The oil price environment remains manageable but looks increasingly uncomfortable for some Gulf states.
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DonateOn March 3, OPEC+ announced plans to unwind voluntary oil production cuts beginning in April. Brent crude oil prices subsequently dropped to 6-month lows, dipping below $70 per barrel. Supply and demand dynamics in global oil markets have led to subdued prices with a strong likelihood of downward pressure as the year unfolds. Recent policies and other signals from the administration of President Donald J. Trump have created significant macroeconomic uncertainty, heightening the downside risks to global oil prices. The current oil price environment remains manageable for Gulf Arab governments, but the short-term outlook and broader trend line for oil prices are moving in an uncomfortable direction. Absent a drastic oil price drop, regional officials will nevertheless continue with familiar economic policymaking to advance economic development agendas while keeping a close eye on energy markets.
Average oil prices have been trending downward in recent years. The spot price of Brent crude oil dropped from $101/bbl in 2022 to $82/bbl and $81/bbl in 2023 and 2024. The U.S. Energy Information Administration forecasts Brent crude oil prices will fall to $74/bbl in 2025 and $68/bbl in 2026. A poll of economists and analysts conducted by Reuters in February reflected similar price estimates of $74.63/bbl during 2025. One key variable in these short-term forecasts involved the timing and scope of the OPEC+ plans to unwind production curbs. The group of oil-producing countries cited “healthy market fundamentals and the positive market outlook” in its March 3 announcement to return 138,000 barrels per day to the market beginning in April as part of a gradual and flexible easing of voluntary production adjustments. As of March 13, Brent crude oil was trading at $69.88/bbl, though prices edged above $70/bbl in the following days.
Current energy market fundamentals increase the likelihood of downward pressure on oil prices. First, oil inventories are expected to grow throughout the year. Robust output expectations in the Americas, Senegal, and Norway will support supply increases. Indeed, concerns that the “industry is over-drilling” and a bearish mood were reported on the sidelines of CERAWeek in Houston earlier in March. Second, there is ample spare production capacity in oil markets. The decision to ease OPEC+ production cuts signals the eventual return of 2.2 million barrels per day. Saudi Aramco alone sits on 3 mb/d of spare capacity “that can be activated in a matter of weeks,” according to the company’s CEO. Third, global oil demand growth appears to be slowing. China – a top destination for crude oil and other energy commodity exports from the Gulf – accounted for around 50% of growth in global oil demand from 2000-23, but this demand growth is decelerating. Recent plans for Chinese oil refiners to reduce fuel output have renewed concerns about slowing Chinese oil demand.
Trump policy announcements – including official orders and other signals – heighten the downside risk to oil prices. The demand picture looks particularly unfavorable. The persistent threat of tariffs, trade policy implementation delays and reversals, and retaliatory actions have created substantial macroeconomic uncertainty, which does not bode well for oil demand. Bloomberg Economics estimates that the escalating trade war was the major driver of oil prices dropping below $70/bbl in early March. The potential for an easing of some U.S. sanctions on Russia, which could ease the entry of Russian oil on the market, is another variable supporting downward pressure on prices given expectations around a well-supplied market.
The Trump administration and Gulf governments do not enjoy a perfect alignment of interests in the energy policy domain. One potential unintended consequence of U.S. tariffs on Canada and Mexico is higher fuel prices for U.S. consumers. Higher gas prices in the United States – though ultimately linked to tariffs disrupting U.S. energy supply chains – may nevertheless renew pressure on OPEC+ from the White House. Even though the OPEC+ decision to begin unwinding oil production curbs broadly aligns with Trump’s interest in lower oil prices, the prospect of higher gasoline prices for certain U.S. consumers could put OPEC+ between a rock and a hard place.
As for other supply-side considerations, Trump has sought to support “unleashing American energy” through various declarations and measures. U.S. crude oil production is already at record levels. The feasibility (and profitability) of even higher levels of production is not entirely clear, but the broader U.S. energy sector nevertheless enjoys robust political support and a favorable regulatory environment under the new administration. Trump even suggested using tariff threats to encourage new buyers of U.S. liquefied natural gas. A successful political intervention of this nature in LNG markets could impact the interests of LNG producers in the Gulf, such as Qatar, and future contracts with Asian and European buyers.
