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Crude oil – the burning platform beneath the Middle East

By: Lynge Gørtz Smestad, Chief Analyst, EKF Denmark’s Export Credit Agency

For decades, oil-producing countries in the Middle East have generated colossal wealth by extracting crude oil as a prime commodity to sell at high prices to the rest of the world. In the last five years, however, the price of oil has remained so low that oil revenue can no longer finance these countries' massive public spending, which now has to be covered by drawing down on sovereign wealth funds and borrowing.

In a new report, the International Monetary Fund, IMF, predicts that Middle East sovereign wealth funds will be depleted within the next two decades – starting with those in Bahrain and Oman, and followed by the funds of Saudi Arabia, Qatar, the United Arab Emirates and Kuwait.

Steep price drop

Crude oil as a secure source of revenue for oil-rich nations took its first knock in 2014-2015 when the price of oil slumped from around USD 100 to around USD 50. Since then, the price has largely levelled off at USD 50-60. However, the age of oil as the dominant energy source globally is waning.

That said, demand for oil is still increasing, driven primarily by global economic growth and secondarily by the global population increase. Meanwhile, the increased focus on energy efficiency and the green transition are expected to drive declining demand for oil. In fact, the prediction is that after peaking within the next decade, the growth of global oil demand will decelerate year on year.

At the same time, the world's known oil reserves are the largest on record, as new techniques have made it possible to extract even more oil. This applies to both conventional oil production and to the new shale oil production, notably in the USA.

Social contract under pressure

When the oil-exporting countries' oil-based sovereign wealth funds dry up, they will either have to borrow capital to meet fiscal deficits or cut public spending. To avoid that, the countries are currently making every effort to identify new sources of revenue to replace oil in the future.

This reversal in fortunes, however, is associated with substantial risks, since much of the population in the region relies on direct or indirect financial support from the state in the form of subsidies, well-paid government employment and free healthcare, for example.

The oil-rich countries were largely undisrupted by the unrest of the Arab Spring, partly because their oil revenue has guaranteed citizens some degree of welfare, which fulfils the social contract that has so far existed between the regimes and their populations. However, the social contract is likely to come under pressure if the continuing decline in oil revenue forces the regimes to make welfare cutbacks. The regimes are consequently being driven to seek sustainable solutions in order to retain popular support in future.

Opportunities for Danish exports

So far, oil-reliant countries in the Middle East have had only limited success in diversifying into new sources of revenue. Dubai, part of the United Arab Emirates, has fared best in this respect by establishing itself, over the last three or four decades, as a centre of trade, tourism and finance. Dubai has the world's fifth-busiest airport, which serves as a hub for flights between Europe, Asia and Africa. It also has the largest shipping port in the Middle East and has positioned itself as the region's financial centre.

The other Middle East oil-exporting countries are planning to follow Dubai's lead, and this holds opportunities for Danish suppliers who will be well-placed to secure substantial orders in the coming years. Saudi Arabia, for instance, is planning to extend its supply of renewables, especially wind power and solar energy, in order to reduce its national oil consumption.

As yet, the oil-exporting countries can still afford these investments, but since their coffers will eventually run dry, the question is whether they will be able to transition in time to a world where oil is no longer in play.

EKF Denmark’s Export Credit Agency assists Danish businesses with export finance. For details, visit

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