Oil price volatility continues to shape economic policies across the Middle East, affecting both oil-exporting and importing nations.
Oil prices have steadily fallen more than 10 per cent from a high this year of USD82 a barrel in January. The trend continued through the week ending March 7, influenced by geopolitical tensions, likelihood of supply output increase by OPEC+ from April, and uncertainty unleashed by the US trade policies of the newly elected government.
In its recently released October Regional Economic Outlook report, the IMF says it expects energy commodity prices to decline by 2.6 per cent in 2025 and has slashed the 2024 growth estimate for the Gulf region down to 1.4 per cent from the earlier 1.5 per cent.
Crude is a volatile commodity. Every turmoil takes the prices shooting up or plunging down. In the aftermath of Russia’s invasion of Ukraine, a barrel of benchmark Brent crude hit almost $130.
This volatility has profound implications for both oil-producing and oil-importing nations, shaping fiscal policies and economic strategies across the region.
These fluctuations in crude oil prices reshape economies with major implications for both oil producers and consumers.
While oil-exporting nations like Saudi Arabia and the UAE benefit from price surges, oil-importing countries such as Egypt and India face rising costs, driving inflation and tighter fiscal policies and widening trade deficits. In India, for example, according to experts, a $10 increase in oil prices raises India’s inflation by approximately 0.3%. This also expands the current account deficit by $12.5 billion, or 0.43% of the country’s total economy (GDP).
The World Bank’s “Commodity Markets Outlook” (October 2024) talks about the “geopolitical tensions and supply disruptions continue to pose upside risks to energy prices,” directly impacting consumer costs.
Oil-exporting countries experience budget surpluses and economic expansion when prices rise, allowing governments to fund large-scale projects. However, when prices fall, spending must be curtailed, affecting infrastructure investments and social programs.
“An oil price shock explains around 22% and 46% of the government revenue and GDP variation, respectively. Decomposing the government revenue and GDP further into petroleum and non-petroleum related components,” says a study by Australian and Omani academics.
The IMF has cut the biggest oil exporter, Saudi Arabia’s 2025 GDP growth forecast to 3.3%, citing extended production cuts. In order to ensure stability in the oil process, the main exporter has been rallying for production cuts and has reduced the oil output by 2 million barrels per day over the past two years.
Analysts estimate that Saudi Arabia needs oil prices to stay around $80 per barrel to balance its budget. However, this could be affected by production cuts and increased government spending.
In its earlier reports, “Oil and Fiscal Policy in Oil-Exporting Countries” IMF has highlighted the need for fiscal discipline and has highlighted the challenge for oil-exporting countries to manage the volatility of oil revenues and to ensure that they are used to promote sustainable economic growth.
A study by Australian and Omani academics found astounding realities which said that oil price fluctuations contribute to “22% of government revenue changes and 46% of GDP variation.”
While the volatility of oil prices presents significant challenges, it also offers an opportunity for Middle Eastern economies to reshape their future. By prioritizing diversification, investing in renewable energy, and implementing sound fiscal strategies, these nations can build a more resilient and sustainable economic landscape.
