COVID-19 changing the dynamics for oil-reliant Gulf Countries
COVID-19 pandemic has the world freaked out and oil is no exception. The pandemic has made the outlook for the oil and gas industry worrisome. Though it was going to face a price crisis at some point anyway, the pandemic has paced up the unfortunate event.
Considering the increased demand-supply gap, the OPEC+ alliance had agreed on a series of production cuts. However, it has agreed to increase production by the start of 2021. This seems, to some, a selfish move by Saudi Arabia and also seems to be overly optimistic considering the second wave of coronavirus potentially shutting down European countries once again. Many oil giants also suspect that the production increase scheduled in 2021 will not be handled well by the oil market and hence, would not give the desired outcome. This is because the recent oil price rise was not due to the demand-supply dynamics but due to the inventory draw and the hurricane effect.
Iran on the other hand is expected to have exported 1.5 million barrels per day (bpd) of crude oil and condensate so far in September despite the US sanctions. This is the highest level of Iranian exports in a year and a half. It is also double the amount observed in August this year.
Dallas Fed Survey states that 75% of oil executives believe that oil production in the US has already peaked. This clearly indicates the stress the US oil industry is going to face in the coming years. Also, California is going to ban ICE (Internal-Combustion Engine) vehicles by 2035 which makes matters worse in the US. The UK, on the other hand, has declared to lead the world to a net-zero economy and promote the global green industrial revolution. The UK has also planned to ban ICE vehicles.
Well, we have observed oil price crashes and crises in the past and the oil dominant countries have nonetheless managed to come out of the crises smoothly and effectively. However, the pandemic has changed the dynamics to levels that pose a threat to these oil-reliant Emirates as well. Two most obvious things that would normally happen in times of oil and gas crises are:
- The M&A activity in the energy sector rises in response to the low commodity price, and
- The oil-reliant Emirates issue debt to keep going till the oil prices recover.
However, the problem is, that the M&A activity in the energy sector this year has declined instead of rising, and nobody is certain if the oil prices will recover to $60+/b ever. Saudi Arabia, Dubai, Abu Dhabi, Bahrain have all issued debt this year. Abu Dhabi issued its longest bond of 50 years in early September which is at $ 5 billion. The debt was oversubscribed indicating a good reputation among the investors. Dubai raised $ 2 billion on the international bond market and its bond was also oversubscribed. Oversubscription, which would normally be a good indication, is not so good this time. With no hope on oil prices recovering, will these countries be really able to pay off the debt? Withdrawing citizen privileges and resorting to other industries both have their set of difficulties. Diversification of these Gulf countries, especially Saudi Arabia’s (its ambitious plan to diversify the economy by 2030), seems threatened because they planned to do so with the money they would receive from the oil trade. And with government spending cuts, consumption in these countries would fall and so would its growth. With oil itself under such a huge crisis, will these countries be able to diversify along with keeping the economic position intact in the world? If they fail in their efforts, this move of increasing debt and cutting government expenditure on citizen privileges will destabilize the entire region.
The best they can do however is to start making them resilient to oil crises with a steady and gradual transition from oil to other industries. A few reforms every year and loads of incentives are the only options left. Probably they should start giving up on oil slowly and focus more on industries, other than tourism and leisure, that would actually help them pull out of the crisis smoothly.