Judging by the futures market, where the price of oil for delivery in August 2015 is US$56 per barrel, there is little optimism about a recovery in oil prices. With cheap oil looking like it is here to stay, the latest Quarterly Economic Bulletin offers a breakdown by country of the potential regional consequences. Here are the highlights:
Gulf Cooperation Council (Loss) oil and gas revenues in 2013 accounted for over half of the Gulf economies’ GDP and 75% of total exports earnings. If prices stay low for a sustained period it is estimated that the region’s governments will face over a US$215 billion loss in oil revenues, more than 14% of their combined GDP. Gulf countries had on average been earning more than they spent, but the combination of rising government spending and falling oil prices could reverse that. The combined fiscal surplus of about 10% of GDP in 2013 could turn into a deficit of 5% of GDP. While they have significant reserves to cover any shortfalls, there are signs that regional governments are re-thinking their spending. Saudi Arabia – with reserves of US$700 billion – is preparing to increase energy and fuel prices. Bahrain, the most severely affected, is contemplating a request for budget support from its Gulf allies. Oman has released a 2015 budget that includes no spending cuts or additional revenues, but may resort to both in the year ahead. The UAE has begun searching for additional sources of revenue, including a tax on remittances – if this policy is adopted throughout the Gulf, it could impact the hiring of expatriates and the flow of remittances. Total remittances from GCC countries to the rest of the Middle East and North Africa region amounted to US$21 billion in 2013, with Saudi Arabia accounting for half that figure.
Egypt (Gain) Oil consumption in Egypt has been rising by an average of 3% per year, outstripping what the country can produce. Cheaper oil will allow Egypt to buy more of it from a greater variety of sources to meet its rising demand. Look for fewer blackouts this summer, which would be a boost to political and social stability. If oil stays at the current price of around US$50 per barrel, Egypt will be able to save on the EGP 100.4 billion budgeted for energy subsidies (based on an expected price of US$105 per barrel.) Cheap oil is also expected to lower inflation and poverty rates – the one downside is potentially fewer tourists from the Gulf, and fewer expatriates sending money home. The impact of the latter will depend on how long lower oil prices stick around.
Iran (Gain/Loss) politics will be as important as the price of oil for Iran. If a deal is reached in the nuclear talks with the P5+1 (the United Nations Security Council and Germany) and oil sanctions are lifted, oil exports are expected to rebound to pre- sanctions levels by 2017. As oil makes up about 80 %of total export earnings and 50 to 60% of government revenues, the economy could grow substantially under this scenario. With no deal, cheap oil could mean a 60% drop in fiscal revenues, down to $23.7 billion in 2015 from its peak of $120 billion in 2011/12. Under this scenario, a loss of about 20% of GDP would be expected, bringing GDP growth down to zero (from the previous year’s 1.5%), and the economy would continue to shrink. This will put tremendous pressure on inflation, unemployment, the fiscal deficit and the currency.
Iraq (Loss) oil exports have increased, despite the current turmoil, reaching an average of 2.9 million barrels per day in December 2014, the highest level since 1980. Oil revenues, however, fell from May to December, 2014 – the value of monthly exports dropped from $8 billion to $5.4 billion. This comes at a time when spending is higher than usual as the government battles to regain ground from ISIS. Lower oil prices will further squeeze government finances, with GDP growth expected to fall to 1.5% in 2015 – remarkably low for a country that should still be in reconstruction-driven growth. The draft 2015 budget – which was based on an anticipated price of US$70 per barrel – is being revised to identify savings through a freeze on public hiring and rooting out abuses (such as the infamous 50,000 ‘ghost soldiers.’) The government is also seeking to delay its final reparation payments to Kuwait, which would defer nearly $5 billion. Even with these savings, maintaining government spending in the face of falling oil revenues will pose a significant challenge. The situation is further complicated by ISIS cutting off the main northern supply routes, raising the price on all imports, including food. This will make the country’s universal food ration system, which is the sole source of nutrition for many Iraqis, more expensive to maintain.
