Oil exporting countries often rely solely on oil revenues, which is especially common in the Persian Gulf countries. Fluctuations in oil prices depend on many factors, both institutional within the country itself and on the policy and volumes of other exporters’ oil production. For countries which rely solely on oil exports, crises in the world market and the abundance can lead to serious problems, since their economies are not diversified.
The abundance in oil production, which occurred in the case of an increase in the amount of shale oil production in the United States, negatively affects exporting countries’ economies. Countries with more diversified economies can overcome changes in the world market, while those who rely solely on oil are experiencing colossal budget deficits. Thus, countries depending on the oil revenues are “extremely vulnerable to sudden market changes and volatility” (El-Kaliouby 18). Examples of such dependent exporters affected by price changes in the global market are Saudi Arabia, the United Arab Emirates, and Kuwait.
The prices for oil produced by Saudi Arabia in the world market fell significantly in 2008-2009, after which they rose sharply in 2011-2013. It signals a threat to the country’s economy for a short period (El-Kaliouby 6). In the case of Saudi Arabia, the government does not develop effective policy measures to regulate the situation, so the country’s economy depends on oil exports (El-Kaliouby 7). Additionally, the current COVID-19 pandemic has caused a significant drop in oil prices and budget deficits in the country. Thus, the unstable situation in the world market can negatively affect the situation over which the government has no control.
For the UAE, the drop in oil prices also means changes in the country’s economic situation. Falling prices in the global market lead to budget deficits, which force the government to raise tariffs or cut costs (El-Kaliouby 8). In particular, the depreciation of the exchange rate leads to a decrease in the growth rate of the economic development of oil-producing countries, which is illustrated by the example of the UAE (El-Kaliouby 8). Thus, changes in world oil prices directly impact the economy of the United Arab Emirates.
Global changes in oil production have a colossal impact on Kuwait’s economy, causing budget deficits. Saudi Arabia’s war on U.S. shale oil production plunged Kuwait into a recession in 2019 (El-Kaliouby 9). It is noted that “Kuwait relies almost entirely on its hydrocarbon products with more than 90% of its exports, 50% of its GDP, and about 90% of its fiscal receipts coming from hydrocarbon products” (El-Kaliouby 10). However, the worsening economic situation in the country is associated with cooperation and dependence on Saudi Arabia. Kuwait decided to develop independent streams of income for the economy, which led to an increase in the exporter’s revenues compared to other Persian Gulf countries.
Changes in oil prices, especially amid the COVID-19 pandemic, have shown how economically vulnerable countries relying on oil exports are. For example, the U.S. decision to increase its oil production has led to a surplus and a significant slowdown in the growth of the economy of the Middle East countries (El-Kaliouby 17). The decline in oil demand during the pandemic also led to a deterioration in the economic situation; since such countries’ economics are not diversified, they have only one source of income. Saudi Arabia has suffered the most and, depending on it, Kuwait decided to develop independent flows, which helped stabilize the economy (El-Kaliouby 9).
The UAE example shows to what extent changes in the price of oil affect all processes in the country since the GDP is also declining (El-Kaliouby 8). Thus, changes in the global oil market strongly affect the oil-exporting countries, particularly the decrease in demand due to the pandemic and the resulting abundance.
El-Kaliouby, Mohamed. “Recent Oil Price Developments and Their Impact on the Middle Eastern Economies.” Research Paper.