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MENA Quarterly Economic Brief, July 2016: Whither Oil Prices?


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A New Normal for Oil Prices

This report predicts that the world oil market will work through its current oversupply and rebalance in early 2020 at market-clearing prices that will be in the range of $53 to $60 a barrel, close to the marginal cost of the last producer, US shale oil producers.

This “new normal” for oil prices will have important implications for the economies of the Middle East and North Africa (MENA). Fiscal balances in MENA oil exporters swung from a surplus of $128 billion in 2013 to a deficit of $264 billion in 2016. The group of Gulf Cooperation Council (GCC) countries lost $157 billion in oil revenues last year and is expected to lose another $100 billion this year. Saudi Arabia has depleted $178 billion in reserves, followed by Algeria ($28 billion), and Iraq ($27 billion) in 2015.

How is MENA Reacting to the New Normal of Low Oil Prices?

Persistently low oil prices are bringing change to MENA economies. Governments in the region are taking measures long considered impossible such as imposing taxes, eliminating fuel subsidies, and reducing public sector jobs and salaries. Almost every oil-exporting country is cutting subsidies to fuel, electricity, gas, and water. Many are cutting public spending and some, like Algeria, are freezing public-sector hiring. Oil importers such as Morocco, Egypt, and Jordan, who started reforming subsidies in 2014, are shifting from a fixed domestic price of fuel to one that is tied to the world price. Morocco and several GCC countries have introduced energy-efficiency improvements, lowering carbon emissions. These reforms are likely to transform the old social contract, where the state provided citizens with fuel and food subsidies and public-sector jobs, to a new one where the state promotes private-sector job creation and empowers citizens to make their own consumption choices.

Read more about how each of the MENA oil exporters is reacting to low oil prices: