Middle Eastern nations are reeling from the awful economic effects created by the COVID-19 pandemic, much of it due to the slumping oil prices that have negatively shaped both the supply and demand.
As the region experiences a drop in demand at the regional and global levels, the majority of supply chains are now being disrupted. Even the region’s wealthier countries are heavily feeling the impact of the plummeting oil prices.
Mike Douglas, the CEO of SKA International who has worked largely throughout the Middle East in areas such as aviation, logistics, and fuel supply chain business, further analyzes the damaging influence COVID-19 has brought onto the region.
Fuel Supply and Demand
The COVID-19 outbreak and its restrictive measures resulted in a staggering economic halt, as airplanes became grounded and automobiles were only utilized for the most essential of tasks. From these developments, the demand of oil products collapsed on a global scale, Mike Douglas says.
What added to the complications of these circumstances was the decision by certain key producers to increase their production in early March, a choice that ultimately exacerbated the ramifications on a market that was already oversupplied. Imbalances were enlarged and one of the largest price shocks in the energy market’s long history was the outcome. Brent oil prices, for example, fell below $20 U.S dollars per barrel in April, representing a nearly 70% loss in value.
With storage capacity creeping towards its limits, the prices for West Texas Intermediate contracts due in May reached a negative total for the first time.
Oil-Dependent Economies
Economies that produce fuel in abundance are seeing their prosperity reversed because of lower oil prices, Mike Douglas states. Indeed, some of them are primarily reliant on revenues generated by oil and gas, economies that become terrifyingly vulnerable when the price hits a downward trajectory. Saudi Arabia’s oil revenue dropped by 24% year-on-year in Q1, despite their oil price surpassing $50 U.S. dollars per barrel in early March, a month that also showed a higher volume of export.
Looking ahead, a steeper decline is projected for this quarter, an agonizing thought for a government that has already been forced to use deposits to meet its payment obligations since the decline of oil revenues commenced.
According to the International Energy Agency, Iraq will be similarly hurt by the rapidly dropping price, as roughly 90% of the government’s revenue stems from oil and it counts on that money to finance a payroll of more than 4 million workers. Although the government was able to fulfill its costs, only just, when oil was trading at $61 dollars a barrel in December, now it is struggling to meet the needs of payroll, pensions, subsidies and other operations.
Iraq’s oil export revenues sunk to $1.4 billion dollars back in April, a stark decline from the $6.1 billion dollars collected in January. The government had to use around $67 billion dollars from its foreign reserves in order to pay off its monthly salary obligation in May. If the price fails to increase considerably in the near future, revenues are expected to reach lower marks.
Mike Douglas’ Future Outlook
These historically low oil prices, combined with the COVID-19 pandemic, the consequential recession, and reduced demand for fuel have dampened the Middle East’s hopes that a deal can be finalized to limit product and boost up prices.
Meanwhile, the Gulf monarchies, usually perceived as a safety net for unstable and struggling regions, are also being challenged because of financial resources diminishing. As such, those desperate nations cannot look to the Gulf for reassurance and depend on it for any financial assistance.
Prior to COVID-19, Saudi Arabia and France held discussions to offer financial support for Lebanon’s worsening economy. Since then, Saudi Arabia has opted to use its finances to fight the outbreak and mitigate its impact on the region’s citizens, residents and businesses.
A response to the pandemic was prioritized over bailing out Lebanon and the country later had to default on a $1.2 billion dollar bond payment, a development that will extend the length of its economic crisis and curtail a post-coronavirus recovery. Countries in drastic need of financial support will witness a slower economic recovery after COVID-19, while perhaps also encountering issues in meeting their debt obligations and, subsequently, a social uproar says Mike Douglas of SKA International.
Interesting related article: “COVID-19 and the risk of compensation claims by workers.”