Petro states and oil's last hurrah

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Petro states and oil's last hurrah

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• Rebound: Oil prices are rising once again due to three reasons. First the extended production cuts by OPEC+, second the economic recovery from pandemic, and third the start of a supply reaction (after a year of diminished production and inventory draw-downs). 
• Is this really good news: The 2003-2014 decade was the "magic decade" for oil producers, but the present price of $70 a barrel doesn't meet fiscal break-even thresholds for most Gulf Arab states. Past few years have seen the gap between revenue and expenditure of most Arab states swell. They need new revenue sources now.
• Saudis' worst fear: They are openly admitting that now, there's little threat from US shale oil producers. So Saudis can focus on Asian buyers without worries, and Biden being eco-friendly only helps.
• Energy inflection point: So the world not has plentiful oil supply, stable demand (not high), and new renewable energy options. Investors are uncomfortable with carbon-intensive products. Oil revenues alone won't help GCC (Gulf Cooperation Council) survive.
• The last oil boom: Any boom in oil prices now is going to be the last one, ever! 

1. Assume that OPEC+ holds its cuts, and $70 stays. The non-OPEC ones (Qatar, Bahrain, Oman) will make merry on higher production. 
2. Even then, these non-OPEC ones have run huge deficits, and won't plug those gap even now. Saudi Arabia and Kuwait are facing huge fiscal gaps already.
3. Price spike will prompt citizens to demand more from govts. to provide financial support and pandemic stimulus. GCC states may be forced to backtrack on utility prices rationalisation and public sector wage bill cutrailment.
4. Revenues have steadily lagged behind expenditure for Gulf states, and even now, borrowings will stay high.
5. What the GCC does from the gains of this "last boom" remains to be seen, in terms of foreign policy and strategies for economic future

• An immediate move: The dominant members of OPEC+ will want to not allow more production coming from Iran, Iraq, Libya and Venezuela. Saudis hate Iran, and will resist its political rehabilitation.
• Medium-term: The goal then will shift to domination of energy markets, and not just oil. The present upcycle's gains have to be invested there. Saudis are putting money into India (Reliance) and chemical plants in Texas, and also building LNG businesses, and working on hydrogen tech. They are focusing on the post oil future.
• Competitive advantage: Larger GCC players will face pressure from providing for a larger citizen base, that small players will not. Their labour markets are small, and can attract talented foreigners. Nations that adopt punitive workforce nationalisation will suffer.
• Summary: When Gulf states enjoy an oil boom, the entire middle east experiences it in terms of aid, remittances, investments. This time round, the money will be used for consolidation domestically, and energy market's future investments. This will be oil's last hurrah, and broader middle east won't benefit.

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