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Crisis could drag Saudi Arabia's economy into collapse, warns …

by ace
Crisis could drag Saudi Arabia's economy into collapse, warns ...

Unlike other oil-producing countries that did not know how to invest the proceeds of black gold in their economies, the Gulf monarchies did not waste these benefits.

In fact, oil discoveries in the middle of the last century turned a poor, tribal region into one of the richest places on the planet. Qatar, Kuwait and the United Arab Emirates are all richer than Switzerland. Even Saudi Arabia, Bahrain and Oman are on an equal footing with Japan or the United Kingdom. But soon everything can change.

Serious problems are looming

However, in an article by Bloomberg columnist David Fickling, ticks that Saudi Arabia and its neighbors could face serious financial problems in the very near future.

"The current price war in the oil markets will only accelerate the time when the Gulf economies will be in a very difficult situation," writes Fickling.

At the moment, all six Gulf monarchies, as well as Russia and the United States, continue to produce oil in large volume and plan to increase production, with the consequent drop in prices, a phenomenon accelerated by lower demand due to the paralysis of the motivated world economy. by the pandemic.

This increase in production is not due to geopolitical reasons: it is a simple mathematical result of the fall in oil prices. With fewer dollars coming in for each barrel of crude oil, Gulf monarchies need to pump much more to maintain their current level of revenue.

It costs as much to pump a barrel of oil from a Gulf oil field as it does to buy a bottle of mineral water. So even in an extreme scenario where crude oil prices dropped to $ 10 a barrel ($ 50) and almost the entire oil industry in the world lost money, Gulf producers would still make a profit.

Fickling noted, however, that Gulf monarchies need high oil prices to balance their budgets. Although central banks in countries in this region and their sovereign wealth funds have accumulated amounts for crisis scenarios, low oil prices over a long period of time could deplete financial reserves.

Even if the oil barrel is in the range of U $ 50 (R $ 250), Saudi Arabia's gold and foreign exchange reserves would already be reduced in 2024 to about five months of import costs – according to the IMF, cited by Bloomberg.

"If demand for oil does not peak before 2040, the remaining amount (of financial reserves), according to IMF experts, would be depleted in 2034. If oil costs $ 20 a barrel, those assets will still run out faster and the treasury of these countries will be empty by 2027 ", noted the expert, who recalls that the Saudi kingdom is one of the largest buyers and holders of US government bonds.

Nothing will ever be the same

If the Gulf monarchies succeeded in transforming inhospitable kingdoms into states that rival the great financial powers, Fickling predicts that "future generations will never see the wealth that the Gulf States enjoy today" due to the likely budget cuts, the introduction of taxes and the end of the welfare state, the columnist concluded.

Oil prices have fallen by almost half since the beginning of March, amid the slowdown in market demand due to the coronavirus outbreak, as well as the lack of agreement within OPEC and the unbridled increase in production in Saudi Arabia, with May Brent futures traded at around $ 27-30 a barrel on March 20.

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