The new coronavirus COVID-19 has been ravaging public health and causing massive panic over a potential pandemic across the world ever since it emerged in China in December 2019. So far, it killed more than 3,000 people worldwide and infected more than 90,000 in 75 countries. Its implications on the health of the global economy also remain serious. According to the Organization for Economic Cooperation and Development (OECD), the virus has the potential to slash global economic growth in half from 2.4 percent to 1.5 if it becomes a global pandemic and remains active for months. The economic slowdown could be the worst since the 2009 banking crisis.
Oil exporting members of the Gulf Cooperation Council (GCC), which includes Bahrain, Oman, Kuwait, Saudi Arabia, Qatar, and the United Arab Emirates (UAE) remain some of the most economically vulnerable to the spread of COVID-19. While the GCC is trying not to panic, the economic outlook of its member-countries looks gloomier every day with every new outbreak. Economists project that the gross domestic product (GDP) of GCC economies could drop in the range of 0.5 to 1.2 percent because of rapidly weakened global demand for transportation, shipping, manufacturing, and travel.
The virus has brought entire industries and fuel demand, especially in China, to a screeching halt almost overnight.
The virus has brought entire industries and fuel demand, especially in China, to a screeching halt almost overnight as travel advisories cut down flights to coronavirus hotspots, vacations and international conferences got canceled, and supply chains got disrupted. It is rare when global crude oil consumption drops so dramatically within such a short period of time. So far, the impact on major Middle Eastern oil producers has been brutal.
The fall in crude oil demand has knocked down prices across major international oil benchmarks. U.S. West Texas Intermediate spot price for crude oil fell from 57.68 USD per barrel in January to 46.75 USD per barrel in March. Brent crude oil spot price, used mostly in Europe, fell from 63.83 USD per barrel in January to 51.80 USD per barrel in March. Oil stocks plunged in the GCC region as prices fell below 50 USD per barrel. According to a Goldman Sachs forecast, oil demand will fall from 1.2 million barrels per day (bpd) to 600,000 bpd.
Faced with this reality, the Organization of the Petroleum Exporting Countries (OPEC) is under pressure to cut oil production to balance the market. Already struggling to boost sluggish oil prices over the past six years, OPEC’s additional production cuts will reduce revenues of oil exporters that heavily depend on high oil prices, which, in turn, will sharply increase fiscal deficits and strain economies of some of the GCC countries, such as Oman and Bahrain.
Oman, in particular, is in a precarious situation. It sells almost all its crude to China compared to its Middle Eastern peers – Saudi Arabia and Iraq respectively export 17 percent and about 23 percent of their oil to China. Although this small Gulf nation of 4 million has not yet felt the sting from the fall of Chinese crude oil demand, a protracted demand slump will be painful for Oman.
Saddled with massive debt and relying on continuous borrowing to offset the growing public deficit, it will be forced to introduce economic austerity measures and restructure its economy, if oil prices remain depressed. COVID-19 is the first major challenge to the new Sultan Haitham bin Tariq Al Said, who took power from deceased long-time ruler of Oman, Sultan Qaboos bin Said, this January. Sultan Haitham pledged to cut public debt and diversify the economy to ward off a downward spiral.
Bahrain is another oil-exporting economy that is bound to be hurt by the oil demand contraction. Although its non-oil sector has already experienced 2.7 percent growth this year, oil exports still account for 70 percent of its national revenue. Similar to Oman, sustained low oil prices over the past six years have ballooned Bahrain’s public debt, which now accounts for more than 90 percent of its yearly economic output. In October 2019, the International Monetary Fund (IMF) projected that Bahrain would need a break-even price (i.e. when cost is equal to revenue) of nearly 92 USD per barrel of oil, while Oman would need 88 USD per barrel, to balance their national budgets. Under the current low-price environment, these two countries are at risk of an economic downturn.
Saudi Arabia is also bound to feel the pain as it continues to struggle to boost its budget. Revenue from the Saudi oil sector is crucial for implementation of the country’s ambitious Vision 2030 reforms, which aim to diversify the economy, improve social services, such as healthcare, education, tourism, and infrastructure, as well as reduce dependence on oil sales. According to IMF projections for this year, Saudi Arabia needs oil price of 83 USD per barrel to balance its budget.
Walking away from the March 5 meeting with Russia with no deal, OPEC saw the worst oil price collapse in decades, especially after Saudi Arabia announced it would increase its oil production and offer big discounts on its oil.
The recent global collapse of demand for crude oil due to the new coronavirus may force Saudi Arabia and the rest of the GCC and OPEC to further cut oil production or face the price of oil dip to 30 USD per barrel. Such a dramatic fall in oil prices would be devastating to these economies. Currently, Saudi-led OPEC is struggling to convince Russia, a powerful non-OPEC player, to cut oil production. Saudi leaders want to reduce output by one million barrels per day because of the coronavirus. OPEC members and Russia met in Vienna, Austria, on March 5 to agree on new production levels, which was met with resistance in Moscow. OPEC would agree to cuts if Russia joined it. Walking away from the meeting with no deal, OPEC saw the worst oil price collapse in decades, especially after Saudi Arabia announced it would increase its oil production and offer big discounts on its oil.
COVID-19 is also expected to hurt the vibrant tourism industry in the GCC. Reportedly, a total of 1.4 million Chinese nationals visited GCC in 2018. However, the number of visitors could be significantly lower this year, which will hit the revenue from the tourism sector, particularly, as new restrictions are imposed on travelers from more countries to limit exposure to the virus. Because the UAE receives the highest number of Chinese nationals visiting the country, shopping, owning real estate, and passing through its airports, compared to the rest of the GCC, it is bound to feel economic loss from weak tourism numbers.
There is no doubt that the impact of low oil prices will be painful for GCC economies this year. But the prices are expected to bounce back once the global oil demand picks up, especially in Asia. Prices will eventually recover as the rates of viral infections are likely to decrease with warmer weather, as was the case with other coronaviruses in the past, and, hopefully, with better detection rates, prevention, and development of a new vaccine.