Some of the world’s biggest hydrocarbon producers, the Gulf nations are seeing billions of dollars added to their coffers aided by a Ukraine war-driven rally in oil prices. They are expected to register their first budget surpluses after an eight-year oil slump that was compounded by a pandemic-linked downturn.
“This will lead to an aggregate GCC fiscal surplus in 2022 of $27 billion,” said MUFG, adding that recently implemented austerity measures as well as the oil surge will support balance sheets.
Gulf states that rely on hydrocarbons for the bulk of their income are used to oil booms and busts. In the past, they have redoubled their rhetoric to diversify sources of revenue during busts but have often fallen short on those ambitions during booms.
Will this boom be any different?
“They are not taking what’s happening for granted,” said Amena Bakr, chief Opec correspondent at Energy Intelligence. “They are using the current oil price to fuel these projects and diversification plans, which are going to help them when the price drops.”
In the past, Gulf states engaged in public sector wage raises and generous handouts to citizens during oil booms, neglecting diversification and re-investment. That’s unlikely to happen this time round, said Omar Al-Ubaydli, Director of Research Bahrain Center for Strategic, International and Energy Studies.
The windfall from high oil prices will “help alleviate short- to medium-term budgetary and liquidity problems and will help them delay the need for further fiscal restructuring,” he said.
“So far the signs are that fiscal policy is made with a much steadier hand than during previous booms,” said Steffen Hertog, associate professor at the London School of Economics. “Governments are sticking to their relatively austere budgets and there are no signs of big giveaways in the form of subsidies, public sector hiring or pay rises.”
The mindset in the Gulf now is that economies need to fortify themselves against future crude price dips and reduce dependence on oil income, said Hertog. “Stepping up patronage as during previous booms would undermine this,” he added.
During the downturn, Gulf states introduced value added tax and cut spending and public sector hiring, thus reducing the price per barrel needed to breakeven their budgets.
Breakeven oil prices declined significantly in Saudi Arabia, the UAE, Qatar, and Oman, said Garbis Iradian, Chief Middle East and North Africa Economist at the International Institute of Finance in Washington DC. “Most GCC countries could cope very well now if oil prices decline to around $70 per barrel, perhaps in 2023.”
UAE Environment Minister Mariam Al Mheiri called the current crisis a “reality check” for the world, saying that the market disruptions caused by Russia’s invasion of Ukraine showed that global systems are not ready to fully abandon hydrocarbons, reported Abu Dhabi’s state-backed The National newspaper.
“What Gulf states are saying is that the pace of the transition needs to be managed because all forms of energy need to be used,” said Bakr. “Renewable energy is still not up to speed and can’t replace hydrocarbons … [and] can’t fill in that baseload that is required to meet demands.”
The demand for oil in the global market has boosted the GCC’s confidence in demand for their main commodity and their ability to bounce back, analysts say.
“I think they [Gulf states] are more confident that they can sustain the prices needed to break even fiscally — around $70 per barrel — for a lot longer,” said Hertog.
Additional reporting from Abbas Al Lawati
Other top Middle East news
Jordan’s Prince Hamza renounces royal title in protest of state policies
Former heir to Jordan’s throne Prince Hamza bin al-Hussein said on Sunday in an online statement that he was renouncing his royal title in protest over Jordan’s current policies.
- Background: Hamza was accused last April of attempting 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 it matters: Hamza has been predominantly silent since last year’s feud, which shook Jordan’s image as a stable state in the region. Hamza’s statement on Sunday came at the beginning of the Muslim fasting month of Ramadan and was filled with religious language that appeals to Jordan’s conservative bloc.
Yemen’s warring sides agree to nationwide truce for the first time in years
Yemen’s warring sides 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 is meant to last for two months and can be renewed by consent from both parties. The ceasefire appeared to be holding as of Monday afternoon.
- Background: Yemen has for the past seven years been torn by conflict between a Saudi-led coalition and the Iran-backed Houthis. The war has pushed millions into hunger and turned the country into one of the world’s worst humanitarian crises. The US and the UN have since last year been trying to organize a permanent truce that can revive the country’s economy.
- Why it matters: The truce will allow fuel imports into Houthi-held areas, as well as some flights from Sanaa airport. It is seen as the most significant step yet toward ending the conflict, especially after a worsening food shortage following the Ukraine war further exacerbated the country’s crisis.
Iran blames US for halt in Vienna nuclear talks
Iran’s foreign ministry said on Monday that the US is responsible for the pause in talks between Tehran and world powers in Vienna aimed at reviving their 2015 nuclear deal. Spokesperson Saeed Khatibzadeh said a deal is “very much within reach.”
- Background: The US State Department said Thursday that a small number of outstanding issues remain in the nuclear talks, adding that the onus was on Tehran to make those decisions. Iran has said that there are still outstanding issues, including Washington removing a foreign terrorist organization designation against Iran’s Islamic Revolutionary Guard Corps.
- Why it matters: Both Iran and the US have indicated that they may lose patience if talks don’t proceed. A return to the deal could release over a million barrels of Iranian oil into the market per day, potentially giving ease to an oil price rally that has caused inflation globally.
Around the region
In the Middle East’s business capital and emerging crypto hub Dubai, a new school is taking interest in the digital economy to a new level by allowing parents to pay their children’s tuition fees in cryptocurrency.
A member of the Al Zarooni Emirates Investments business family, Citizens School opens its doors in fall 2022, saying that while it will accept tuition payment in the 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 set period of time, says Hisham Hodroge, CEO of Citizens School.
“At the time of payment, it takes the best exchange rate in that specific point in time,” Hodroge told CNN.
“As a school, we are not holding cryptocurrency in our account,” he said. “We are effectively providing or facilitating through a third party the option or the choice 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 been recently accepting payments in cryptocurrency, the Dubai-based school claims to be the first of its kind in the region to implement it on a school level.
Dubai is seeking to become a global crypto hub. Last month it issued its first law governing digital assets and formed the Virtual Asset Regulatory Authority (VARA) to oversee the sector.
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