With oil prices having gone negative for the first time ever, it raises the question whether oil-exporting countries can survive this latest crash. Exporting countries are now facing the triple whammy of slashed oil prices, curtailed production and an economic downturn due to the impact of the new coronavirus 2019.
Although virtually every oil-exporting country will face an economic contraction in 2020, as the new oil production agreement has failed to keep prices above $25 per barrel (/b), the level of impact will vary. Can Saudi Arabia and Russia survive or even thrive from the oil price fall? How will this impact their fellow oil producers?
Five interrelated economic factors will determine the fate of the oil-exporting countries over the rest of 2020 and through 2021: the cost of extracting crude oil in the country; its degree of oil dependency; the size of its buffers; its fiscal position; and its external position.
The cost of extraction
In terms of the cost of extraction, a number of oil fields are already operating at a loss, particularly in countries not associated in the Organisation of the Petroleum Exporting Countries. Some US oil shale fields need oil prices of a minimum of $35/b to be profitable, but other US shale fields need at least $40/b, whereas in the Canadian tar sands it is even more expensive to extract oil. In contrast, Saudi Arabia can still make a profit if oil prices fell to $12/b, while in Russia profitability starts becoming a factor below $20/b.
Dependency on oil
Even though Saudi Arabia can make a profit with oil prices heading towards single digits, the Kingdom has become so dependent on oil production to keep the economy functioning, prices need to be a lot higher. According to the IMF, Saudi Arabia needs oil prices in 2020 to average over $83.6/b just to balance its budget and to be over $55.3/b to ensure the current account is in surplus; we are currently forecasting an average oil price of $34/b in 2020. Oil exporting countries such as the US and Norway with their far more diversified economies can cope with lower oil prices before their fiscal and current account balances are threatened.
FX Reserves and Sovereign Wealth
Next, we need to consider the size of a country’s buffers. This refers to how much a country has in foreign currency (FX) reserves and in its sovereign wealth fund. Using these funds can help a country outlast any temporary oil price downturn. Prudential countries such as Qatar are in far better shape than Algeria, which was burning its reserves rapidly even before the oil price started to collapse in January this year. At the end of 2013, Algeria had FX reserves totaling almost $200bn, by the end of this year these are liable to have shrunk to $35bn.
Earlier, I referred to the reliance of the fiscal account in terms of oil dependency. The fiscal position is also important when assessing which countries are best able to sustain a lengthy period of low oil prices. For example, Oman is currently running a large fiscal deficit (9.1% of GDP in 2019), which makes it more vulnerable to a downturn in oil revenues compared to say the UAE.
Furthermore, the greater the reliance of the government on oil revenues to cover its spending, the more vulnerable it is to the present downturn: in Iraq, for example, oil revenues account for over 90% of total government revenues. Finally, there is the question of how easily governments can cut back spending in response to lower oil prices without raising popular protests. Bahrain, for example, with its already elevated social tensions would find it difficult to adopt this approach.
The final area of vulnerability to be considered is the country’s external position. Countries running current account deficits, such as Oman, will find themselves under even greater pressure in an era of low oil prices. Those with current account surpluses, in this context Iraq is in a strong position, would more easily be able to absorb low prices for a longer period. In addition, how diversified a country’s export position is will also affect its vulnerability to low oil prices. In Kuwait, oil exports account for around 70% of total exports; whereas in the US this figure is around 12%.
In conclusion, regardless of the cost of extraction of oil, most oil-exporting countries, with the notable exception of the US, need higher oil prices to ensure their macroeconomic stability. This is the reason behind the latest OPEC+ agreement announced in mid-April. However, the agreement for the 10m barrels per day (b/d) is only set to last until end of June before the cuts are eased to 8m b/d and is likely to face compliance issues.
Warwick Knowles is deputy chief economist at data analysts Dun & Bradstreet
Further reading: Could increased recycling be good for oil and gas companies?