The recent happenings in the oil industry, particularly during the peak-COVID-19 phase, imposed dramatic changes to the policies of producing countries. These will influence the future of the industry, which, in turn, will be reflect in these countries’ economic conditions.
What we can see are two distinctive trends shaping the industry. The first is the GCC approach, which aims to augment cooperation with major oil-consuming countries, particularly in Asia, to maintain their export markets in the face of declining demand and increased production.
Among the new approaches is the agreement by some GCC countries to store substantial quantities of oil in consuming countries for use when needed. An example is the agreement signed by the UAE and India under which India will lease part of its strategic oil storage facilities to Abu Dhabi National Oil Company (ADNOC) for use in case of supply disruption.
India’s oil minister also said India is in talks with Saudi Arabia to store its oil reserves at facilities in southern India, and earmarked as strategic oil reserves.
Within the same context, an oil storage agreement signed by Kuwait and Japan under which the Japanese refining company Ineos will give Kuwait Petroleum Corporation the right to use its tanks. In exchange, Japan will have the priority to source from these stocks in case of emergency.
This is a GCC’s strategic approach to preserve Gulf interests.
All for cash
The other approach is followed by Iran, Iraq, Angola and Venezuela deals in the sale of oil and getting paid in advance to help them through their financial crises.
For example, the agreement signed by Baghdad with China ZhenHua Oil Co. - a bailout from Beijing for the cash-strapped government - will ensure it receives payments upfront in exchange for long-term oil supply at lower prices than market rates.
These moves pose significant downsides, because these producers’ attempts to solve their current problems create conditions for more tougher financial crises and further deteriorate conditions. This is because the cash proceeds obtained now will be used to finance ongoing expenditures and in non-productive sectors, and with the chances of much of it going to waste through corruption.
Because of their low credit ratings, these countries cannot resort to external borrowings, while Iran and Venezuela also have severe economic sanctions that do not allow them to borrow.
All about ratings
In contrast, the GCC nations have high credit ratings and their debt issues are coveted by global investors. This is because GCC countries enjoy political, economic and financial stability. Their approaches are aimed at strengthening this stability and forging solid alliances with major oil consumers.
The leaders of the other group of countries act as “transients”, which drives them to make the greatest possible gains at the expense of the economic future of their countries. Such an approach will lead to complex situations for future governments in these countries.
This situation reminds us of another financial crisis, this one experienced by a country in Europe, where its government had to resign and then form an alternative. When its new minister of finance came to his office, he found a short message on the desk from the former minister stating simply: “No money... Good luck”.
The scenario will be repeated with the next ministers at other countries…
- Mohammed Al Asoomi is a specialist in energy and Gulf economic affairs