Low oil prices set off decline of Gulf’s oil empire
A consortium of lenders led by State Bank of India (SBI) will add about `770 crore to their bottomlines during the fourth quarter following the exit of Jindal Stainless Ltd (JSL) from the Corporate Debt Restructuring (CDR) framework. SBI will get `300 crore from the resolution of this account, sources said. PNB will write back about `100 crore from this, sources said, adding that other lenders too will be able to show cash recovery from this account.
For much of the world, oil wealth is a curse. Endowed with ample reserves of hydrocarbons, the likes of Nigeria, Angola, Kazakhstan, Mexico and Venezuela frittered the benefits away.
Only in the Persian Gulf has oil been a nationbuilding blessing. The discoveries of petroleum in the mid-20th century turned an anarchic, desperately poor region into one of the most affluent places on the planet. Qatar, Kuwait and the United Arab Emirates are all richer than Switzerland. Even Saudi Arabia, Bahrain, and Oman are on a par with Japan or the United Kingdom.
The transformation has been so complete that it’s easy to believe the wealth derives from some eternal law of nature. That’s not true, though. The current price war in oil markets will only hasten the moment when the unsustainable nature of Gulf economies faces a brutal reckoning.
Right now, all six monarchies are joining with Russia in opening the taps to flood the crude market and flush out higher-cost producers. While the planned 2.5 million barrels per day increase from Saudi Arabia is by far the biggest wave in this tsunami, its neighbors aren’t holding back. The UAE will daily add about 200,000 barrels or more, according to consultancy
Rystad Energy, while Kuwait will lift output by 110,000 barrels. Russia will raise daily production by 200,000 barrels.
That splurge of supply isn’t due to geopolitics. Instead, it’s a mathematical result of the decline in the oil price. With fewer dollars coming in for each barrel of crude, Gulf monarchies need to pump much more to maintain something resembling current revenues.
In principle, there’s ample firepower to fight this war. It costs about as much to pump a barrel of oil from a Gulf oilfield as it does to buy a bottle of fancy mineral water. Even in an extreme scenario where crude prices fall as low as $10 a barrel and almost the entire global oil industry loses money, Gulf producers would remain in the black. The problem comes for their economies, which need a far higher price to balance their budgets and support dollar-linked currencies.
The region’s central banks and sovereign wealth funds have assembled vast sums to see them through such a crisis, as well as the longer-term risk of declining demand. Faced with lower prices, however, these buffers could disintegrate quickly.
Take the net financial assets held by Saudi Arabia’s government. These declined to just 0.1 per cent of gross domestic product from 50 per cent over the four years through 2018 as crude plunged from levels of around $100 a barrel at the end of 2014. The kingdom is now likely to be a net debtor for the foreseeable future, even if prices rise back above $80.
Over the same four years, net financial assets held by the six Gulf monarchies fell by around half a trillion dollars, to around $2 trillion, according to a study last month by the International Monetary Fund. Even if peak oil demand doesn’t hit until 2040, that remaining sum could be depleted by 2034, according to the Fund. Oil at $20 a barrel would run it down even faster, emptying the coffers as soon as 2027.
With oil prices in the range of $50 to $55 a barrel, Saudi Arabia’s international reserves would fall to about five months of import coverage as soon as 2024, according to an IMF report last year. That should be a deeply alarming prospect, bringing the kingdom within months of an unthinkable balanceof-payments crisis and the abandonment of the dollar peg, which has underpinned the global oil trade for a generation. Yet the prices we’re now seeing make this look almost like an optimistic scenario.
There’s still time to avert this future, but it will involve major changes to our ideas about the Gulf and its the role in the global economy.
The era when the Gulf nations and their sovereign wealth funds were magic cash machines prepared to pay top dollar for assets on every continent may be coming to an end. They may even have to turn into net sellers. That will affect institutions from the US Treasury market, where Saudi Arabia holds about $183 billion of securities; to Softbank Group Corp., which may find Riyadh a less generous partner for funding Masayoshi Son’s expansive visions.
The monarchies have surfed a remarkable tide of wealth over the past half-century or so, but every wave eventually crashes. Future generations will never again see the wealth that current subjects enjoy. Perhaps the Gulf wasn’t spared from oil’s curse, after all. That moment was only deferred.