Despite the alarm stirred by Goldman Sachs's recent forecast of a regional recession this year, state revenue may be a more useful benchmark than GDP for assessing the impact of the US-Israeli war on Iran on Saudi Arabia's economy and the Gulf states more broadly.
Indeed, the primary driver of the projected downturn is the expected decline in oil and gas production as a result of Iranian strikes and disruptions to shipping through the Strait of Hormuz. A rebound in production by 2027 could restore growth, and this is a scenario Goldman's take as their base case.
The point here is not to downplay the challenge facing GCC states. It is to read the war's impact through a framework that reflects the structure of most regional economies and the outsized role energy revenues continue to play, even as the contribution of private sector and other activity to revenue has risen in the past decade through measures such as the introduction of value-added tax and the growth of tourism, logistics, and transportation.
With all of this in mind, we can conclude that increased revenue from oil exports could cushion the fiscal blow if the war's principal risks subside within weeks, which remains the base case of analysts and credit rating agencies.
The math, when it comes down to it, is straightforward. If oil output falls 15% over the course of the year but prices rise by 25%, the contraction in the oil sector would be offset by the increase in government revenue - assuming that export volumes can be increased quickly and meaningfully enough to be sold at these higher prices. That is, the value of the barrels sold may matter more than the number of barrels lost.
Pre-war estimates had the average Brent crude price at $60–$65 a barrel, and most regional and global research centers and analysts have since raised their projections, Goldman Sachs to $77 a barrel and Standard Chartered to $85.
Several regional economists I spoke to in recent days agree with this analysis. Most also add that, among the countries affected by Hormuz shipping disruptions, Saudi Arabia might be uniquely well placed to generate higher revenues and thereby limit its budget deficit this year.
The Kingdom's relative advantage stems from the export infrastructure that Aramco has developed over decades - most notably the East-West pipeline, which can transport five million barrels per day to the Red Sea port of Yanbu and has the potential capacity to export up to seven million barrels. Saudi Arabia also has offshore reserves that could help meet some of the demand. It also has the world's largest spare production capacity and could ramp output to roughly 12 million barrels per day if needed, according to industry experts.
Despite the drop in the volume of Saudi exports during the conflict, a report published last week by Abu Dhabi Commercial Bank points to a possible narrowing of the Kingdom's budget deficit from 5.8% of GDP in 2025 to between 3% and 3.5% of GDP this year.
This analysis assumes Saudi Arabia will raise exports above seven million barrels per day in the second half of the year at an average price of $80 per barrel. That would also mean higher Aramco dividend payments to the Saudi treasury, according to Monica Malik, the bank's chief economist.
Tim Callen, a former IMF official specializing in the Saudi economy, offers an even more optimistic projection: eight million barrels per day sold at an average of $95 per barrel, allowing the Kingdom to reduce the budget deficit by a full percentage point of GDP relative to pre-war estimates.
Malik also believes that the GCC states, Saudi Arabia and the UAE in particular, could increase revenue this year on the back of elevated oil prices, with the caveat that the duration of the conflict remains a decisive variable for the broader economy.
Somewhat ironically, Goldman Sachs arrives at the same conclusion in its base-case scenario for the conflict's impact, arguing that sustained price increases after production recovers could compensate exporting nations’ losses as a result of the supply shortfall and “even improve fiscal and current account balances relative to pre-war levels."
The bank's more pessimistic scenario assumes the war continues at its current intensity through the end of April. In this event, losses increase but remain less severe for Saudi Arabia than neighboring states more dependent on the Strait of Hormuz.
For now, most analysts consider a protracted conflict at this tempo unlikely. They might be over optimistic or an unwillingness to contemplate a scenario everyone would rather avoid; what is certain, however, is that in this event, the repercussions would be felt far beyond the Gulf.
