The economy of Gulf countries mostly depends on oil prices and ‘black gold’ sales volumes. That is why, after the region faced a price war declared by Saudi Arabia in response to Russia’s refusal to reduce oil production, the economies of the UAE, Oman, Saudi Arabia, Qatar, Iraq, and Iran were under attack (England, Al Omran, and Kerr, 2020). The situation was also exacerbated by declining consumer demand caused by the coronavirus pandemic. In March-May, the Gulf countries had to go through difficult times. This paper aims to explain how the recent drop in oil prices posed severe challenges for Gulf oil-exporting countries.
After oil prices collapsed in early March, OPEC members, including MENA and Gulf countries, had only two possible solutions. First, some countries, including Saudi Arabia, resorted to state fiscal regulation (Poudineh and Fattouh, 2020). Secondly, oil-exporting countries had to agree on a joint reduction in oil production, as this is the only way to create a shortage in the market and increase the price (Poudineh and Fattouh, 2020). It is noteworthy that OPEC + collapsed as a result of a conflict of interest but was then restored.
Therefore, countries need to reduce the dependence of their economies on crude oil sales through diversification to mitigate long-term risks. In particular, states have to find a way to develop areas indirectly related to the oil industry (Poudineh and Fattouh, 2020). Maintaining a competitive advantage is necessary since reliance on industries that are entirely different from the main business of states will not allow them to remain competitive. In this connection, European nations proposed that the Gulf countries begin to invest in green energy development long before the oil price crisis.
Since the US companies own about half of the oil companies based in Saudi Arabia, the decision to declare Russia a price war was made more by the US than by the Arab government represented by Prince Mohammed Bin Salman. This step was most likely postponed until the onset of a ‘hotter’ political time, for example, the anticipation of the US presidential election. Notably, the collapse in prices affected not only the Gulf countries but also small US and Canadian oil producers, which cannot compete with the leading players in terms of non-cessation of production in the face of negative prices. During the crisis, there were days when the oil price was negative, meaning that producers had to pay customers. The extracted oil must be stored somewhere, and despite the decline in production, the storages of oil producers turned out to be crowded due to the lack of demand. At the same time, the oil production processes from a technical point of view allows either continuous production, even the minimum acceptable volumes, or complete closure of the oil field.
Therefore, Saudi Arabia is an affected party, just like the rest of the countries in the bay. Especially considering that the state provides most jobs, and its economy rests on oil sales. Saudi Arabia managed to survive the price war, thanks to the extensive state budget. Interestingly, the state did not even have to abandon some ambitious projects developed personally by Prince Bin Salman, which were included in Vision 2030 (Vision 2030, 2020). However, the Minister of Finance announced an increase in VAT from 5% to 15% and stopped compensation for living for civil workers (England, Al Omran, and Kerr, 2020). Besides, a proposal was made to strengthen the economy by developing incentives for the private sector (England, Al Omran, and Kerr, 2020). Noteworthy, Vision 2030 aims at reducing the dependence of the state economy on the oil industry (Vision 2030, 2020). However, the government has so far failed to develop clear and feasible schemes.
Iran’s economy, which depends on the public sector, has also been threatened. The dramatic decline in oil prices, which was the most significant one-time drop after the Gulf War, was a considerable blow. Now, experts say that Iran’s economy could not withstand such a situation for a long time. Given the existing US sanctions, Iran was on the verge of an inability to pay for vital services for the population and ensure security. Besides, the country suffers from COVID-19; in particular, in early March, Iran was in third place in the number of recorded cases after China and South Korea. Experts noted the likelihood of deliberate underestimation of real indicators, as Iranian politicians were intending to ensure the turnout on February 11 election (Chakraborty, 2020). After two Iranian lawmakers died from the virus, General Hossein Salami accused the United States of intentionally spreading the virus in Iran (Chakraborty, 2020). Therefore, the subsequent solution to economic problems did not come as a surprise to the US.
In particular, the Iranian government decided to resume oil supplies to Venezuela, in violation of US sanctions against both countries. In particular, Iran managed to deliver four fuel tankers to Venezuela in May 2020 (Iranian oil reaches crisis-stricken Venezuela, 2020). Experts expect the total supply to be about 1.5 million barrels of gasoline and oil refining components, while another tanker is still on its way (Iranian oil reaches crisis-stricken Venezuela, 2020). This move is crucial for the Venezuelan oil industry, which had to close its refineries.
The reason was the need to repair equipment, and the inability to import a diluent for the processing of super-heavy crude oil, which fell under US sanctions. Therefore, Iran also sent two aircraft to Venezuela with a cargo of equipment and chemicals necessary for the production of gasoline in April 2020 (Slav, 2020). Thus Iran helped to restart a refinery in Karakas with a capacity of 310,000 barrels per day (Slav, 2020). In response to this service, Venezuela paid Iran nine tons of gold that had already been delivered to Iran (Slav, 2020). In light of the above, although Iran violated the sanctions, such a solution to economic problems was expected and economically justified.
