The decline in the demand for oil and oil products around the globe has harmed the Saudi Arabian economy. The spread of COVID-19 throughout the globe has created uncertainty which is expected to generate the first contraction in global oil demand growth since 2009. The contraction in the demand for petroleum has spilled over into the Saudi economy which is the world's largest crude oil exporter. As demand began to contract in April the damage was increased following the initiation of an oil price war by Prince Mohammed bin Salman which precipitate a crash in the price of oil through $20 per barrel. Saudi Arabia has also budget constraints and austerity which will make an economic rebound more difficult.
Clean Energy and a Trump Loss
The global recession created by the pandemic is only part of the problem for oil-producing countries such as Saudi Arabia. Global attention is focused on clean energy as a way to mitigate the risks of climate change. The petroleum industry is at the heart of the carbon footprint which is set to decline during the next 5-years. The International Energy Agency expects demand growth in diesel and gasoline to slide during the next 5-years as the world implements policies that will reduce the carbon footprint. This includes the expansion of electric vehicles. While there will be some decline in petroleum demand the actual impact of clean energy is unclear. A new administration focused on clean energy on commodity trading could(the world's largest consumer of petroleum) will harm petroleum demand.
The Saudi Economy
The decline in global petroleum demand has weighed on Saudi economic growth. The Saudi economy contracted 7% in the Q2 of 2020 compared to the same period in 2019, while unemployment soared to a record high, according to the Saudi government. The catalyst was the oil sector, which contracted by 5.3% in the Q2 due to the spread of COVID-19 which has substantially reduced demand.
US Demand has Been Hammered
US demand has been walloped. According to Energy Information Administration total product demand which includes gasoline, distillates, and jet fuel, is down 14.4% year over year during the past month falling to 17.9 million barrels a day. During September 2020 gasoline demand has averaged 8.5 million barrels a day, down nearly 9% year over year according to the Energy Information Administration. Distillate fuel demand which includes items such as diesel fuel and heating oil averaged 3.5 million barrels a day last month which was a decline of nearly 9% year over year. The most significant drop in petroleum demand has come in the aviation sector. While packages continue to be shipped around the United States at a brisk pace, there is very little air travel by consumers. Business travel has been curtailed while few travelers are going on vacation. In many states around the US, visitors are required to quarantine for 14-days. This has let to a lack of travel demand and has weighed on Jet fuel demand. Jet fuel demand in September was down 46.1% compared with the same four-week period last year.
Saudi Self Inflicted Wounds
The decline in the price of crude oil was initiated with the spread of COVID-10, but there was also some self-inflicted harm. The damage was exacerbated after the Crown Prince Mohammed bin Salman initiated an oil price war with Russia after the countries could not agree on a new output cut. Russia was annoyed that it was being asked to reduce the production of oil during the pandemic as the US was reaching new production highs. This sent the price of oil below $20 a barrel in April.
The decline in oil demand had knock-on effects. The Saudi non-oil sector shrank by 8.2% in the Q2 as lockdown restrictions brought business activity to a halt. While some of these restrictions are now being eased, and truce amongst oil producers has lifted the price of oil to $40 per barrel, the price is far short of the number Saudi Arabia needs to balance its budget. According to the International Monetary Fund, oil prices will need to exceed $76 per barrel for Saudi Arabia to achieve a balanced budget. According to the International Monetary Fund, the Saudi kingdom derives roughly 80% of its revenues from oil.
Economic growth has contracted which has pushed Saudi Arabia’s unemployment rate to an all-time high of 15.4% in the Q2. Coming back could be a challenge as a budget squeeze that constricts government spending, and austerity measures, including a tripling of value-added tax to 15% will make finding a job difficult. The IMF expects the Saudi economy to contract 6.8% in 2020 with a small rebound of 3.1% growth in 2021.
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