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End of the oil era?

What is it about?

Covid-19 has hit the Arab states hard. Oil price plummeted to all-time lows due to social distancing rules that stopped people from traveling around and businesses suspending their operations. Oil-reliant Arab states are currently suffering from a drastic fall in oil earnings. Algeria, where energy accounts for 60% of the state budget, decided to cut the government budget by half. In Iraq, the monthly oil revenue is currently $2.7 billion, which contrasts with $7 billion in 2019. Its budget deficit is the biggest among other Middle East countries. Saudi Arabia, the world’s biggest oil exporter, fortunately has large foreign currency reserves to better cope with a fall in oil revenue, but IMF forecasted it to face a 6.8% shrink in its economy. Saudi Arabia recently tripled VAT to recover state finances hit by the oil crisis.

Thinking beyond

Oil demand may increase and price may rise again as countries begin to relax Covid-19 restrictions. However, the pandemic has shown us what the future of oil would ultimately be. It has proven to us that traveling to offices every morning is not always necessary and more companies are considering adopting remote working policies even after the pandemic. For example, Facebook announced that it will aim to have at least half of its employees working from home by 2030. Also, according to a survey released by PwC in June, a quarter of chief financial officers (CFOs) are considering to reduce business premises. If this trend of less traveling becomes the new normal, oil demand would struggle to recover to pre-COVID levels. This trend will also be combined with the impact of the worldwide movement to convert to cleaner energies.

Many oil-dependent Arab economies have already forecasted the dismal future of oil and have been preparing for diversification. For example, Saudi Arabia’s Vision 2030 aims to reform the economy and raise the share of non-oil exports in non-oil GDP from 16% to 50%. Algeria is planning to launch an Islamic finance sector to seek a new source of funding for its economy. Foreign investments will be key for these reforms to succeed as relying solely on domestic investors will not be enough to raise enough money for the economy. As such, law firms like Allen&Overy and Bryan Cave Leighton Paisner with a strong presence in the Middle East would see a rise in deals. Deals could include Islamic financing work, construction deals and project finance. Law firms will be working with local lawyers to advise both foreign investors and local firms and governments.

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