Due to declining oil export revenues, the Iraqi economy also felt threatened, given the rather high incidence of COVID-19. In particular, the budget did not even have the $ 5 million required by the Minister of Health to help fight the virus (Saadoun, 2020). Besides, because of curfews, most non-governmental sector employees lost their jobs – the industrial, tourism, transport, and partly agricultural sectors stopped work processes. The unstable political situation exacerbates the problems in the economy after the Iraqi Prime Minister was ousted as a result of public rallies in November.
At the same time, militias receiving Iran’s support continue to attack US troops while there are not enough funds in the country to strengthen security. Iraq found itself without financial reserves, while 90% of state revenue comes from oil exports (Saadoun, 2020). The government created a pandemic donation fund, raising less than $ 50 million in contributions (Saadoun, 2020). Nonetheless, such a fund will not fill a monthly state budget deficit of more than $ 2 billion (Saadoun, 2020). Besides, the informal economy was blocked due to the coronavirus pandemic; therefore, builders, street vendors, domestic workers, and taxi drivers lost funds for living.
Currently, the state owns most oil companies, factories, and plants. Up to 7 million Iraqis, either work in the public sector or depend on government contracts, and salary payments account for more than 40% of the state budget (Saadoun, 2020). In this regard, the government had to reduce wages for middle and senior workers, and the option of introducing electricity payments to households was also considered. It is noteworthy that in a similar situation in 2014, after a sharp drop in oil prices, Iraq received funding from the IMF of $ 4.5 billion (Saadoun, 2020). However, such generosity was driven by international support in the fight against ISIS; besides, the current situation is exacerbated by the coronavirus pandemic worldwide. The state budget deficit in 2020 amounted to $ 40 billion, with a total budget of $ 135 billion; when recounted taking into account falling oil prices, the deficit reached $ 51 billion (Rubin, 2020). Besides reducing salaries in the public sector and seeking international support, the Iraqi Parliamentary Committee proposed several measures to overcome the crisis.
Among them was the cessation of investment costs, the limitation of operating expenses, and the conclusion of agreements with creditors to defer repayment of Iraqi local and external debt. It was also decided to collect the public debt from cellular and telecommunication companies (Rubin, 2020). The government proposed to suspend the payment of money to investors in the electricity sector, support for the treasury in the cost of crude oil exports, support regional border outlets, and review the exchange rates of the Central Bank of Iraq.
In Dubai, the coronavirus pandemic, coupled with a sharp drop in oil prices, has pushed the state to the edge of a financial crisis. The total external debt of government-related organizations (GREs) amounted to $ 88.9 billion, or more than 80% of Dubai’s gross domestic product; thus, the emirate was on the verge of default. The pandemic has led to a decrease in revenues in real estate, transport, tourism, and hotel businesses. Dubai World Expo 2020, which usually attracts a lot of investment, will also be delayed. Experts believe that the economy of Dubai may contract by at least 5-6% in 2020 (Turak, 2020). It is noteworthy that a decrease in income has been observed in sectors for several years. In 2019, Dubai’s economy grew by only 1.94%, which is the slowest pace since the recession in 2009 (Turak, 2020). The only salvation from the financial crisis for Dubai is the assistance of Abu Dhabi.
Abu Dhabi’s earnings also suffered from falling oil prices, but the emirate’s strong economy softened the blow. Therefore, in March, Abu Dhabi announced the allocation of $ 27 billion in support of the private sector and banks (Turak, 2020). The assets of the emirate’s sovereign funds amount to 950 billion dollars – 13 times more than the external debt of Dubai (Turak, 2020). Nonetheless, the government of Abu Dhabi is in no hurry to help the neighbouring emirate, even though the refusal to support Dubai will likely cause concern about the UAE’s economic and political stability.
The fall in oil prices and the COVID-19 pandemic did not affect the Qatar economy in the same dramatic way since LNG sales bring considerable revenue to the country’s budget. At the same time, the fall in prices for LNG compensated the decline in demand associated with the pandemic. In particular, in March 2020, the monthly LNG imports to Europe amounted to 10.45 million tons, which is a record high (Katona, 2020). Demand for LNG in China had already returned to the level before the pandemic. However, India announced a complete blockage; Japan paused due to a state of emergency, and South Korea reported declining demand. Qatar’s low manufacturing costs, huge resource base, and lack of internal competition put the country in a favourable economic position for LNG exports and allow it to compete with the United States and Russia.
Thus, it was discussed how the fall in oil prices created acute tests for oil-exporting countries in the Persian Gulf. To summarize, even though oil prices have grown over time, most Gulf countries, whose economies depend on oil export revenues, have found themselves in a challenging situation. For example, Iran had to violate US sanctions and begin cooperation with Venezuela. At the same time, Iraq cut salaries for public sector employees and proposed several government measures. For Saudi Arabia, the March-June period was not so disastrous due to the country’s full budget. Dubai faced more financial difficulties, unlike Iraq, where the main blow fell on society. Finally, Abu Dhabi was able to survive in a difficult situation calmly, thanks to a strong economy, just like Qatar, which has an alternative source of filling the treasury through the sale of LNG.
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