What will happen to the economic fortunes of OPEC members if it turns out the Saudis and their Gulf Arab allies (UAE, Kuwait, and Qatar) bet on the wrong horse in November 2014? With the wager Saudi Oil Minister Al al-Naimi announced on market forces as the cure for the pressures on OPEC’s global market—a wager which their fellow OPEC members questioned and only reluctantly supported – could this backfire spectacularly for the cartel’s members?
As the December 4, 2015 OPEC meeting in Vienna approaches, OPEC members have the tools to assess the impact of “lower for longer” crude prices on their countries. Serendipitously, the IEA in its recently published World Energy Outlook 2015 describes a low price scenario in which crude stays around $50/barrel through the current decade’s end. It is based on four assumptions: lower near-term global economic growth, a less unstable Middle East, continued OPEC emphasis on market share, and resilient non-OPEC supply. Equally serendipitously, the IMF October 2015 World Economic Outlook projections are premised on $51.62 crude in 2015 and $50.36 crude through 2020 and therefore show the impact ~$50 crude through the end of the decade would have on OPEC in general and the economies of individual OPEC members.
It’s not very pretty with crude at ~$50 per barrel—and therefore is likely to be uglier since the OPEC basket crude price in 2015 will average ~$47 and OPEC basket crude, which generally trades at a discount to Brent crude, would average below $50 in the IEA scenario.
Economic Consequences of a Wager Gone Bad
In national currencies, it appears that OPEC members will show steady, if not spectacular, growth through 2020 with “lower for longer crude,” and that the GDP of each member will exceed 2014 levels before the end of the decade. In fact, the IMF projections show that the GDP of two, Nigeria and Iran, will exceed 2014 GDP in 2015. (Red font shows the year in which GDP in national currency terms is projected to exceed 2014 GDP; GDP figures adjusted for inflation).
This steady, if unspectacular performance, results largely from the negative impact “lower for longer” crude prices have on the currencies of OPEC members with floating exchange rates (as long as the percentage devaluation of the currency exceeds the percentage decrease in crude prices, revenue from crude exports increases). Their growth in national currency tracks the rate of currency devaluation and is higher than that of the countries with pegged currencies (Saudi Arabia, Qatar, UAE, Ecuador, Iraq) or a currency basket (Kuwait, Qatar, and Ecuador).
The GDP picture is less positive in US$ terms. In Angola, Venezuela, and Libya, GDP does not exceed 2014 GDP before 2021, and the GDP in the other OPEC countries reaches 2014 levels one year later than in national currency terms (red font). For OPEC as a whole, GDP grows at only 2 percent annually through 2020.
For OPEC as a whole as well as for Venezuela, Angola, Nigeria, Algeria, Kuwait, and the UAE individually, per capita income in US$ terms remains below 2014 levels and the rate of growth in the other countries, except Iran, is anemic at best (the improvement in Iran, Iraq, and Libya assumes Iran will exit international sanctions and that the political and security situations in Iraq and Libya will improve).
By the end of 2020, government revenue will exceed 2014 levels in three OPEC members only— Iran, Iraq, and Libya (noted in red font) (again, this assumes that Iran will exit international sanctions and that the political and security situations in Iraq and Libya will improve. For OPEC as a whole, government revenue will be nearly 11 percent lower in 2020 than in 2014).
Government expenditures in OPEC as a whole will exceed 2014 levels in 2019—but will be only 4.8 percent higher—an annual rate of growth below 1 percent. Government spending will contract in seven OPEC members (UAE, Ecuador, Venezuela, Angola, Nigeria, Algeria, and Libya).
Net lending/borrowing—which measures government budget surplus/deficit (and therefore its ability to cover social and financial obligations)—deteriorates for OPEC as a whole. The deficit falls below -$301 billion in 2015 and remains below $200 billion through 2020. The cumulative budget deficit for OPEC member countries from 2015-2020 is $1.471 trillion. In only six countries—Ecuador, Angola, Algeria, Iran, Iraq, and Libya—does the budget surplus/deficit situation begin to improve before the end of the decade (year in which situation improves in red font).
