Nothing quashes a good oil price rally like the chance of “black swan” in China. FTSE 100 stocks copped a belting in early trading after RBS said China’s recent surge of lending to non-financial firms could end with an “abrupt reversal.” We usually call such reversals “a crash”.
As if it weren’t already bad enough for the oil producers in the Middle East and North Africa (MENA). Brent crude may have bottomed earlier this year. But at $44.45 per barrel, the oil price isn’t high enough to prevent serious damage to the budgets of key oil producing countries. The International Monetary Fund has the gory details in a new report on the Middle East region.
You can read the report if you like. You’ll find a detailed exposition of how much money the oil producers lost last year (around $350 billion) and how much more they’ll lose this year ($150 billion) because of a lower oil price. What you find is what I’ll show you after this excerpt from the report:
The oil price drop since mid-2014 has been spectacular: prices have fallen nearly 70 percent to about $40 a barrel. Futures markets anticipate oil prices to recover only modestly to $50 a barrel by the end of this decade, though much uncertainty surrounds this forecast. The weak price prospects reflect the expectation that global oil supply growth will moderate only slowly as Iran boosts its exports and other MENA oil exporters maintain high output, at a time of sluggish global growth. The outlook for lower oil prices implies weak oil revenues for years to come, dramatically reducing the capacity of governments to spend. Export receipts in MENA oil exporters declined by $390 billion in 2015 (17½ percent of GDP).
Despite a partial offset from reduced imports owing to subdued prices of non-oil commodities, the combined current account of the GCC [Gulf Cooperation Council] and Algeria has reversed from a comfortable surplus to a projected deficit of about 8 percent of GDP in 2016. The deficit of other MENA oil exporters is projected to be 4¾ percent of GDP this year. The current account is expected to improve only gradually over the medium term, as the oil price recovers somewhat and fiscal adjustment unfolds.
Despite the announced policy measures, medium-term fiscal positions remain challenging given the expectation of oil prices remaining low. The cumulative fiscal deficits of the GCC and Algeria are projected at almost $900 billion during 2016-21. Algeria, Bahrain, Oman, and Saudi Arabia will become significant debtors over this period as their financing needs are expected to exceed their current liquid financial buffers. The budgets of almost all non-GCC countries are also projected to remain in deficit by the end of the decade.
Low oil prices undermine the stability of MENA political regimes. That’s the plain and simple truth. Yes, they have gaping holes in their budgets. Yes, you can plug some of those holes by selling government owned assets and/or drawing down foreign exchange reserves. And yes, a rise in the oil price will bring high current account deficits back into manageable levels.
But all of that assumes oil will remain the chief source of energy in the global economy for the next 100 years. In MENA, political power is derived from the demand for oil. If something else, say, solar, comes along to challenge oil, you’ll see bigger fiscal problems. More than that, you’ll see a region in political turmoil as its underlying source of power goes down the gurgler.
Category: Market updates