Rashid Husain SyedGlobal economies are in distress.

In the United States, the world’s largest economy, jobless claims rose last week for the first time since March. With measures to contain the COVID-19 virus keeping drivers off the road, recent data shows gasoline demand edging even lower.

In South Korea, a large crude oil consumer, the economy is taking a significant hit. With exports plummeting, courtesy the COVID-19 pandemic, the country seems to be sliding into recession.

According to Bloomberg, Chinese oil consumption is also cooling.

And derivatives that help bring value to North Sea crude oil grades are showing renewed weakness.

The outlook for consumption doesn’t appear any better in Europe, with Finnish refiner Neste Oyj predicting demand for oil products to remain “severely reduced” in the third quarter.

Despite the recent unprecedented output cuts by oil-producing countries, crude continues to trade around $40 a barrel. Energy analyst CMarkits’ latest forecast sees an average price of $43 for Brent in July; that may rise to $50 by December if demand continues to smoothly recover. That remains a big if. (All prices in U.S. dollars.)

That’s not enough, especially for the single-product economies of the Persian Gulf. The International Monetary Fund says the crude price plunge and the production cuts will hit oil exporters in the Middle East and North Africa hard, with the combined oil income for those countries expected to plummet by $270 billion this year compared to 2019.

The six countries of the Gulf Cooperation Council – Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates – are set to accumulate as much as $490 billion in combined government deficits between 2020 and 2023, S&P Global Ratings reported.

In order to plug the deficit, Saudi Arabia has announced tripling its value-added tax. The government has also suspended the cost-of-living allowances for its employees.

It’s also cancelling, extending, or postponing some operational and capital expenditures of government agencies, as well as reducing provisions for a number of major projects this year. According to the Saudi Finance Ministry, through such measures, the country would save US$26.6 billion.

In order to raise additionally required money, Saudi Arabia also plans to put up for privatization state-held assets in health care, education and water utility sectors. Saudi Arabia could receive billions from such privatizations over the next five years, Finance Minister Mohammed Al-Jadaan said at a Bloomberg forum.

Kuwait, one of the world’s wealthiest countries, also faces a severe budget crunch. Running a deficit that could reach 40 per cent of its economy this year, the Kuwaiti Finance Ministry is seeking permission from parliament to tap global debt markets for as much as $65 billion.

Kuwait has little options. The General Reserve Fund, essentially its treasury, has been tapped so aggressively in recent months that its liquid assets could come close to being depleted within the current fiscal year, or by April 2021.

Oil giant Russia, though not as dependent on oil sales as the Organization of Petroleum Exporting Countries (OPEC) states are, is also considering options to protect its revenues from oil price crashes in the future. According to the Russian news agency Interfax, the government is evaluating whether to adopt a kind of state oil hedging program, like Mexico.

The Mexican oil hedge – the Hacienda Hedge – is considered the biggest hedging bet on Wall Street, as well as perhaps the most secretive. Oilprice.com says the hedge has earned Mexico – and a few large investment banks – billions of dollars. Russia could adopt this path, too.

The horizon of the once-fancied oil-rich world, however, seems to be greying.

Toronto-based Rashid Husain Syed is a respected energy and political analyst. The Middle East is his area of focus. As well as writing for major local and global newspapers, Rashid is also a regular speaker at major international conferences. He has been asked to provide his perspective on global energy issues by both the Department of Energy in Washington and the International Energy Agency in Paris.

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