OPEC’s current account deteriorates sharply from 2014 to 2015—a $320 billion negative swing from a surplus of $237.149 billon to a deficit of $83.353 billion—and only returns to a surplus in 2018. The cumulative current account deficit for OPEC members 2015-2020 is $107.76 billion. (The current account is an important measure of a country’s ability to pay external debt and external interest).
It is possible, if not likely, that the IMF projections understate the deterioration in the current account. The following table uses data for 2014 from the 2015 OPEC statistical bulletin for each OPEC member’s current account in 2014, their 2014 exports, and their petroleum exports in volume terms to calculate each country’s 2015 total exports using the OPEC basket price for 2015 ($46.92/barrel). Assuming that imports in 2015 remained at 2014 levels, OPEC’s current account would swing from a surplus of $311 billion to a deficit of $306 billion—a $617 billion negative swing.
Gross government debt for OPEC doubles from 2014 to 2020 $1.187 trillion from $592 billion. In only three countries, Qatar, Venezuela, and Angola, does gross government debt decline. Saudi gross government debt increases nearly 32 times, from $11.81 billion to $375.74 billion.
Net indebtedness also increases (minus sign signifies net debt, positive number net government reserves). For OPEC as a whole, reserves decline by $809 billion, from $1.345 trillion to $536.24 billion. Saudi net reserves swing from a surplus of $404.37 billion in 2014 to a $374.50 billion deficit in 2020. (Since the IMF projections do not provide net government debt for Ecuador, Venezuela, Nigeria, and Angola, their gross debt is used).
Almost a year on from Saudi Oil Minister al-Naimi’s November 27 wager announcement, market forces have produced little in the way of gain in suppressing non-OPEC output growth. Output from OPEC’s two major competitors remains robust. Russia’s 2015 output is on track to exceed its 2014 output, as is output in the U.S. While the IEA forecasts that U.S. crude output will decline to 12.56 mmbbl/day from 12.75 mmbbl/day in 2015, 2016 output still will be higher than 2014’s output (11.96 mmbbl/day).
Moreover, companies in the U.S. have a large inventory of wells they have drilled but deferred completing until pricing improves, and observers have consistently underestimated U.S. hydrocarbon output growth potential (see Figure 5, page 17 in Leonardo Maugeri’s Falling Short: A Reality Check for Global LNG Exports for a discussion of the glaring misses in predicting natural gas output growth, for example). Moreover, crude inventories have reached epic levels and promise to keep a lid on prices even if (i.e., perhaps not when) non-OPEC output begins to decline.
A year later, however, the wager has produced a lot of pain. The situation in Venezuela, already suffering from years of economic mismanagement and almost entirely dependent on oil revenues to fund government expenditures, has become so dire that some observers are warning of a looming humanitarian crisis. In an August 5 article, Bloomberg details Angola’s growing misery. Iraq faces mounting difficulty in funding its effort to defend itself against the existential threat from ISIS, as does Nigeria in fighting its own existential threat (Boko Haram).
Saudi Arabia and its Gulf Arab allies have not been immune. At a recent meeting, IMF Managing Director Christine Lagarde noted that with crude generating $275 billion less in revenue in 2015 for Gulf Cooperation Council members (Saudi Arabia, Qatar, UAE, Kuwait, Oman and Bahrain) the region’s fiscal and current account balances are “deteriorating sharply.” Moreover, more pain is on the way for individuals and the hydrocarbon industry.
Nevertheless, Saudi and Gulf officials continue to put on a brave face on the situation. UAE Energy Minister Suhail Al Mazrouei predicted at a recent Asian energy conference in Qatar improving prices in 2016 based on stronger economies in Europe, continued decline in shale oil output, and a recovery in global demand. CNBC reported that, at the same conference, Saudi's Vice Oil Minister Prince Abdulaziz bin Salman dismissed Lagarde’s concerns on Saudi Arabia’s financial situation, asserting that "Rather than being a commodity in decline, as some would like to portray, supply and demand patterns indicate that the long-term fundamentals of the oil complex remain robust.”
By Dalan McEndree for Oilprice.com