Some of the world’s biggest hydrocarbon producers, the Gulf nations, are seeing billions of dollars added to their coffers helped by a spike in oil prices fueled by the war in Ukraine. They are expected to post their first budget surpluses after an eight-year oil slump that was compounded by a pandemic-related recession.
“This will lead to an aggregate GCC fiscal surplus in 2022 of $27 billion,” MUFG said, adding that recently implemented austerity measures as well as rising oil prices will support balance sheets.
Gulf states that depend on hydrocarbons for most of their income are used to oil booms and busts. In the past, they have redoubled their rhetoric to diversify sources of income during busts, but have often fallen short of those ambitions during booms.
Will this boom be any different?
“They don’t take what’s happening for granted,” said Amena Bakr, chief OPEC correspondent at Energy Intelligence. “They are using the current price of oil to drive these projects and diversification plans, which will help them when the price goes down.”
In the past, Gulf states have engaged in public sector wage increases and generous handouts to citizens during oil booms, neglecting diversification and reinvestment. That is unlikely to happen this time, said Omar Al-Ubaydli, Research Director at the Bahrain Center for Strategic, International and Energy Studies.
The windfall from high oil prices “will help alleviate short- and medium-term budget and liquidity problems and help delay the need for further fiscal restructuring,” he said.
“The signs so far are that fiscal policy is being done with a much firmer hand than during previous booms,” said Steffen Hertog, an associate professor at the London School of Economics. “Governments are sticking to their relatively austere budgets and there is no sign of big handouts in the form of subsidies, public sector hiring or salary increases.”
The mindset in the Gulf now is that economies need to fortify themselves against future oil price declines and reduce reliance on oil revenues, Hertog said. “Intensifying patronage like during previous booms would undermine this,” he added.
During the recession, the Gulf states introduced value added tax and reduced public sector spending and contracting, thus lowering the price per barrel needed to break even from their budgets.
Breakeven oil prices fell significantly in Saudi Arabia, the United Arab Emirates, Qatar and Oman, said Garbis Iradian, chief economist for the Middle East and North Africa at the International Institute of Finance in Washington DC. “Most GCC countries could do very well now if oil prices drop to around $70 a barrel, perhaps in 2023.”
UAE Environment Minister Mariam Al Mheiri called the current crisis a “reality check” for the world, saying market disruptions caused by Russia’s invasion of Ukraine showed global systems were not they are ready to abandon hydrocarbons altogether, reported The National, backed by the state of Abu Dhabi. Newspaper.
“What the Gulf states are saying is that you need to control the pace of the transition because you need to use all forms of energy,” Bakr said. “Renewable energy is not yet up to date and cannot replace hydrocarbons… [and] can’t fill that base load that’s required to meet the demands.”
Global market demand for oil has boosted the GCC’s confidence in demand for its main commodity and its ability to recover, analysts say.
“I think they [Gulf states] they are more confident that they can sustain the prices needed to break even (around $70 a barrel) for much longer,” Hertog said.
Additional reporting by Abbas Al Lawati
Other highlights from the Middle East
Jordan’s Prince Hamza renounces his royal title in protest of state policies
Former heir to the Jordanian throne, Prince Hamza bin al-Hussein, said in an online statement on Sunday that he was giving up his royal title in protest of Jordan’s current policies.
- Background: Hamza was accused last April of trying to destabilize the monarchy in a foreign-inspired plot. He was placed under house arrest after making accusations about corruption and authoritarian rule, but was spared punishment after he pledged allegiance to his half-brother, King Abdullah.
- why does it matter: Hamza has been predominantly silent since last year’s dispute, which rocked Jordan’s image as a stable state in the region. Hamza’s statement on Sunday came at the start of the Muslim fasting month of Ramadan and was full of religious language that appeals to Jordan’s conservative bloc.
Warring sides in Yemen agree to a national truce for the first time in years
Yemen’s warring parties have agreed to a nationwide truce for the first time in the country’s seven-year conflict, the UN envoy said late last week. The truce lasts for two months and can be renewed with the consent of both parties. The ceasefire appeared to hold as of Monday afternoon.
- Background: For the past seven years, Yemen has been torn apart by conflict between a Saudi-led coalition and the Iranian-backed Houthis. The war has driven millions of people to starvation and has turned the country into one of the worst humanitarian crises in the world. The United States and the UN have been trying since last year to organize a permanent truce that can reactivate the country’s economy.
- why does it matter: The truce will allow the importation of fuel to the areas controlled by the Houthis, as well as some flights from Sanaa airport. It is seen as the most significant step yet to end the conflict, especially after worsening food shortages after the Ukraine war further exacerbated the country’s crisis.
Iran Blames US for Halting Vienna Nuclear Talks
Iran’s Foreign Ministry said Monday that the United States is responsible for the pause in talks between Tehran and world powers in Vienna to revive their 2015 nuclear deal. Spokesman Saeed Khatibzadeh said a deal is “well within reach.” hand”.
- Background: The US State Department said on Thursday that a small number of outstanding issues remain in the nuclear talks, adding that Tehran has a responsibility to make those decisions. Iran has said there are still issues pending, including Washington’s removal of a foreign terrorist organization designation against Iran’s Islamic Revolutionary Guard Corps.
- why does it matter: Both Iran and the US have indicated that they may lose patience if the talks do not continue. A return to the deal could release more than a million barrels of Iranian oil onto the market a day, potentially easing an oil price rally that has caused inflation globally.
around the region
In Dubai, the business capital and emerging crypto hub of the Middle East, a new school is taking the digital economy to a new level by allowing parents to pay their children’s tuition fees in cryptocurrency.
Citizens School, a member of the Al Zarooni Emirates Investments family of businesses, opens its doors in the fall of 2022 and says that while it will accept tuition payment in local currency, it will also accept Bitcoin and Ethereum.
Payments in Bitcoin and Ether will be made through a blockchain platform that will then convert the currency into UAE dirhams, choosing the best market price in a given period of time, says Hisham Hodroge, CEO of Citizens School.
“At checkout, you take the best exchange rate at that specific time,” Hodroge told CNN.
“As a school, we don’t have crypto in our account,” he said. “We are effectively providing or facilitating through a third party the option or option for parents to pay through crypto.”
The school has not yet announced the platform it intends to use.
While a handful of universities in the US and Europe have recently accepted cryptocurrency payments, the Dubai-based school claims to be the first of its kind in the region to implement it at the school level.
Dubai seeks to become a global crypto hub. Last month it issued its first law governing digital assets and formed the Virtual Assets Regulatory Authority (VARA) to oversee the sector.