the dispute between two oil-producing giants; Russia and Saudi Arabia
Recently, the world has witnessed the dispute between two oil-producing giants; Russia and Saudi Arabia. The conflict emanates from different views about the oil price, production cuts, and how to handle competition from U.S shale oil production. Consequently, Saudi Arabia has increased production considerably, thereby flooding the markets the world over with cheap oil, causing a price collapse. The oil spat is happening during a period of weak demand for oil, which has been further weakened by the coronavirus pandemic. The weak demand in the recent past has led to low prices, which have strained the budgets of many oil-producing countries. Thus, the oil dispute between Russia and Saudi Arabia is likely to deteriorate the economies of many Middle East countries, which might cause geopolitical tensions within the Gulf region.
Generally, the drop in prices will reduce the revenues for gas and oil producers, which are already experiencing fiscal deficits. For instance, more than half the countries in the Gulf region would need oil prices to double from the present level so that that can reach the fiscal breakeven point. Moreover, before the ongoing price disputes, the International Monetary Fund highlighted that the Gulf Cooperation Council (GCC) nations would exhaust their financial reserves within 15 years. Therefore, considerable cost reduction initiatives are necessary for the countries, including a reduction in wages and subsidies associated with public services. Such measures are expected to cause social stability enjoyed hitherto.
While some countries such as the UAE and Saudi Arabia can handle fiscal deficits by borrowing from global capital markets and taping into their reserves, the non – GCC countries such as Iraq and Iran do not have such options due to U.S sanctions. Specifically, Iran has lost significant oil revenue due to the trade sanctions as oil exports have reduced by 80% since 2017. Consequently, its GDP declined to 9.55 after a 4.85 negative growth in 2018. Inflation in the country is at 35%. It has affected the purchasing power, and more price drops will affect the government’s ability to maintain social spending, which might result in cuts for social expenditure that might cause unrest, as witnessed in 2019. As a result, Iran has borrowed $5 from the IMF as a contingency measure; the first time since 1962. However, Iran will not be adversely affected by the price wars as it started diversifying its economy in 2018 following trade sanctions, and now oil revenues account for 30% of its budget. Conversely, Iraq might suffer as oil revenues account for 95% of its budget. Iraq is also experiencing a continuous political crisis and suffering from U.S sanctions, which include cash flow restrictions and power imports.
Both UAE and Saudi Arabia are likely to suffer due to the price drop. The UAE has never recovered since the 2008 recession, and despite extensive diversification, the state has accumulated debts about 50% of its total GDP. Moreover, its stock exchange has lost about 61% of its value in the last years, while real estate prices dropped as investors feared a bubble. The UAE was expected to hold a trade expo later in October which is now uncertain due to the ongoing Coronavirus epidemic. Saudi Arabia is also struggling with shrinking reserves and a widening fiscal deficit. Therefore, the Kingdom assertive policy that has led to the price war might damage the country international standing and also affect the crown effects to consolidate power if it impacts social spending in the country.
Moreover, the price war might cause instability in regions beyond the gulf including in Jordan, Lebanon and Egypt. For instance, Egypt depends on GCC countries to sustain development, security and social services. Lebanon and Jordan also depend on GCC assistance for various projects. Thus, if fiscal pressure continues for GCC countries, the countries might reconsider their financial aid to other countries in the Middle East. In summary, the oil dispute between Russia and Saudi Arabia is likely to deteriorate the economies of many Middle East countries which might cause geopolitical tensions within the Gulf region.