Whither Oil Prices?

July 27, 2016

Low Oil Prices Likely to Continue, Bringing Change to Middle East and North Africa Economies

WASHINGTON July 28, 2016 With the oil market entering a new normal of lower prices, the price per barrel is projected to settle in the range of $53 to $60 by 2020, when supply and demand are expected to be in balance.

These developments will have important implications for the economies of the Middle East and North Africa (MENA). According to the World Bank’s latest MENA Quarterly Economic Brief, “Whither Oil Prices?” oil producers in the region have been grappling with low oil prices for the past few years. . At the same time, several countries--Libya, Iraq, Syria and Yemen--are dealing with the devastating impact of civil war and forced displacement, exacerbating pressure on already tight budgets.

According to the report, 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 and is expected to lose another $100 billion this year. , followed by Algeria ($28 billion), and Iraq ($27 billion) in 2015.

, and introducing some bold measures that are expected 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,” said Shanta Devarajan, World Bank Chief Economist for the Middle East and North Africa region.

Throughout the MENA region, governments 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, if sustained, will enhance the overall efficiency of MENA economies going forward.

because of fundamental changes in the behavior of market players. Without a sustained pickup in demand, the market will remain over-supplied and low oil prices are likely to persist at least through 2020,” said Lili Mottaghi, World Bank MENA Economist and the lead author of the report

The oil market has entered a new normal with the changing role of the market players.  Saudi Arabia appears to have relinquished its role as the swing producer who absorbs fluctuations in global demand and supply. With over 4000 idle oil wells and a reaction time in ramping production up or down of about 4 to 6 months—compared with several years for conventional producers—the US shale oil industry is becoming the marginal producer, effectively setting oil prices in the market.  

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