Is the Gulf’s petroleum party over?
That’s the way it looked over the weekend, with the Saudi stock market the first guest to leave; the exchange’s Tadawul index fell more than 4% on Saturday, its biggest one-day drop since last August, leaving investors with paper losses of $15 billion after the price of Brent crude futures fell to $99.76 a barrel.
That brought the price for the benchmark crude to a two-year low but more importantly broke the psychologically important $100 barrier. The Tadawul recovered somewhat Sunday and Monday, but the price of crude looks to be headed lower for the foreseeable future, with potentially serious implications for the Gulf economies. On Monday, Brent crude closed at $97.
The economies of the Gulf Cooperation Council (GCC) countries have all worked hard to diversify their economies, but oil remains their lifeblood, paying for massive infrastructure projects, covering bloated civil service payrolls and ensuring free or low-cost health care and other benefits.
The GCC countries’ reliance on petroleum profits has only grown since the start of the Arab Spring, when rulers increased spending to prevent political unrest from spreading to their domains. They were helped by record-high crude prices in 2011 and the first part of this year, ironically pushed higher by nervousness in the West over the Arab Spring.
But with the price of oil falling, some of the GCC countries – most particularly Bahrain, which has been wracked by sectarian conflict – are going to have more trouble paying their bills. The trick is figuring out when the oil-profits inflow is insufficient to cover the government’s expenses, the so-called breakeven point.
“Clearly there are some countries getting close to it. Some like Bahrain are dangerously close while others like Saudi Arabia have a large margin,” Nael Shehadeh, an economics researcher at the Gulf Research Center, told The Media Line.
The International Monetary Fund (IMF) estimates that Bahrain and Iraq (which is not a GCC member but is nevertheless a major Gulf producer) need oil prices of about $100 per barrel to keep their expenditures in line with income. The United Arab Emirates is better off, with a breakeven of $80, but calculating breakeven is an inexact science: Emirate NDB, a local UAE bank, has put the breakeven at $107.
Saudi Arabia's breakeven price is around $70-$80, according to bankers and analysts surveyed by the Reuters news agency. Shehadeh said for Qatar and Kuwait breakeven is $50-60 per barrel, which would give the two countries considerable cushion, but the IMF has already warned Kuwait to trim government expenditures.
But oil prices may well start testing those levels in the weeks and months ahead. On a fundamental level, the supply and demand equation is starting to work in favor of buyers over sellers.
Iraq has stepped up production by a fifth this year to 2.5 million barrels a day as it restores its pipeline and ports infrastructure, returning it to the ranks of the top OPEC producers. Libya, a smaller producer, has gradually restored its oil exports following last year’s civil war. US energy needs are being increasingly met by shale gas, which today accounts for almost a quarter of the country’s natural gas production, compared with 4% in 2005.
On the demand side, things look bearish for oil prices, too. Signs of an economic slowdown encompassing the US, Europe and China, which would reduce demand for energy, grew more ominous at the end of last week. The US reported that its economy added just 69,000 jobs in May, half the amount predicted by economists, as the unemployment rate held steady at 8.2%. In China, the Purchasing Managers' Index fell to 50.4 points in May, the slowest reading since December.
Last week’s drop in Brent crude prices to below $100 came after both Brent and US crude posted losses in May, their biggest since late 2008.
Oman and, in particular, Bahrain are the most vulnerable of the GCC countries to the declining price of oil. They have a lifeline of a $20 billion GCC aid package awarded them more than a year ago when the Arab Spring looked dangerously close to spreading to the usually placid Gulf. But analysts say few details about the timing and conditions of the aid have been released and that makes it hard to gauge its potential impact.
But even for Saudi Arabia, the world’s biggest oil producer, wiggle room on oil production and price is not that great. Farouk Soussa, the chief Middle East and North Africa economist at Citigroup told The National daily on Monday, that the kingdom cannot afford for political reasons to cut back spending because it needs to create jobs and ensure affordable housing.
Nor does the kingdom want to see oil prices climb too high again, which was one of the reasons it increased production early this year when Iranian oil came under pressure from Western sanctions. In March, Saudi Arabia overtook Russia to become the world's biggest oil producer.
“The trick with Saudi Arabia is the right balance of keeping prices high enough to finance domestic packages and help the GCC budget. But it’s not in their best interest to see oil prices too high, which would deter consumption and encourage competing oil. It will be a tough balancing act.”