faced the biggest drop in one day since the Gulf War in 1991.[5] The consequences are expected to continue for the remainder of the year. The International Energy Agency and OPEC expect that some oil-producing developing countries may lose up to 85% of their oil revenues, which represents the main revenue for their national budgets.[6] The implications of the two crises have led several analysts to predict the stock market to lose 30-40 % of its value and oil prices to drop below $20 per barrel in April as the OPEC+ agreement expires at the end of March 2020.[7]
For the Gulf states, the collapse of the Saudi-Russian pact that has balanced the oil market and prices since 2016 places them in one of the greatest economic difficulties in decades. Immediately after the failure of the negotiations, the Saudis raised their oil production from 9.7 million to 12.3 million barrels per day (bpd), followed by Russia, who announced an increase of 500,000 bpd, as both countries aimed to protect their share in the oil market.[8] As expected, the announcement of the oil supply increase has led to a price collapse of around 30%.
Such flexing of muscle in the market to posture an ability to control oil pricing globally is not uncommon for Saudi Arabia. King Khalid decided to flood the oil market in a challenge to the Shah of Iran in 1977, and more recently, King Abdullah increased the supply in 2014 for similar reasons. In the last decade, the tight Saudi control of the oil market has been challenged by the new and inexpensive technology for shale oil extraction. However, Saudi Arabia is still able to lower the price by flooding the oil market due to its low-cost production and the kingdom’s high reserves and pumping capacity.[9]
The oil price collapse has also impacted the U.S. energy sector. Amid the last few weeks of this oil price war, the previously-raised notion by President Trump that the U.S. currently dominates the oil market as a result of increased production seems inaccurate.[10] The American oil sector could be one of the most affected by the fall of prices and we could see smaller oil companies go bankrupt if prices continue dropping. Therefore, the real price war will be in the long term while we wait to see whether Saudi Arabia or Russia will cave first. This struggle is mainly linked to two factors, first, the cost of the oil production and second, oil price breakeven. According to the International Monetary Fund (IMF), Saudi Arabia’s breakeven oil price is $85 while Russia is at $42, almost exactly half.[11] [12] Yet, oil production cost per barrel for Saudi Arabia is around $5, which could be an advantage for Riyadh.[13]
And new conditions surface each day. While the pandemic and the crash of oil prices are the first two parts of this dilemma facing the Gulf, the third part is expected to unfold soon as Europe and the U.S. face expected spikes in COVID-19 cases. This spread will greatly impact the European and American economies, and consequently the Gulf region since it will reduce demands for oil and gas. This scenario will probably incite further drops in oil and gas prices to the teens per barrel, which would certainly leave Gulf state economies in an even worse situation as the Gulf region is among the main exporters of oil and natural gas to Europe and the U.S.
In sum, there is no winner in this situation. While the whole world is dealing with the COVID-19 pandemic, Gulf states are equally dealing with a reduction in oil demands and an economic crisis. Therefore, flooding the market with more oil will only cause more damage in the near and mid-terms for nearly all Gulf states. While Saudi Arabia made this move to protect its share in the oil market, the de facto leader of OPEC might be able to weather the drop in oil prices for a few months; however, other countries in the Gulf region are expected to face major challenges, especially Iraq, Iran, and to a lesser extent, Kuwait.
References:
[1] “Gulf stock markets hit multi-year lows as virus, oil weigh,” Arabian Business, March 19, 2020
[2] Dave Goldiner and Chris Sommerfeldt, “Wall Street suffers worst losses since 1987 crash as coronavirus fears escalate,” NY Daily News, March 12, 2020
[3] Dallen J. Timothy, “Tourism Trends in the MENA Region,” European Institute of the Mediterranean, 2019
[4] Laura Sanicola, “Brent crude sinks below $30 a barrel as recession fears weigh,” Reuters, March 16, 2020
[5] Pippa Stevens, “Oil plunges 24% for worst day since 1991, hits multi-year low after OPEC deal failure sparks price war,” CNBC, March 8, 2020
[6] Sam Meredith, “OPEC and IEA warn developing countries could lose up to 85% of oil and gas income this year,” CNBC, March 17, 2020
[7] Natasha Turak, “Oil prices could hit teens in coming weeks as markets crater over coronavirus and price war,” CNBC, March 17, 2020
[8] Rania ElGamal and Olesya Astakhova, “Saudi Arabia, Russia raise stakes in oil production standoff,” Reuters, March 10, 2020
[9] Andrew Scott Cooper, “Why Would the Saudis Deliberately Crash the Oil Markets?” Foreign Policy, December 18, 2014
[10] “President Donald J. Trump Remains Committed to Expanding Energy Production and Increasing Manufacturing in the United States,” The White House, August 13, 2019
[11] Davide Barbuscia, “Saudi Arabia would need oil at $80-$85 a barrel to balance budget: IMF official,” Reuters, February 11, 2019
[12] Huileng Tan, “Oil prices will keep falling until Russia or Saudi Arabia hit ‘pain point,’ says former White House aide,” CNBC
[13] “Cost of Producing a Barrel of Crude Oil by Country,” knoema, May 4, 2018
