Oil prices have now almost halved in six months to below $60/barrel thanks to OPEC’s refusal to cut production. This means all the member countries are revising their government spending policies. While countries such as Iran and Venezuela face an imminent fiscal crisis, the short-term ramifications for the Arabian peninsula’s oil monarchies are less dramatic.
In the long run, however, their very high dependence on oil poses a more fundamental challenge than for almost any of their rivals.
The current cash situation
The large Gulf hydrocarbons producers – Kuwait, Qatar, Saudi Arabia and the United Arab Emirates (UAE) – have recorded substantial fiscal surpluses for 2014, benefiting from high oil prices earlier in the year. Among these countries of the Gulf Cooperation Council (GCC), Bahrain alone has incurred a substantial deficit.
Yet there is trouble building up for the future: the oil prices at which government budgets break even have on average increased by more than three times since the early 2000s as spending commitments have risen.
According to IMF estimates, break-even now lies above current oil prices for Bahrain, Oman, Saudi Arabia and the UAE, with even Kuwait and Qatar now touching it at the current price.
Gulf state breakeven oil prices (US$/barrel)
Source: IMF October 2014 Steffen Hertog
Saudi Arabia, UAE, Kuwait and Qatar have substantial overseas reserves that are equivalent to several annual budgets, giving them considerable leeway to incur deficits without debt. Bahrain and Oman, both of whom have only small overseas reserves, have less room for fiscal manoeuvre. Bahrain in particular already has government debt of more than 40% of GDP. It has already taken some austerity measures, being the only country among the group in which estimated 2013 spending lay below that for 2012.
