Big Oil is reporting strong first-quarter results thanks to higher prices, maybe making some shareholders think twice about the whole energy transition thing. But not everyone is happy. Despite the marked improvement in benchmark prices in recent months, Middle Eastern oil producers are expected to remain in the red this year.
Abu Dhabi and Qatar are the only two exceptions that may book budget surpluses, Fitch Ratings said in a new report this week, as quoted by Reuters. The rest of the oil economies, however, will continue struggling with deficits as prices are not high enough for them yet.
"High fiscal break-even oil prices illustrate the scale of the public finance reform challenge and mostly remain well above current or forecast oil prices," the ratings agency said, noting it expected Brent crude to average $58 per barrel this year and $53 over the longer term.
This is bad news for almost all Gulf economies. Bahrain, Fitch said, needs Brent at $100 to break even. Kuwait needs above $80 per barrel. Saudi Arabia, the biggest Gulf producer, needs Brent at around $70 to balance its 2021-2022 budget.
None of this should come as a surprise. Just how difficult an economic diversification would be for the oil-dependent Gulf states became apparent during the previous oil industry crisis. At the time, the governments of these countries had to introduce austerity measures to cope with the crisis and attempted some reforms, which were met by strong public opposition. Related: Goldman: Oil To Hit $80 On Largest Ever Demand Jump
Now, less than five years later, Gulf economies are again in the same position: they need to reform their economies and make them less reliant. But they need oil revenues to do that. The only other option is severe austerity, which no government in the region would risk.
As a result, Gulf economies are on a debt-issuing spree combined with asset sales. In July last year, at the height of the first wave of the pandemic, S&P Global Ratings said the Arab Gulf states were likely to amass as much as $490 billion in budget deficits by 2023.
The forecast came days after 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.
That was then. Now, the IMF has a much brighter outlook for the Gulf economies. That's thanks to the improved outlook for the global economy, however, and nothing is set in stone as the situation with the pandemic remains quite dynamic. The Fund expects growth of between 0.7 percent, for Kuwait, to 3.1 percent, for the UAE. The Saudi economy, according to the IMF, is set to grow by 2.9 percent this year.
Growth would be a welcome change from the contractions from last year and a well-deserved reward for all the measures governments in the Gulf took to shore up their finances. Tax cuts and spending cuts were among the least popular ones, and there was a lot of debt issuance from the Gulf. By November 2020, the six nations had issued some $100 billion in debt, breaking their previous record, set just a year earlier.
Besides debt, Gulf governments, through the state-owned oil companies, also resorted to listings of some businesses and asset sales. Abu Dhabi's ADNOC said earlier this month it planned to list its drilling business on the local stock exchange, and Saudi Aramco announced a deal to sell 49 percent in its pipelines business to a consortium led by EIG Global Energy Partners.
In the meantime, prices have not been climbing higher, making Gulf economies' job harder. It is clear to all that to diversify away from oil that these economies need higher oil revenues. What could be seen as a vicious circle is the reason their efforts at diversification have so far had quite mixed success. And unless prices recover strongly, these economies will continue spinning in this circle.
The chances of that happening are slim. With Covid-19 infections surging in India—the world's third-largest consumer and a major importer of oil—and with more supply coming on the market from OPEC, including Gulf producers, benchmarks are likely to remain range-bound. Unfortunately for the Gulf economies, that range is lower than most of them need to make budget ends meet.
This would mean more debt and more asset sales, perhaps, and maybe more unpopular measures for the population. This should help over the short term, but over the longer term, diversification remains the only viable option, especially in the context of a world in energy transition that will see demand for their flagship export commodity wane. The question is whether Gulf governments would have the wherewithal to go through with their crisis-induced diversification plans.
By Irina Slav for Oilprice.com
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