The main consequence of this new market structure is that, unless there is a sudden and large-scale supply disruption, caused for example by a military conflict with Iran, oil prices should fluctuate within a range of $40 to $70/bbl. for annual averages. Good news for the world economy, which is still dependent on oil - even if much less so than 20 or 30 years ago -, but bad news for the oil monarchies.
In both Riyadh and Abu Dhabi, there has been a long-standing awareness of the structural changes in the market, and efforts have been made to implement adaptation strategies. Whether or not they are up to the task remains an open question.
Rich and sparsely populated, Qatar and Kuwait are hardly concerned
The case of Qatar is peculiar. Sparsely populated (2.8 million inhabitants, only 11% of whom are nationals), this country holds 13% of the world's reserves of natural gas. The gas market differs from that of oil because of its shipping costs, but also because of its lower carbon content, which makes it a very sought-after substitute for oil. From a strictly economic point of view, Qatar is therefore not really in trouble.
Kuwait, which is more populated and whose wealth essentially consists in oil, is nevertheless in a similar situation to that of Qatar, because of the importance of its reserves in proportion to its population (more than 90 years of production at the current rate). Besides, over the last decade, Kuwait has had an average budget surplus of 20% of GDP.
Things are different for Saudi Arabia and the United Arab Emirates.
Already in the 1990s, the low level of oil prices after the first Gulf War had undermined Saudi Arabia's public finances, although in a limited way. The gap between government revenue and spending peaked at 9% of GDP in 1998, before being rebalanced and moving towards revenue, up to a surplus of 29% of GDP in 2009. The fall in the price of oil in 2015 and 2016 caused public revenues to drop again, just when the Kingdom had to spend more to try to meet the aspirations of a youth frustrated by the lack of prospects and the rigidity of their society. As a result, government spending rose to 40% of GDP in 2015-16, while revenues fell to 23% of GDP. Only by selling a share of the assets accumulated by its various sovereign funds was the Kingdom able to limit the call to the market to finance a public deficit of 16% of GDP on average over these two years.
By comparison, the situation in the UAE is less alarming: thanks to a better control over public spending, the deficits caused by the drop in revenue were limited to 2.5% of GDP on average during the two black years.
Saudi Arabia: the deterioration in public finances is structural
Three different strategies: massive investment, institution-building, Singapore
Although they are multifaceted and partially determined by the economic, social and political structures of each state, adaptation strategies fall into the three following categories: (1) using accumulated savings to create a sustainable non-oil economy; (2) building governance institutions that are as politically independent as possible; (3) attracting talent and using the regional oil rent to develop a financial industry and other services.
Saudi Arabia is ready to spend a lot, but it won’t be enough