Desperation is creeping into the crude oil industry.
With crude oil prices stuck at around $40 a barrel, S&P Global Ratings has estimated that the total government budgetary deficits of the oil-producing countries of the Co-operation Council for the Arab States of the Gulf could reach $490 billion cumulatively between 2020 and 2023.
At the same time, government debts will surge by a record-high $100 billion in the current year. And this is in addition to the plummeting foreign exchange reserves.
Gulf Arab oil producers are getting desperate for higher oil prices, says an Oilprice.com headline. Saudi Arabia, the world’s largest crude exporter, suffered a gross domestic product (GDP) contraction of seven per cent in the second quarter 2020 from a year earlier. And unemployment from April to June rose to 15.4 per cent – the highest level recorded in data that goes back two decades.
To plug the growing fiscal gap, the Saudi government has tripled its value-added tax, announced spending cuts in non-priority areas and suspended a cost of living allowance to public servants. Health and education services, along with many others, are to be privatized over the next two years, reports indicate.
All these actions may carry political consequences.
Gulf oil producers are also tapping global debt markets much more frequently. In April, the Saudi government sold $7 billion worth of bonds on international markets. A month earlier, the government opted to increase its debt ceiling to 50 per cent of GDP from the previous 30 per cent.
The April offering marked the second time this year that the world’s largest oil exporter had to turn to international capital markets. In January, even before the pandemic, Saudi Arabia came to international market and raised $5 billion.
In August, the United Arab Emirates government also announced plans for what Bloomberg called the longest bond ever issued by a Gulf government. The 50-year debt stood at $5 billion and its issuance was completed in September. That nation also sold $2 billion on the international bond markets in early September.
Governments in the oil-rich region are also auctioning minority stakes in national oil companies to plug their deficits. Last year, as much as $29.4 billion were raised through Saudi Aramco’s initial public offering (IPO), while U.A.E.’s Adnoc raised some $28 billion in equity sales.
Russia is also clamouring to do more. All players on the global energy market need to act together to tackle the effects of the pandemic on oil demand, Russian Energy Minister Alexander Novak said at a virtual meeting of G20 energy ministers last week.
Novak noted that the COVID-19 pandemic has wiped out a 10th of oil demand this year. Fuel demand, he added, was down by 28 to 30 per cent, mostly on the back of a sharp decline in trucking activity. And recovery will be slow in coming, Novak emphasized at the conference, according to TASS.
The bad news continues to pour in.
At a Bloomberg event, Neil Atkinson, the International Energy Agency’s head of oil industry and markets, said the agency was more likely to downgrade its demand forecasts than lift them in its next market report.
The IEA has already slashed its forecast for 2020 by 400,000 barrels a day in the past two months to 91.7 million barrels per day. This is a far cry from almost 100 million barrels per day recorded in 2019.
Offering a gloomy outlook, executives at some of the world’s largest independent oil traders don’t expect global oil demand to materially improve over the next six to nine months. They expect oil prices to remain stuck in a narrow range in the $40s at least until the middle of 2021.
So the fiscal pressure on crude oil producers is rising.
Toronto-based Rashid Husain Syed is a respected energy and political analyst. The Middle East is his area of focus. As well as writing for major local and global newspapers, Rashid is also a regular speaker at major international conferences. He has been asked to provide his perspective on global energy issues by both the Department of Energy in Washington and the International Energy Agency in Paris.