Oil prices surged on Tuesday, recovering from a brief decline on Monday. This uptick comes as tensions in the Middle East escalate. Brent crude for November delivery rose by 1.4%, reaching $74.93 per barrel by 1:10 PM ET. Similarly, West Texas Intermediate (WTI) crude for October delivery increased to $71.33 per barrel.
The rise in oil prices follows Israel’s recent military actions against Hezbollah. Israel launched an unprecedented attack on Hezbollah’s communications infrastructure, injuring thousands of militia members. This was quickly followed by the assassination of Ibrahim Aqil, a significant Hezbollah leader, and subsequent targeting of Ali Karaki, another key leader, whose current status is unknown. Israel’s strikes in southern Lebanon have resulted in nearly 500 fatalities and heightened fears of a wider regional conflict.
Despite the increase in oil prices, many Gulf Cooperation Council (GCC) countries are not celebrating. After experiencing a budget surplus in 2022, these nations are now facing widening budget deficits, as current oil prices remain below the levels needed to balance their budgets.
According to the International Monetary Fund (IMF), Saudi Arabia, the largest economy in the GCC, requires an oil price of $96.20 per barrel to achieve budget equilibrium. This need arises partly from Crown Prince Mohammed bin Salman’s ambitious Vision 2030 initiative. In recent years, Saudi Arabia has made significant production cuts, agreeing to reduce output by 1 million barrels per day, which is nearly half of the OPEC+ total cuts of 2.2 million barrels per day. As a result, the kingdom has been selling less oil at lower prices, exacerbating its revenue shortfall.
However, there are signs of progress. Vision 2030 aims to diversify Saudi Arabia’s economy and lessen its dependence on oil price fluctuations. The Saudi Ministry of Economy and Planning announced that non-oil revenues reached 50% of the Kingdom’s GDP in 2023, the highest level recorded. The non-oil economy is valued at approximately 1.7 trillion Saudi Riyals ($453 billion) and has been buoyed by growth in exports, investment, and consumer spending.
Last year, private-sector investments in Saudi Arabia grew by 57%, hitting a record 959 billion Saudi Riyals ($254 billion). Sectors like arts, entertainment, and real services saw massive growth, reflecting the Kingdom’s transformation into a global tourism and entertainment hub. The food sector also grew by 77%, while transport and storage services rose by 29%. Other sectors, including health, education, trade, and hospitality, also saw growth.
Despite these advancements, the IMF warns that rapidly diversifying the economy has its costs. Saudi Arabia now requires oil prices to be over $20 per barrel higher than current levels. Li-Chen Sim, a scholar at the Middle East Institute, noted that Saudi Arabia will face significant budgetary demands until at least 2030 due to its ongoing Vision 2030 projects and preparations for major sporting and cultural events.
Moreover, the IMF indicates that the financial challenges extend beyond Saudi Arabia. Bahrain and Algeria require oil prices of $125.70 per barrel for budget balance, Iraq needs $93.80, and Kuwait $83.50. Among the six GCC nations, only the UAE and Oman are anticipated to record budget surpluses. Fitch Ratings predicts that the UAE’s fiscal breakeven oil price will average $64 per barrel from 2024 to 2026, though higher dividend payouts from Abu Dhabi could affect this average. The UAE’s surplus is expected to reach 3.3% of GDP in 2025 and 2.6% in 2026. Oman is also expected to see a budget surplus, though it will narrow from 3.2% in 2023 to 0.9% in 2025.
Economic Slowdown Ahead
In July, a Reuters poll indicated that GCC economies would grow at a slower pace this year due to ongoing oil production cuts, with Saudi Arabia’s economy particularly affected. A survey of 24 economists forecasted a 1.3% growth for Saudi Arabia in 2023, a decline from the earlier forecasts of 1.9% in April and 3.0% in January.
In contrast, the UAE is expected to achieve a 3.7% growth rate as it increases oil production and focuses on tourism. Kuwait is projected to remain in recession, while Qatar, Oman, and Bahrain are expected to grow by 2.2%, 1.6%, and 2.6%, respectively. Overall, GCC economies are anticipated to average a growth rate of 1.9% in 2024.
Ralf Wiegert, director of MENA economics at S&P Global Market Intelligence, noted that lower oil revenues are negatively impacting non-oil growth. He stated, “Saudi Arabia is in the process of an overhaul of Vision 2030 and adjusting investment spending… The impact on real GDP growth is clear – less investment means a more moderate growth outlook.”
Looking ahead, the GCC’s economic outlook for 2025 appears brighter, with Saudi Arabia’s economy expected to grow by 4.5%, and the UAE by 4.2%. Moderate inflation is also anticipated, with predictions ranging from 1.0% to 3.0% in 2024. Saudi Arabia’s inflation rate is expected to be 2.1% this year.
You Might Be Interested In
- Why is Tullow Oil’s Share Price Falling?
- Are Oil Stocks Safe?
- How to Buy Crude Oil ETFs: A Comprehensive Guide