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What does the plunge in oil prices mean for the Arab world?

March 10, 2020 at 2:00 pm

A general view shows the Saudi Aramco oil facility in Riyadh, Saudi Arabia 23 November 2007 [AFP PHOTO/HASSAN AMMAR/Getty]

Oil prices have plunged to levels not seen in years. They are the lowest since 2016, but a crash of this size and nature has not been seen in modern history. Such chaos in the oil markets has not actually been seen since Iraq’s invasion of Kuwait in 1990, when prices plunged by more than 30 per cent within a few minutes. However, since the beginning of this year, prices have dropped by between 50 and 60 per cent, more than half.

In January, the price of Brent Crude was $72 a barrel; it is now down to $33 in just two months, a decline that was not expected by even the most pessimistic analysts. Nor could it have been expected by the oil producing countries, which means that if prices remain at such a level, there will definitely be economic crises in countries that depend on oil revenues.

The plunge in oil prices affects all parts of the global economy, because energy is the most important sector, it being a commodity that all people need and all people and countries use. There is no country in the world that does not import or export oil, and so the commodity enters automatically into their economic calculations. Nevertheless, oil-producers such as the Gulf States are undoubtedly the most affected by this collapse.

The prices fell, apparently, based on market forces driven by the spread of the coronavirus, which threatens a major global recession that may lead to a decline in oil demand. This is in addition to the collapse of the OPEC+ agreement, which had guaranteed stability in the markets over the past four years when Russia was convinced to reduce production and align with OPEC policies.

Fitch: Collapse of oil prices harms GCC revenues

The third factor of the collapse, which is perhaps the most important, is the Saudi decision to reduce prices as from next month, which was intended to put pressure on Russia, but is now putting pressure on the whole world. Saudi Arabia decided to reduce its oil prices by $6, but the markets responded the next day with the collapse and a decline of over $10.

The crash will mean a lot for the oil-producers. Saudi Arabia, for example, is the world’s largest oil producer and its oil revenues make up more than 70 per cent of its economy, making it the largest oil-dependent economy in the world. There is no other that depends on this commodity to such a degree. This is not the problem, though; it’s the fact that Riyadh prepared its national budget for 2020 on the basis that the average oil prices would be at $60 per barrel, and this is virtually impossible. The Saudis, therefore, face a large budget deficit.

The slide of the Gulf States towards inevitable financial crises will mean that the whole Arab region will also be hit by comprehensive economic difficulties. Countries across the region need to move quickly to contain the repercussions and limit the impact.

READ: Saudi Aramco shares drop 10% 

This article first appeared in Arabic in Arabi21 on 9 March 2020

The views expressed in this article belong to the author and do not necessarily reflect the editorial policy of Middle East Monitor.