Geopolitical developments present some upside risk to crude oil prices. On February 4, Trump signed a National Security Presidential Memorandum “restoring maximum pressure on Iran” with a “campaign aimed at driving Iran’s oil exports to zero” among other stated objectives. While there have been some indications that Washington and Tehran are open to discussing a deal on Iran’s nuclear program and other issues, any stricter enforcement of sanctions on Iranian oil in the meantime would likely unfold alongside growing oil inventories supported by producers outside of and inside OPEC+, limiting prospects for a significant elevation of oil prices. Moreover, Iran is undertaking new strategies to skirt U.S. sanctions, including using smaller vessels, to ensure Iranian oil continues to arrive in China, a key market.
Any engagement by the United States or its allies with Iran that raises the regional temperature and increases the risk of more conflict in the region runs counter to the prevailing foreign policy stances of Gulf Arab governments. Riyadh, Abu Dhabi, and Manama have all eased tensions with Iran – part of loosely coordinated foreign policies prioritizing de-escalation in recent years. The potential for oil shocks, however, did not disappear. There are ongoing concerns that Israel may launch a preemptive attack on Iran’s nuclear program or other critical infrastructure, and Gulf officials understand that a vulnerable regime in Tehran could opt to retaliate by targeting their critical infrastructure. Regional governments are likely to push quietly for moderation and an easing of tensions with Iran. Reports that Saudi Arabia is open to mediating between Iran and the United States reflect Saudi efforts to convert relations with Iran from potential liability to potential.
Tensions around the Strait of Hormuz or in the Red Sea can also disrupt global supply chains. The Red Sea remains the more likely theater of conflict, given the demonstrated proclivity of the Houthis in Yemen for attacking commercial vessels. On March 11, the Houthis vowed to resume attacks on Israeli ships in the Red Sea following the expiration of a Gaza aid deadline. One week later, following the breakdown of the Israel-Hamas cease-fire deal and renewed U.S. military strikes on Houthi strongholds, the group claimed a missile launch against Israel as well as attacks targeting U.S. war ships in the Red Sea. However, the upward impact on oil prices is likely to be limited without direct disruptions to energy supply.
Lower oil prices lead to increasingly uncomfortable fiscal positions. While Gulf countries have made some progress diversifying government revenue, oil prices still directly impact government finances and the balance sheets of key government-related entities, though associated pressures vary from country to country.
Saudi Arabia’s 2025 state budget expected a deficit of around $27 billion when approved in November 2024, and that deficit is likely to widen. The country’s Annual Borrowing Plan released in January includes additional funding needs of $10.1 billion for debt obligations in 2025. In a revised credit rating from March, S&P Global suggested the fiscal deficit would increase to 4.8% of gross domestic product this year owing to “current sensitivity to oil prices,” but it still expects a strong sovereign balance sheet and stable outlook. If Saudi Arabia brings more oil to market this year as part of the easing of production curbs alongside contained oil prices, then the fiscal outlook may be rosier.
Yet the profits of key government-related entities in Saudi Arabia are under pressure. Saudi Aramco reported a decline in 2024 net profits. The company plans to slash dividends this year to $85.4 billion, down from $124.2 billion in 2024. AGSIW Visiting Fellow Tim Callen called this adjustment to dividend payments “bad news” for Aramco’s main shareholders, the government, and the Public Investment Fund. His calculations suggest that the contribution of oil revenue to the 2025 budget may be $40 billion lower than in 2024 when accounting for fewer dividends, tax revenue, and royalties.
The smaller Gulf countries of Bahrain and Oman likewise confront fiscal constraints, especially amid lower-oil-price environments. Bahrain has not finalized its 2025 and 2026 budget plan, but high fiscal deficits are expected. Fitch Ratings, which revised the country’s outlook to negative in February, forecasts a general government budget deficit of around 9% of GDP when extra budgetary spending is included. Bahrain’s general government gross debt – at nearly 130% of GDP – is high and rising.
Oman’s fiscal position is more favorable than that of Bahrain, given the sultanate’s steady progress on fiscal consolidation, reducing government debt, and other reforms in recent years. Omani authorities expect a budget deficit of 620 million Omani rials (approximately $1.61 billion) – around 1.4% of GDP – assuming a relatively conservative average oil price of $60/bbl. Oman plans to meet its total financing obligations through local borrowing, external borrowing, and reserve withdrawals.