Jordan (Gain) the large drop in oil prices is a positive shock, promoting growth by lowering the cost of production. The government will be able to save the US$300 million budgeted in 2015 to compensate households for the lifting of fuel subsidies (the system of cash transfers was designed to stop automatically once oil fell below US$100 per barrel.) Both citizens and refugees will benefit from lower prices, as inflation dropped to its second lowest level since December 2009. Over the medium term, though, if cheap oil persists Jordan could see fewer remittances from its expatriate workers in the Gulf (over 60% of remittances to Jordan originate from the Gulf.) With lower revenues, Gulf countries could also be less generous with grants. Jordan relies heavily on these grants, and they were expected to form 2.7% of GDP in 2015.
Lebanon (Gain) one significant way in which cheap oil will save the government money is by lowering the cost of supporting the national electric utility, Electricité du Liban (EdL). With tariffs unchanged since 1996 – when oil was $23 per barrel – EdL only covers a fraction of its costs. The government picks up the difference, with transfers to EdL amounting to 4.7% of Gross Domestic Product (GDP) since 2011. Lower oil prices will lower the cost of generating electricity and shrink EdL’s shortfall. This will in turn lower the transfers to EdL, albeit with a 6-9 month lag given the structure of outstanding contracts with fuel oil and gasoil providers. At an average of 8.3% of GDP, imported oil is also a significant component of Lebanon’s trade deficit, which cheaper oil will help to improve. The benefits will be counter balanced by the fact that, like other countries in the region, cheaper oil could affect the amount of money sent home by Lebanese expatriates in the Gulf. Yet as energy imports are greater than the total value of all remittances, a cheaper price per barrel is expected to improve the country’s balance of payments.
Libya (Loss) there will be a high price to pay in lost oil revenues if rival political factions do not reach an agreement. Oil production is currently at one-fifth of its pre-crisis 1.6 million barrels per day. Libya has accumulated substantial financial reserves but the combination of low oil prices and low output has forced the government to draw on it. Reserves reached $100 billion in August 2014, falling by 20% since the start of the year, and could be depleted in four years if the current situation persists. One quarter of the population is on the public payroll, and public sector wages have been increased by 250% since the 2011 revolution. With no increase in oil production on the horizon, the government will struggle to meet its obligations. The Tripoli-based rival parliament recently announced that it was considering lifting fuel subsidies which stand at 20% of GDP – a move that would help close some of the widening gap between public spending and revenues.
Tunisia (Gain) the newly approved budget was based on an anticipated oil price of $95 per barrel. Cheaper oil will mean the government will have to spend far less on energy subsidies. Lower oil prices will also lower the cost of producing and transporting food. A 15% drop in energy prices coupled with a 5% drop in the price of food could increase real incomes of the poor by 3 percent and of the bottom 40 percent of the population by 2.5 percent.
Yemen (Loss) oil dominates the government budget. Lower prices combined with ongoing political instability (including frequent sabotage of oil pipelines) halved oil revenues. Receipts from May to September, 2014 totaled US$1.4 billion, compared with US$2.4 billion for the same period in 2013. Yemen also relies on remittances from expatriate workers in the Gulf – the source of 90% of all remittances – which may also be affected. Lower oil prices are expected to reduce prices of imported goods, though, and boost household consumption, especially for food items, as 55% of food products are imported. In addition, inflation would likely drop, as food constitutes about 44% of the Yemeni consumer’s spending. Yet to protect its currency and compensate for the drop in oil revenues, Yemen has been drawing on its foreign reserves. The country currently has enough to cover 4.6 months of imports, down from 5.1 months in September. This downward trend is likely to continue in the face of cheap oil and continued instability – and the decision by Saudi Arabia to suspend most of its aid. Yemen will need ongoing assistance from its development partners if it is to avoid a balance of payments crisis in the coming years in which it is unable to afford critical imports.
*For more detailed analysis, please visit the latest issue of the Quarterly Economic Brief