In recent weeks, the oil markets have encountered significant challenges, leading to a notable slump in prices. Analysts have highlighted that fears of a trade war between the United States and China, combined with a surprising decision by OPEC+ countries to increase production in May, have heightened concerns. This situation poses potential risks for several oil-dependent economies in the Middle East, particularly as additional pressures seem to mount on oil prices.
On April 8, oil futures plummeted to a four-year low as investors considered the increasing potential for a recession linked to growing tensions between these two global economic giants. While there has been a slight uptick in prices since that low point, experts remain cautious about the prospect of a robust recovery in the near future. Notably, on April 13, financial giant Goldman Sachs projected that oil prices are likely to decrease through 2025 and 2026, estimating that Brent crude would average around $63 a barrel for the remainder of 2024 and expected even lower prices the following year.
Following Goldman’s grim forecast, JP Morgan also revised its oil price predictions, anticipating a price of $66 for Brent in 2025 and a lower target of $58 for 2026. Such declines in oil prices represent “bad news” for oil exporters within the Middle East and North Africa (MENA), according to Tim Callen, a visiting fellow at the Arab Gulf States Institute based in Washington. Countries like Saudi Arabia, Oman, and Bahrain are expected to feel the pinch most acutely, while others such as the United Arab Emirates, Qatar, and Kuwait may fare better amidst the ongoing turbulence in oil markets.
Of all the MENA economies, Saudi Arabia is considered the “most vulnerable” due to its heavy reliance on oil revenues, according to James Swanston, a senior economist at Capital Economics. The nation holds the title of the world’s leading oil exporter, with crude oil contributing around 60% of its government revenue in 2024. Moreover, oil and natural gas combined make up over 20% of Saudi Arabia’s Gross Domestic Product (GDP) during this time frame.
This heavy reliance underscores the need for oil prices to exceed $100 per barrel for Saudi Arabia to balance its budget effectively, as highlighted by Swanston. When oil prices hover around $60 a barrel, as estimated, Callen projects that Saudi Arabia’s fiscal deficit could soar to $62 billion, far exceeding the conservative $27 billion deficit included in its annual budget.
In an effort to counter the volatility of oil prices, governments in the region are working to diversify their economies. A key aspect of this endeavor in Saudi Arabia is the introduction of numerous ambitious initiatives known as “giga-projects” which are central to the Kingdom’s Vision 2030 framework. Noteworthy among these is NEOM, an envisioned futuristic city intended to become a hub for various sectors including manufacturing and media. The first phase of this monumental project is expected to require investments in the hundreds of billions.
Additionally, Saudi Arabia is focused on developing luxury tourism along its Red Sea coastline and creating Qiddiya, a vast entertainment district on the outskirts of Riyadh. Since the launch of Vision 2030, an impressive $1.3 trillion in infrastructure and real estate projects has been announced, emphasizing the Kingdom’s commitment to transformation as reported by Knight Frank’s Saudi Arabia Giga Projects Report.
However, experts warn that potential delays in these ambitious projects may occur if the nation opts to scale back its capital expenditures amid unstable oil revenues. While Saudi Arabia’s finance ministry and the Public Investment Fund, which are heavily involved in these initiatives, have not provided public comments regarding the situation, it’s evident that the country is prioritizing essential infrastructure to accommodate significant international events, including the 2029 Asian Winter Games, the 2030 World Expo, and the 2034 FIFA World Cup.
Historically, OPEC has restrained output to stabilize oil prices, often keeping Brent crude within a narrow range of $70 to $90 per barrel. Recently, however, internal disagreements among member countries have surfaced, as some, like Kazakhstan and Iraq, have consistently exceeded their production quotas. This trend is expected to exacerbate ongoing pricing issues, as indicated by a recent output-increase announcement from OPEC designed potentially to sanction these overproducing nations.
Despite indications of easing tensions in trade relations between the U.S. and China by President Joe Biden, uncertainties tied to ongoing production surpluses could imply prolonged downward pressure on oil pricing. Lower prices may ultimately hinder Saudi Arabia’s efforts toward economic diversification, warns Swanston.
Nonetheless, Callen suggests that Saudi Arabia remains in a relatively strong fiscal position, primarily due to its extraordinarily low public debt levels. The Kingdom has the capacity to cope with reduced oil revenues by trimming expenses and borrowing more, marking a situation that, while not ideal, remains “very manageable.” Swanston concludes by noting that Saudi Arabia has among the lowest production costs globally, enabling the