Kuwait projects a deficit of approximately $20.4 billion in its 2025-26 state budget – around 13% of GDP – assuming an oil price of $68/bbl. Kuwaiti budget projections do not account for investment income from the country’s massive sovereign wealth fund, making its fiscal situation more comfortable than it may appear. In fact, some optimism surrounding economic reform momentum after years of policymaking stagnation has led to a rally in Kuwaiti stocks, which have outperformed Gulf peers’ this year.
Qatar and the United Arab Emirates remain in solid, but moderating, fiscal positions. Qatar’s general budget for 2025 envisions a deficit of $3.63 billion assuming a cautious average oil price of $60/bbl. Qatar has enjoyed consecutive surpluses every year from 2021-24, and the International Monetary Fund as well as ratings agencies expect surpluses – though narrowing – over the short term. The IMF also envisions the UAE enjoying a “comfortable” fiscal surplus of 4% of GDP this year, down slightly from an estimated 5% of GDP in 2024.
Major shifts in the region’s immediate economic policymaking are unlikely. Instead, familiar economic policy decisions and stances are most likely to prevail as the year unfolds. The oil price environment nevertheless increases the salience of three policy areas:
At the outset of 2025, Saudi Arabia sold $12 billion of bonds and also raised $2.36 billion as part of a euro-denominated bond sale later in February. Bahrain is expected to issue $2 billion to $3 billion in international bonds this year. Oman issued its first government development bond of the year in February, and the next issuance is slated for April. Governments and government-related entities in these three Gulf countries will also look toward local and international banks for help meeting funding needs. In January, the Saudi Public Investment Fund signed a $7 billion Islamic loan with 20 banks as part of a “medium-term capital raising strategy.”
Gulf countries in stronger fiscal positions will continue developing their capital markets through issuances. On February 24, Qatar completed a $3 billion bond issuance. The UAE plans to issue more bonds in Emirati dirhams to support its local debt market this year. Issuers in the UAE – along with Saudi Arabia and, to lesser degrees, Qatar and Kuwait – are expected to drive between $18 billion and $23 billion in sustainable bond issuances across the region in 2025. Kuwait’s government may push through a new debt law, permitting the country to begin issuing the first sovereign bonds since the country’s previous debt law expired in 2017.
Smart, sustainable spending on high-priority projects and initiatives will be crucial for regional governments, especially amid a period of subdued or declining oil prices. Saudi Arabia’s social and economic transformation agenda is particularly ambitious and expensive. Saudi officials have started to adjust expectations. For example, regarding the Neom gigaproject, the Saudi finance minister said, “Neom is a 50-plus-year plan. If anyone is thinking Neom in its grand size is going to be built and operated and making money in five years, that’s foolish.”
Plans to host major events require steady progress and meeting hard deadlines. Such events will ultimately shape spending and development priorities. For example, Saudi Arabia will host the Asian Winter Games in 2029, World Expo in 2030, and FIFA World Cup in 2034. Aspects of the projects that are critical to running these events – such as Neom’s Trojena, which will host the Asian Winter Games – are likely to receive stronger political and funding support.
Gulf governments will continue to promote long-standing pillars of economic diversification. The financial sector, renewable energy, logistics, tourism, and entertainment will remain non-oil focus areas. Abu Dhabi aims to maintain momentum attracting asset managers and financial institutions to set up offices in the emirate, especially in Abu Dhabi Global Market. Meanwhile Dubai recently launched a sports and entertainment-focused free zone, which utilizes a preferred economic policy instrument to advance one focus area of economic diversification.
Higher-risk, higher-reward investments into artificial intelligence and other advanced technologies will remain a spending priority. Regional governments will lean on their sovereign wealth funds when and where possible to support these nascent industries. MGX, the Abu Dhabi sovereign wealth fund-backed technology investor, is one entity playing such an enabling role.
Experience managing oil price crises has made Gulf countries more prepared to weather periods of lower oil prices and market volatility. Yet slow progress on economic diversification means that lower oil prices will still hamper various dimensions of the region’s ambitious economic and development agendas. If there is a major downside move in the oil market, economic policymaking decisions would become more difficult. Tricky tradeoffs are not required at this stage but remain a distinct possibility in this uncertain macroeconomic environment.
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