Their budgets don’t add up anymore. Algeria needs the price of Brent crude, an international benchmark for oil, to rise to $157 dollars a barrel. Oman needs it to hit $87. No Arab oil producer, save tiny Qatar, can balance its books at the current price, around $40 (see chart).
So some are taking drastic steps. In May the Algerian government said it would slice spending in half. The new prime minister of Iraq, one of the world’s largest oil producers, wants to take an axe to government salaries. Oman is struggling to borrow after credit-rating agencies listed its debt as junk. Kuwait’s deficit could hit 40% of gdp, the highest level in the world.Since the end of World War II, the wealth of the Persian Gulf monarchies—Saudi Arabia, the United Arab Emirates (UAE), Kuwait, and Qatar—has overturned the traditional centers of power that dominated the region for millennia: Turkey, Egypt, and Persia [Iran]. While those civilizations were built on agriculture, industry, and trade, the monarchs were fabulously wealthy simply because they sat on a sea of oil.
The monarchies—Saudi Arabia in particular—have used that wealth to overthrow governments, silence internal dissent, and sponsor a version of Islam that has spawned terrorists from the Caucasus to the Philippines.
And now they are in trouble
The Saudi owned oil company, Aramco, just saw its quarterly earnings fall from $24.7 billion to $6.6 billion, a more than 73 percent drop from a year ago.
Not all the slump is due to the pandemic recession. Over the past eight years, Arab oil producers have seen their annual revenues decline from $1 trillion to $300 billion, reflecting a gradual shift away from hydrocarbons toward renewable energy. But Covid-19 has greatly accelerated that trend.
For countries like Saudi Arabia, this is an existential problem. The country has a growing population, much of it unemployed and young—some 70 percent of Saudis are under 30. So far, the royalty has kept a lid on things by handing out cash and make-work jobs, but the drop in revenues is making that more difficult. The Kingdom—as well as the UAE—has hefty financial reserves, but that money will not last forever.
In the Saudi case, a series of economic and political blunders have worsened the crisis.
Riyadh is locked into an expensive military stalemate in Yemen, while also trying to diversify the country’s economy. Crown Prince, Mohammed bin Salman, is pushing a $500 billion Red Sea mega project to build a new city, Neom, that will supposedly attract industry, technology, and investment.
However, the plan has drawn little outside money, because investors are spooked by the Crown Prince’s aggressive foreign policy and the murder of journalist Jamal Khashoggi. The Saudis are borrowing up to $12 billion just to pay Aramco dividends of $75 billion a year.
The oil crisis has spread to Middle Eastern countries that rely on the monarchs for investments, aid, and jobs for their young populations. Cairo sends some 2.5 million Egyptians to work in the Gulf states, and countries like Lebanon provide financial services and consumer goods.
But Lebanon is now imploding, Egypt is piling up massive debts, and Iraq can’t pay its bills because oil is stuck at around $46 a barrel. Saudi Arabia needs a price of at least $95 a barrel to meet its budgetary needs—and to feed the appetites of its royals.
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