The continued production of surplus oil, combined with falling prices and the accelerating global shift toward clean energy, has complicated the fiscal outlook for Middle Eastern oil-exporting countries.
The International Energy Agency estimates that in 2026 the global oil market will face an average surplus of 3.8 million barrels per day, while oil prices are expected to decline to around $55 per barrel. According to projections by the International Monetary Fund, at this price level all major Middle Eastern oil exporters—except Qatar, which is primarily focused on gas exports, and the United Arab Emirates, whose economy is relatively diversified—will face budget deficits. Even Oman, which has made progress in diversifying its fiscal base, has calculated its 2026 oil revenues based on a price of $60 per barrel; yet even if that level is reached, the country still would post a budget deficit of about $1.4 billion.
The most severe situation is expected to be in Iran, where budget balance requires oil prices of at least $165 per barrel—roughly three times the price forecast for 2026. This gap highlights the depth of Iran’s fiscal vulnerability under current market conditions.
Since last year, the rapid expansion of clean energy has reduced annual global oil demand growth.
Despite the enormous volume of surplus oil production, there is little prospect of absorbing this excess supply in the medium term. Since last year, the rapid expansion of clean energy has reduced annual global oil demand growth. This year, as in the previous one, demand growth is expected to remain below one million barrels per day, and by the end of the decade it is projected to nearly come to a standstill.
Another major challenge for Arab oil producers in the Middle East is the presence of roughly 400 million barrels of sanctioned oil from Iran, Russia, and Venezuela floating on global waters. In response to sanctions and market pressure, Russia has increased its oil discounts to $20-$30 per barrel. These discounted barrels further intensify competition and weigh on prices for Middle Eastern exporters.
Over recent years, Arab countries across the region have launched economic diversification programs aimed to reduce their dependence on oil revenues. The problem, however, is that development of non-oil sectors still relies heavily on higher oil income, creating a paradox in which diversification itself remains tied to favorable oil prices.
The most important factor behind the cooling of the global oil market is the acceleration of clean energy deployment. In 2025, one-third of the world’s total $3.3 trillion in energy investment was directed toward renewable energy and energy efficiency. At the same time, total upstream investment in oil and gas fell by 4 percent to $570 billion, with around 40 percent of that amount allocated to projects designed merely to prevent production declines in aging fields, rather than to develop new ones.
The Middle East’s share of global upstream oil and gas investment now stands at only about 25 percent—lower even than that of the United States—underscoring a shift in global capital flows away from traditional oil-producing regions. Not only has the rapid growth of U.S. oil and gas production and exports intensified competition for Middle Eastern producers, but changes in the structure of oil demand have created additional challenges. Given the sharp increase in electric vehicle production, global demand for transport fuels is unlikely to see significant growth. In addition, more than 90 percent of power plants commissioned worldwide last year were based on renewable energy. As a result, the limited remaining growth in global oil demand is increasingly concentrated in the petrochemical sector.
In light of these trends, oil-rich Middle Eastern countries will need to draw more heavily on their sovereign wealth funds to finance economic diversification and stabilize government revenues. However, several countries—including Iraq, Bahrain, and Iran—lack substantial oil savings and remain heavily dependent on current oil export revenues.
Oil-rich Middle Eastern countries will need to draw more heavily on their sovereign wealth funds to finance economic diversification and stabilize government revenues.
Iraq’s situation is particularly fragile from another perspective. Nearly its entire export base depends on oil revenues, and roughly 70 percent of investment in its oil and gas sector relies on foreign capital. With falling oil prices, foreign companies are unlikely to show the same appetite as in previous years for entering new Iraqi projects or expanding existing ones.
Meanwhile, Oman is projected to exhaust its oil production capacity within the next 15 years. To successfully diversify its economy and replace future income sources, the country urgently requires higher oil revenues in the present.
At the same time, Iran’s regional escalation, the killing of protesters this month, and growing U.S. military threats against Tehran have heightened concerns among Persian Gulf states. Any military strike against Iran could provoke retaliatory actions against U.S. interests and those of its regional allies. While the likelihood of Iran closing the Strait of Hormuz remains low, attacks on or seizure of oil tankers remain plausible, posing a risk to the security of Middle Eastern oil exports.
In sum, Middle Eastern oil producers are entering a period in which structural oversupply, weakening demand growth, and falling prices intersect with fiscal vulnerability and rising geopolitical risk. While most governments in the region recognize the urgency of economic diversification, their ability to execute these strategies remains bound to oil revenues that are now under pressure. With limited fiscal buffers in several key producers and a global energy transition accelerating faster than anticipated, 2026 is shaping up not as a cyclical downturn, but as a defining stress test for the long-term economic resilience of oil-dependent states in the Middle East.
