Oil traders and Wall Street analysts expect further declines in oil prices in the coming weeks. Several have predicted that prices will fall below $30 a barrel and even approach $20 a barrel.
But prices are expected to rise sooner or later. Tension between Saudi Arabia and Iran has increased in recent weeks, and Middle East turmoil often causes prices to rise because traders worry about a potential disruption in supplies in the world’s most important oil region.
Middle East and North Africa
Regionally, Algeria, Iraq and Iran, the oil-producing Gulf Cooperation Council states, will feel the most impact from low oil prices. For 2016 government budgets to break even, the International Monetary Fund projects that Saudi Arabia will need oil prices of $98.3 per barrel. Bahrain will need prices of $89.8 per barrel and Oman of $96.8. All are significantly higher than the break-even points of Kuwait, Qatar and the United Arab Emirates (UAE). For the most part, however, the Gulf Cooperation Council nations are in a position to weather low prices, since they hold low levels of debt and high financial reserves built up from years of high oil price revenues. Although Bahrain is an exception to this because it is not a major producer, and that’s why the Bahrain cabinet on Monday raised fuel price. The new prices took effect on Tuesday, which was heavily condemned by several Bahraini parliament members, arguing such a move will hurt the poor.
However, analysts say in the short term, the Gulf Cooperation Council will not fall into financial crisis, but its member states are still making the financial adjustments needed to keep their reserves high and to avoid going deeper into debt. All of the Gulf nations will cut government spending in 2016 to some degree, albeit carefully, and will accelerate legal reforms. To ease the burden on citizens, Saudi Arabia and the UAE are reducing fuel subsidies but maintaining spending on education and social services. Bahrain has reduced food subsidies but is considering cash handouts to balance the cuts. The UAE, Saudi Arabia, Oman, Qatar and Kuwait are all discussing implementing taxes to increase state revenue, a measure unprecedented in the regional bloc.
Insiders say Saudi Arabia is the most important country to watch. In addition to the careful cuts in social spending, the government has already started to privatise assets, starting with three major airports. Riyadh has even discussed floating a part of state-owned Saudi Arabian Oil Co, known as Saudi Aramco, in an initial public offering. Privatisation will diversify the funding sources of these entities but also is politically risky. Earlier this week, the influential Deputy Crown Prince Mohammed bin Salman has hinted that reforms may be rapid, even as the king emphasises the strength of the economy, but powerful members of the ruling al-Saud family will be wary of moving too swiftly. With dozens of privatisation plans on the table, discontent within the ruling family is all but inevitable. Riyadh is also facing major regional changes with the return of Iran to the international economy and the enduring conflict in Yemen, meaning that defense and foreign spending will need to remain high.
Not all regional players have the fiscal advantage of the Gulf Cooperation Council. Algeria’s economy is highly dependent on natural gas, and its foreign reserves dropped precipitously in 2015 because of lower oil export revenue, leading to a $10.8bn deficit. A mild winter in Europe, a key market for Algerian natural gas, will not help the situation. Algeria has sought to boost foreign investment through tax reform and the introduction of import and export license authorizations. But the country is heading toward a precarious political moment: the eventual death of President Abdelaziz Bouteflika, who has held office since 1999. The nation’s elite are now jockeying for position ahead of this transition; although continued reform measures are necessary, many will be wary of any that may erode their power. This will limit the country’s options, compounding the current crisis.
In Iraq, both Baghdad and the Kurdish capital of Arbil are already in serious financial trouble. The national government and the Kurdistan Regional Government need to maintain high levels of spending to fund their battle against the Dae’sh. With oil revenues dropping, this means they will need to reduce other expenditures. The governments do have the option of renegotiating their contracts with international oil companies. Baghdad is in the midst of such talks to replace its current contract, which stipulates that Baghdad pay oil companies a fixed fee. Arbil is juggling its security situation with payments to international oil companies and the giant Kurdish civil service sector. The Kurds have already made it clear that they have no plans to export oil through Baghdad’s state-owned marketing company but will instead market it themselves and export through Turkey. Ankara and the Kurdistan Regional Government in Arbil will grow closer as both increase energy cooperation and deal with the mutual threat of the Islamic State. Arbil’s increased suffering under low oil prices will only strengthen this relationship.
Amid low oil prices, February elections are also approaching in Iran. Iranian President Hassan Rouhani will be banking that his talks with the West and success in negotiating the end of sanctions will help moderates and his traditional conservative allies defeat hard-line conservatives. The opposition has asserted that Rouhani’s economic policies are not working. Low oil prices will make these arguments only more credible. The end of sanctions will enable Iran to increase the volume of its exports, but with prices down nearly 70% since 2014 the revenue generated will not reach the level it would have two years ago. This realisation may not become clear to voters until after February elections, meaning Rouhani could perform well. But by 2017, the discrepancy will likely be obvious, jeopardising his chances for re-election in 2017.
