Saudi Arabia's March oil revenue did not decline but increased: the Strait of Hormuz "deadlock" and Riyadh's "only child"!

Lianhe Zaobao (Finance and Economics Society), April 7 (Editor: Xiaoxiang) A recent industry analysis finds that the “counterintuitive” windfall for Saudi Arabia, the Middle East’s largest oil producer, comes from the blockade of the Strait of Hormuz and the resulting surge in global oil prices, even though countries that lack alternative shipping routes still lose tens of billions of dollars.

After U.S. and Israeli airstrikes on Iran in late February escalated the conflict, Iran has effectively sealed off the Strait of Hormuz—through which roughly one-fifth of the world’s oil and liquefied natural gas shipments have historically passed. Although Iran later said it would allow vessels not linked to the United States or Israel to pass, so that some tankers could still transit this narrow waterway, energy markets have still faced unprecedented turbulence.

In March, the international Brent crude oil price jumped 60%, setting a record for the largest monthly increase.

What’s interesting is that while many regions around the world are seeing inflation spikes and economic losses driven by higher energy prices, for Middle East oil producers, the extent of the impact actually depends on their geographic position.

Even though Iran controls the Strait of Hormuz, Saudi Arabia, Oman, and the UAE can route some oil around the strait via pipelines and ports. By contrast, because Iraq, Kuwait, and Qatar lack alternative routes to international markets, their oil exports have stalled.

One indisputable fact is that as the conflict among the United States, Israel, and Iran has led to the Strait of Hormuz being effectively blocked, the export volumes of crude oil and condensate from most Gulf countries have indeed declined. Industry estimates of March export data show that, year over year, Iraq’s and Kuwait’s estimated nominal oil export revenues both plunged by roughly three-quarters.

However, figures on the other side show that Iran’s oil export revenues rose 37% year over year, Oman’s rose 26%, and Saudi Arabia’s oil revenues increased by 4.3%.

Among these, Saudi Arabia’s “no decline but an increase” in oil export revenues is especially noteworthy—industry estimates indicate that, among the countries facing export restrictions via the Strait of Hormuz (excluding Iran, which actually controls the strait, and Oman’s main ports that are outside the strait), in theory only Saudi Arabia achieved revenue growth in March. That is because the rise in oil prices offset the relatively smaller decline in its export volumes, and even helped drive revenues higher.

This estimate uses export-volume data provided by the vessel-tracking company Kpler and, where available, combines it with JODI data; it multiplies the result by the average Brent crude oil price and compares it with the same period last year. To simplify the calculation, Brent crude oil prices are used as the benchmark here, even though many crude oils are actually priced by reference to other Middle East benchmark crude grades, which currently trade at a significant premium to Brent crude oil.

The “East-West pipeline” earns its keep for Saudi Arabia

For Saudi Arabia, growth in oil export revenues means higher royalties and tax revenues from the state-owned oil major Saudi Aramco, of which the government and its sovereign wealth fund hold the vast majority of shares.

After Saudi Arabia invested heavily to achieve revenue diversification and reduce reliance on oil, the current rise in oil prices is particularly beneficial for the country, and the biggest contributor that has clearly enabled oil revenue growth even under the strait blockade is, without question, its East-West oil export pipeline network.

Saudi Arabia’s largest oil pipeline is the 1,200-kilometer East-West pipeline. Built during the Iran-Iraq War in the 1980s, the pipeline was designed to bypass the Strait of Hormuz. It connects the eastern oilfields to the Yanbu port along the Red Sea coast. It is currently operating at full capacity, moving 7 million barrels per day of oil via the expanded pipeline.

Saudi Arabia’s domestic consumption typically averages about 2 million barrels per day, leaving roughly 5 million barrels per day for export. Shipping data shows that although the Yanbu port hub was attacked on March 19, the amount of oil loaded at Yanbu for the week of March 23 still reached nearly full capacity at about 4.6 million barrels per day.

Kpler and JODI data show that in March, Saudi Arabia’s total crude oil export volume fell 26% year over year to 4.39 million barrels per day. Despite this, higher oil prices still made the value of these exports increase by about $558 million compared with a year earlier.

It is worth noting that the Saudi government had proactively raised exports in February to the highest level since April 2023, in case the United States carried out strikes on Iran.

A rundown of other Middle East oil producers’ situations: Is Iraq the worst?

Among other Middle East oil producers, the UAE, thanks to its 1.5 million to 1.8 million barrels per day transportation volume and the Habshan-Fujairah pipeline that bypasses the Strait of Hormuz, has to some extent mitigated the impact of the blockade. But estimates suggest that the country’s oil export value in March still fell by $174 million year over year. Earlier, the port of Fujairah was hit in succession, causing loading operations to be suspended.

Among Gulf oil-producing countries, Iraq saw the steepest decline in oil revenues in March—down 76% year over year to $1.73 billion. Kuwait followed next, with a decline of 73% to $864 million.

Iraq’s State Oil Marketing Organization (SOMO) said on April 2 that in March, oil revenues were about $2 billion, close to the industry estimates mentioned above.

But one piece of good news is that Iran’s military spokesman said over the weekend that “brother country Iraq” is exempt from any restrictions Iran imposes on the Strait of Hormuz, with those restrictions applying only to “hostile countries.” If the waiver is implemented, in theory as much as 3 million barrels per day of Iraq’s oil cargo volume could be released.

Adriana Alvarado, vice president for sovereign ratings at Morningstar DBRS, said Gulf governments have multiple ways to shore up their fiscal positions: they can tap fiscal reserves or enter financial markets to issue bonds. She added, “Other than Bahrain, the Gulf states have enough fiscal space to cushion the shock—government debt levels are moderate, below 45% of GDP.”

However, in the long run, the impact remains unclear. Some Western oil companies and figures in politics had lobbied for increased investment in fossil fuels in an attempt to guard against supply shocks, but some analysts believe renewable energy is the best safeguard.

(Lianhe Zaobao • Xiaoxiang)