OCT
22

New Report: As Oil Tumbles, What are the Risks for Exporters?

 
With ISIS militants making continued advances in Iraq and Russian President Vladimir Putin threatening European gas supplies ahead of winter, there has scarcely been a time when energy issues were more solidly at the forefront of American and global security challenges. Yet, with oil prices sitting well below $90 per barrel (bbl) amid weakened global demand and rising supply from U.S. producers, it is tempting to think that the outlook for stability in global energy markets is set to improve. Indeed, a number of analysts and reporters have suggested that the current moment signals everything from the end of OPEC to the arrival of cheap and stable long-term oil supplies. SAFE’s newest report, released in partnership with Roubini Global Economics (RGE), highlights one of the most important and underappreciated factors that could fuel increasing levels of geopolitical instability and serve to keep oil prices high and volatile in the coming years: the rising fiscal break-even oil prices required by the world’s largest oil exporters. In the report, “Updating Fiscal Break-Even Oil Prices: As Oil Tumbles, What are the Risks for Exporters?” SAFE and RGE find that governments in oil exporting nations accounting for 45 percent of global oil supply will require an oil price in excess of $90/bbl to finance 2015 budget requirements, an increase from 25 percent in 2014 and 15 percent in 2010.

Fiscal Break-Even, 2014-2015

Deteriorating fiscal outlooks will force exporters to either reduce social spending, risking short-term political instability, or maintain current spending in favor of cuts to upstream capex, eroding long-term growth and risking longer-term economic instability.

The recent dip in gasoline prices, linked to access to this cheaper crude, has been a welcome sight for American consumers, who have spent record amounts on gasoline for three years running, though it is still important to be mindful of the broader market dynamics at play in such a bear market. Nearly half the world’s oil supplies now originate in countries facing major fiscal adjustments with potentially profound social, economic, and geopolitical implications. Unable to meet spending goals with an oil price below $90/bbl, most countries will draw on accumulated savings and debt to maintain spending in the short term. However, only a handful of countries belonging to the Gulf Cooperation Council (GCC) are able to do so for more than a few quarters. A decline to below $80/bbl would drive all OPEC countries but Qatar, Kuwait, and UAE into fiscal deficit. Regional instability brought on by the Arab Spring, which prompted increases in short-term domestic spending, is partly to blame for the rise in the break-even prices. More broadly, the cycle of violence that engulfed several nations, most notably Syria, Egypt, and Libya, stressed regional political divides and contributed to a cycle of rising military expenditures in several nations, including Saudi Arabia and, to a lesser degree, Iran.

Military Spending, Share of Total Spending

The current cycle of declining oil prices and reduced revenues will undoubtedly create significant challenges for a number of major oil exporters. In general, producers with more diversified economies and export portfolios will be better equipped to weather the cycle, but within OPEC and Russia, this is not the norm. Most countries are heavily dependent on oil revenues to finance not just economic growth, but also the expanding fiscal promises made to otherwise potentially restive populations. The risk that countries will defer investing in future production to meet current spending goals is exacerbated by an increasingly unstable geopolitical climate, marked by multiple supply outages in major oil producing countries and the ongoing specter of Russian military activity in Ukraine. Since the U.S. oil boom began, OPEC has not formally reduced its standing production quota of 30 million barrels per day. Some member states, such as Iran, have already called for production cuts in an effort to boost prices. Other Gulf States with lower break-evens, such as Saudi Arabia, have preferred to wait and see, putting fiscal pressure on their neighbors and adding tension to the already-tenuous OPEC relationship. So, while it appears at a passing glance that the global oil market is set to enter a new era of stability and low prices, it is important to remember the fragility inherent in the system—it takes only one serious disruption to send prices skyrocketing once again. Be sure to read the report, available here, for a thorough breakdown of each country’s break-even price and the potential implications for American economic and national security.