PwC: 'Use oil-based fiscal windfall to fuel energy transition'

08 July 2022 4 min. read
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The rise in oil prices is providing a windfall for GCC states, according to PwC’s latest Middle East Economy Watch, with most governments set to bump up their fiscal surplus in the coming months.

For large oil-exporting countries such as Saudi Arabia, Kuwait, Qatar and Iraq, the surge in oil and gas prices is having a “major positive impact on the fiscal outlook of governments”, according to PwC’s research. GCC’s six states for instance are expected to enjoy an aggregate fiscal budget surplus of around $150 billion in 2022, with that amount to grow in the years ahead.

The price of oil currently trades at around $100 per barrel, a seven-fold increase on the low of $14 per barrel when Covid-19 grappled the market.

Barrel, $/average weekly

Despite a major agenda to accelerate non-oil revenues, oil-focused Middle East states typically still earn more than two thirds of their state revenues from oil and gas production.

Because oil-focused governments in the region tend to follow pro-cyclical fiscal policy, “we have high hopes that the surge in oil prices will drive a rapid economic recovery in these countries,” said Richard Boxshall, Chief Economist at PwC in the Middle East.

However, the situation is not so bright for oil importers such as Egypt, Jordan, Lebanon and Palestine. “The rise in prices is a major source of strain on their fiscal position,” said Boxshall.

Spending more and wisely?

Unlike similar cycles in the past – this is the third major oil price boom of the 21st century – PwC’s economists however expect to see stronger discipline around spending. “While governments in the region have often demonstrated pro-cyclical fiscal policy, data from the IMF suggests that spending hikes are now more modest.”

Prices oil tracks expenditure

Boxshall continued: “If spending is indeed controlled, the region will have a major surplus to direct to other purposes. Oman and Saudi Arabia have given the clearest indications of how they intend to use the funds. Oman’s government was directed to reduce debt, which peaked at $55 billion of GDP last year. While Saudi Arabia developed the national debt management plan, giving the priority on rebuilding reserves.”

Looking beyond the current boom, PwC’s research advises governments to “take advantage of the current windfall to accelerate the transition to a more future-oriented future.” At the heart of this transition is the shift to renewable energy, as net zero ambitions (slowly) fade fossil fuels to the back seat.

According to another study by Strategy& (the strategy consulting wing of PwC), renewable energies are on a growth trajectory in the region, with abundant sunshine and cheap marginal land driving national and foreign investments. The road to serious energy diversity remains long, though.

Export potential of GCC countries

The hydrogen opportunity

In particular hydrogen – green hydrogen – is seen as a key opportunity for the Middle East. Boxshall: “The region is in a unique position to take advantage of hydrogen. If states can proactively lead this transformation, then the 2030s are likely to be a boom decade for hydrogen in our region. A study by Strategy& projected that global demand for hydrogen could reach 530 million tons/year in 2050, and identified the GCC as the region with the strongest export potential.”

Strategy&’s finding is backed by two other recent reports from think tanks, who both similarly position the region at the forefront of industry developments.

Stephen Anderson, Strategy and Markets Leader at PwC: “Dozens of hydrogen projects have been proposed across the region. The UAE, Saudi Arabia and Oman have so far been the most aggressive in advancing hydrogen, but other countries such as Egypt, Jordan, Kuwait and Libya are also waking up to the hydrogen race with major hydrogen projects being planned or under development.”