Why Saudi’s former allies in Opec will be worst hit by oil crash - Financial Times

Saudi Arabia’s aggressive oil price war ostensibly targets Russia, which baulked at the kingdom’s request that Opec members and Moscow deepen and prolong production cuts to balance the crude market. But Moscow is better positioned than most to weather low prices. It is Saudi Arabia’s peers inside the cartel and other economically vulnerable producers that will suffer more from a collapse of the oil alliance.

One indicator of the risk to each country is the price per barrel that each producer needs in order to meet spending requirements while balancing the national budget.

Iran, for example, which has been battered by US sanctions, would theoretically need prices of $195 a barrel to balance its spending, according to IMF figures, while Algeria requires $109 a barrel. Even Gulf economies, that have deeper financial reserves, are not immune to the shock. The UAE requires $70 a barrel to break even, while Saudi Arabia needs prices of $83.

With crude now at $36 a barrel, it means Opec members may need to dip into foreign exchange reserves, increase domestic oil prices to boost revenue or borrow to survive. Currency movements, depending on how barrels are priced, can also impact how countries cope but the implications for Saudi Arabia’s one time oil allies will be severe across the board.

The Gulf

In the Gulf, where oil revenues underpin all expenditure and the private sector remains addicted to government spending, Saudi Arabia’s actions have set a time bomb underneath the economy of each of its neighbours.

The six Gulf states, including Saudi Arabia, will face a fiscal shortfall of around $140bn this year if prices average around $30 a barrel. That will force painful spending cuts and extra borrowing just as leaders hoped that economic recovery from the last price crash in 2014 was finally in sight.

The wealthier Gulf states — Kuwait, the UAE and Qatar — have large financial buffers to cushion them through the oil downturn. But Bahrain, which turned to its wealthier neighbours for assistance in 2018, is more exposed. Oman, under a new leader, faces the region’s widest fiscal deficit if prices average $30 a barrel — approximately 22 per cent of GDP.

Iran and Iraq

Iraq, Opec’s second-largest producer, has relatively low production costs but also one of the group’s least diversified economies leaving the government highly dependent on oil revenue. After decades of unrest, Iraq has doubled production since 2010, and had budgetary surpluses in recent years that it failed to invest. Still, Essam Jihad, oil ministry spokesperson, warned on Tuesday of the negative economic consequences of the price war, which has arrived with Iraqi authorities already under strain from months of anti-government protests.

Iran’s oil minister Bijan Namdar Zanganeh said the Opec meeting was one of the worst he had ever seen. But with production already severely constrained by US sanctions, the price war is less consequential for the republic than it would have been. Iran doesn’t publish export figures but analysts estimate that oil shipments last year probably amounted to only a few hundreds of thousands of dollars, mostly to China. So although Iran continues to run a large deficit, Tehran says reduced oil exports were already being addressed by higher taxes, borrowing and cuts to energy subsidies.

Africa

The last oil price crash in 2014 sent Nigeria, Africa’s biggest producer, into a recession from which it is still recovering. Zainab Ahmed, Nigeria’s finance minister, said on Monday the government would slash its budget for 2020, which was based on an average $57 oil price. It could also force a much-needed devaluation of the naira, according to Charles Robertson, chief economist for Renaissance Capital. The central bank has spent billions of dollars propping up the currency since 2017, and will be under “significant pressure” to depreciate if oil prices remain so low, he said.

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The economic effect could be worse in Angola, where president Joao Lourenço has sought to use Africa’s largest IMF programme to boost non-oil revenue and reform its currency. “Angola is going to be even more dependent on IMF good will” as the economy faces another “deep trough” this year, said Alex Vines, an Angola expert and head of the Africa programme at Chatham House, a think-tank.

In Algeria, where there have been anti-government protests for a full year, the 2020 budget is based on an oil price of $60. It includes a 9.2 per cent cut in public spending but already projects a deficit of 7.2 per cent of gross domestic product.

“The impact of the latest fall in oil prices will be massive,” said Riccardo Fabiani, north Africa director of the International Crisis Group. “It may not be so bad, if it is only for a month or two, but if it is for longer, the country will have to speed up its adoption of austerity measures.”

Latin America

In Latin America, the biggest impact is likely to be felt in Venezuela, where it could potentially bring down the government, and in Ecuador, where it could push the country towards default.

Venezuela’s oil output has already crashed to its lowest level since the 1940s due to years of mismanagement. Production has stabilised at around 700,000 barrels a day but Caracas is selling at a heavy discount to entice buyers wary of falling foul of recent US sanctions. A further drop in prices will squeeze the government of Nicolás Maduro and potentially starve it of virtually all its remaining revenue.

Ecuador’s bonds have sold off sharply in recent days in reaction to the fall in oil prices. The country, which left Opec in January, spent much of last year trying to keep its $4.2bn IMF lending deal on track and, by the end of 2019, looked to have done it. But its assumptions for 2020 are based on an oil price above $50 per barrel, and a prolonged slump in prices could force the Fund to once more re-evaluate its agreement.

Reporting by Anjli Raval in London, Simeon Kerr in Dubai, Najmeh Bozorgmehr in Tehran, Chloe Cornish in Beirut, Neil Munshi in Lagos, Joseph Cotterill in Johannesburg, Heba Saleh in Cairo and Gideon Long in Bogotá.

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