The decline is coming, and then the collapse of the Persian Gulf oil empire

US, WASHINGTON (ORDO NEWS) — For most of the world, oil wealth is a curse. Countries such as Nigeria, Angola, Kazakhstan, Mexico, and Venezuela, which have large hydrocarbon reserves, have squandered petroleum-related advantages on trifles.

Only in the Persian Gulf was oil a blessing conducive to the process of state formation. The discovery of oil reserves in the middle of the 20th century turned this archaic and extremely poor region into one of the richest places on our planet. Qatar, Kuwait and the United Arab Emirates are all richer than Switzerland. Even Saudi Arabia, Bahrain and Oman are on the same level as Japan and the United Kingdom.

This transformation was so complete that after that it is easy to believe in some eternal law of nature, on the basis of which wealth arises. However, this is the wrong conclusion. The current price war in the oil markets will only hasten the approach of the moment when the unstable nature of the Gulf economies will be presented with a cruel account.

At the moment, all six monarchies, as well as Russia, have opened their valves and, having filled the crude oil market to the limit, washed away producers with more expensive oil from it. While the growth of 2.5 million barrels per day planned by Saudi Arabia is the largest wave of this tsunami, however, its neighbors also do not intend to restrain themselves. According to the consulting firm Rystad Energy, the United Arab Emirates will add 200 thousand barrels or even more daily, while Kuwait will increase production by 110 thousand barrels per day. Russia will increase production by 200 thousand barrels per day.

Such a demonstration of production opportunities is not caused by considerations of geopolitics. This, in fact, is the mathematical result of a drop in oil prices. As less and less dollars can be obtained for each barrel of oil, the Gulf monarchies are forced to pump more and more oil in order to achieve a result comparable to current income.

In principle, in this war there is a sufficient amount of firepower. The cost of producing one barrel of oil at oil fields in the Persian Gulf is comparable to the price of a bottle of good mineral water.

Even in the case of an extreme scenario, when the price drops to $ 10 per barrel and almost the entire global oil industry suffers losses, Gulf producers will receive some profit. The problem, as we pointed out last week, is related to their economies, which need significantly higher prices to balance their budgets and support dollar-linked currencies.

Central banks of this region and sovereign funds have accumulated amounts that will help them cope with this kind of crisis, as well as with longer-term risks associated with reduced demand. However, as a result of lower prices, their airbags can quickly dry out.

Take, for example, all the financial assets of the Saudi government — the Central Bank’s gold and currency reserves plus sovereign wealth funds minus government debts. They decreased and make up only 0.1% of the gross national product, and during the four years to 2018, they amounted to 50%, since the price of crude oil at the end of 2014 was about $ 100 per barrel. However, the Saudi kingdom, apparently, will be a pure debtor in the foreseeable future even if oil prices again exceed $ 80.

Over the same four years, the net financial assets of the six Gulf monarchies declined by about half a trillion dollars to $ 2 trillion. These data are presented in a study published last month by the International Monetary Fund (IMF). If there is no peak in oil demand before 2040, the remaining amount, according to IMF experts, will end by 2034. And if oil costs $ 20 per barrel, then these assets will run out even faster, and the treasury of these countries will be empty in 2027.

If the oil price is in the range from $ 50 to $ 55, then the gold and foreign exchange reserves of Saudi Arabia, according to last year’s IMF report, will be reduced to about five months of import costs already in 2024. This option is very alarming, because after only a few months the kingdom of Saudis may be in an incredible crisis due to the balance of payments and will have to abandon the fixed dollar exchange rate, which has supported the global oil trade throughout the life of the generation. But, given the current situation, this option looks almost like an optimistic scenario.

There is still time to avoid such a future, but this requires changes in our ideas about the Gulf countries and their role in the global economy.

The governments of the countries of this region carried out very significant budget cuts due to the collapse of prices in 2014, they eliminated subsidies and introduced a sales tax, and made it so that as a result the edges of their magnificent welfare states were slightly frayed. If they drop to a lower level, then there will be a need to introduce additional taxes and limit the bloated state apparatus. None of these steps will be supported by citizens who have never had the opportunity to participate in a democratic vote. The generous defense and security spending, which accounts for almost a third of the Saudi budget, can also be reduced.

Perhaps the period will come to an end when the Gulf states and their sovereign funds were a magic machine, ready to pay the highest price for assets on any continent. They may even be forced to become net sellers. This can affect institutions from the US bond market (Saudi Arabia owns these bonds for $ 183 billion) to Softbank Group Corp., which may consider Riyadh to be a less generous partner in financing large-scale projects of Masayoshi Son.

The Gulf monarchies were able to ride a wonderful wave of wealth and sit on it for about the last half century, however, any wave ultimately breaks. Future generations will never see the wealth that the Gulf countries enjoy today. Maybe they, too, are not spared the oil curse. It’s just that this moment was a little delayed for them.


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The article is written and prepared by our foreign editors from different countries around the world – material edited and published by Ordo News staff in our US newsroom press.