[Global Issues+] 1,400 Trillion Won in 4 Years Due to High Oil Prices... Where Is the Overflowing Oil Money Flowing?

IMF Estimates Middle Eastern Oil-Producing Countries to Accumulate Over $1 Trillion in Revenue by 2026

[Image source=Yonhap News]

Amid a trend of high oil prices, Middle Eastern oil-producing countries centered around Saudi Arabia are expected to earn massive revenues exceeding $1 trillion (approximately 1,421 trillion KRW) over the coming years, drawing global attention to the flow of 'oil money.' In particular, as the Saudi government has recently announced large-scale construction projects across the Middle East, the construction and manufacturing industries are increasingly focusing on the region.

On the surface, this is interpreted as an industrial diversification strategy aimed at promoting economic development within Saudi Arabia and neighboring Middle Eastern countries while reducing reliance on oil exports. However, some analysts suggest that there are underlying security strategies to maintain authoritarian monarchies and power struggles linked to the U.S. exit strategy from the Middle East. Concerns are also rising that conflicts of interest over international oil prices between the U.S. and Saudi Arabia may intensify in the future.

IMF: "Middle Eastern Oil Producers Expected to Earn $1 Trillion by 2026"

On the 31st of last month (local time), the International Monetary Fund (IMF) stated in a regional economic report that "major oil-producing countries in the Middle East are expected to record cumulative revenues exceeding $1 trillion from this year through 2026," adding, "especially Saudi Arabia and Gulf Cooperation Council (GCC) member countries (Saudi Arabia, Kuwait, United Arab Emirates, Qatar, Oman, Bahrain) are expected to maintain high current account surpluses."

Earlier, the Saudi General Authority for Statistics announced that the third-quarter gross domestic product (GDP) growth rate was 8.6% year-on-year. This growth rate is significantly higher compared to other major countries facing recession concerns. The Saudi statistics agency reported that the oil sector grew by 14.5%, while the non-oil sector grew by 5.6%, indicating that high oil prices primarily drove economic growth.

Fiscal revenues, which had been in deficit since the COVID-19 pandemic, also increased substantially. Saudi Arabia's fiscal revenue for the third quarter surged 24% year-on-year to 301.87 billion riyals (approximately 115 trillion KRW). Of this, oil sector revenues accounted for over 75%, totaling 229 billion riyals.

Neom City, Distribution Hub, Middle East Development... Building Capital Hegemony

Based on this massive accumulation of oil money, the Saudi government is announcing a series of mega construction projects throughout the Middle East. According to the 'Vision 2030' project announced by Crown Prince Mohammed bin Salman, who recently assumed the position of Prime Minister, over $1 trillion will be invested in various projects by 2030.

According to Bloomberg, the Saudi government announced the opening of an integrated economic zone in the Riyadh area, where a large-scale distribution logistics center will be established for use by global manufacturers. Saleh Al-Jasser, Saudi Minister of Transport, stated at a press conference, "Apple has agreed to establish a regional logistics center in Riyadh, where it will carry out various activities such as some production lines and repair work," adding, "We have already signed contracts with more than 20 multinational companies and are working to attract firms in technology, telecommunications, aviation, and pharmaceuticals."

The Neom City construction project, previously announced by the Saudi government as a $500 billion project, is expected to expand further. According to CNBC, the Saudi government revealed that the budget for 'The Line,' the core urban construction plan of Neom City, could more than double to $1.1 trillion. The city is planned to be built on the western Red Sea coast of Saudi Arabia, bordering Egypt and Jordan, designed as a futuristic complex city featuring massive skyscrapers 500 meters high and 200 meters wide stretching over 170 kilometers.

The Saudi government also plans to establish companies investing in the development of neighboring Middle Eastern countries together with the UAE government. According to The New York Times (NYT), the Saudi Public Investment Fund (PIF) and the UAE sovereign wealth fund will jointly create a $24 billion fund to establish five development companies investing in neighboring Arab countries such as Egypt, Bahrain, Iraq, Oman, and Jordan.

While this appears to be a strategy for regional development and industrial diversification on the surface, the dominant analysis is that the investments in underdeveloped Middle Eastern areas, which entail significant potential losses, are driven more by security strategy considerations.

Dr. Hussein Ibishi of the Arab Gulf States Institute (AGSI), a U.S. think tank, explained in an interview with CNN, "Saudi Arabia's large-scale projects tend to strengthen infrastructure integration and interdependence with surrounding Arab League countries, aiming to stabilize the Middle East situation," adding, "Since the Arab Spring in 2011, Saudi Arabia and other Arab monarchies have likely considered economic development as a way to soothe internal and external dissatisfaction and conflicts."

High Oil Prices Essential to Support Finances... Concerns Over Continued Conflict with the U.S.

However, to maintain the massive finances supporting these large-scale construction projects, high oil prices must continue, leading to expectations that conflicts with the U.S. will intensify.

According to The Washington Post (WP), the estimated floor price for international oil prices to maintain Saudi Arabia's balanced budget is around $84 per barrel. Although Saudi Arabia's oil production cost ranges between $10 and $20 per barrel, since 75% of government revenue comes from oil export payments, a prolonged period of high oil prices is necessary.

It is also analyzed that the breakdown of negotiations with the Biden administration, which requested a delay in OPEC+ production cuts, was due to failed negotiations over the oil price floor. According to The Wall Street Journal (WSJ), before OPEC+'s production cut decision last month, the Biden administration offered Saudi Arabia a condition to prevent oil price drops by purchasing large amounts of strategic reserves if international oil prices fell below $75 per barrel. However, negotiations collapsed as Saudi Arabia demanded prices above $80 per barrel.

With the U.S. no longer a major buyer of Middle Eastern oil and reducing military support while pursuing an exit strategy from the Middle East, some analyses suggest that Saudi Arabia finds it difficult to prioritize relations with the U.S. anymore.

Foreign Affairs, a U.S. diplomatic journal, pointed out, "The Biden administration's foreign policy dichotomizing democratic and authoritarian states likely gave Saudi Arabia, an authoritarian monarchy, the impression that maintaining the previous friendly relationship with the U.S. is difficult," adding, "Even if the U.S. stops arms sales to Saudi Arabia, it is unlikely to exert significant pressure as European countries facing an energy crisis due to the current Ukraine war are rushing to sell weapons."