Gulf oil producers are finding it difficult to diversify their economies away from their biggest export revenue contributor, and it may take them at least a decade to make any progress on this. This is what Moody’s forecast in a recent report, as quoted by Reuters, noting that this reliance on oil revenues would be the “key credit constraint” for the six members of the Gulf Cooperation Council: Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates.
The forecast hardly comes as a surprise for anyone watching the region. The Gulf oil economies tried to diversify their economies amid the 2014 oil price crash, but they lacked the resources to do much precisely because of the oil price crash. To tackle the crisis, the governments of these countries had to introduce austerity measures and attempted some reforms, which were met by strong public opposition, hinting of the danger of destabilization if the reform push continued.
Now, the situation is even direr because of the unprecedented degree of demand destruction that the pandemic caused last year. This demand destruction led to a price collapse that forced the Gulf economies to borrow increasingly heavily.
Earlier this year, the International Monetary Fund issued a forecast that the revenues of oil producers in the Middle East and North Africa could see a slump of $270 billion by the end of 2020. The economies of the Gulf producers alone, a Fund official said at the time, could shrink by 7.6 percent in 2020.
Borrowing was the only way for these economies to get their hands on some much-needed cash as the world reeled from the effects of the pandemic. It was no time for diversification when you had to survive. Now, however, things are different. Oil prices have rebounded so strongly that there are forecasts Brent could hit $100 before long.
For high-breakeven economies such as Bahrain and Kuwait, this would be a welcome solution to their budget problem. Even for those with lower breakeven levels, such as Saudi Arabia, higher prices are invariably welcome news. After all, the Kingdom is working on an economic diversification program that costs hundreds of billions. There is no other place these hundreds of billions could come from except oil export revenues.
This, of course, would keep the Gulf economies in the same vicious circle that saw them struggle amid the last oil price crisis. According to Moody’s, it would also interfere with their diversification efforts.
“If oil prices average $55/barrel ... we expect hydrocarbon production to remain the single largest contributor to GCC sovereigns’ GDP, the main source of government revenue and, therefore, the key driver of fiscal strength over at least the next decade,” the ratings agency said in its report.
This is a problem in a world where a lot of big economies are moving away from oil. Another thing that is a problem, according to Moody’s, is, ironically, the diversification drive that would fuel intra-GCC competition, ultimately hampering every member’s efforts to diversify.
Resources necessary to fund this diversification are also limited, the ratings agency noted, casting further doubt over the chance of success of any diversification push. The reason for this resource scarcity lies in the manner in which these countries are run.
Citizens in the GCC enjoy a largely tax-free life and a lot of state-subsidized social services such as healthcare and education. This means they stay happy and vote appropriately, but it also means that there is little tax revenue to use to wean the economy off oil revenues. Any change in that social contract would be dangerous for the ruling elites.
It looks like the Gulf economies have painted themselves into a corner, and the only way to leave it is to risk getting overthrown with all the dramatic implications of every long-standing regime change. Luckily for them, the post-oil era is still in the distant future despite the many predictions saying we’re just years away from peak oil demand. Just look at the latest oil price rebound.
For all the hype around growing renewable energy installations and EV sales, the fact that oil prices have not just recovered to pre-pandemic levels but have already exceeded them suggests that oil is still going strong.
And while oil is going strong, so will the Gulf economies.
By Irina Slav for Oilprice.com