Saturday, December 06, 2014

Falling Oil Prices and Federal Budget Deficits

Oil prices continue to fall causing reverberations in major oil producing nations around the world.  Last month, OPEC decided to continue production at current levels, around thirty million barrels a day, despite falling crude prices.  Oil is currently trading at about $70 a barrel, with expectations for the next year plus or minus five dollars per barrel. 

Suspicion is high that Saudi Arabia’s motive behind sticking to current production is that depressed oil prices may dent profits from collection methods such as fracking that have a lower profit margin.  Some suspect the cartel is trying to keep prices low enough that many smaller shale companies will go out of business.  When OPEC then has tighter control of the monopoly, they can better manage their profit margin.

Despite consumers enjoying lower prices at the pump, many oil producing nations will soon be feeling the heat.  Most major oil producing countries are heavily dependent on revenues from oil to fund their federal budgets.  National revenues collected from oil production fund a significant portion of these countries fiscal budgets.  According to The Guardian, most countries need oil prices to be consistently greater than current rates to fund their spending.  This includes Saudi Arabia, which requires at least $93 dollars to maintain a balanced budget.  Requirements have increased in the Gulf States as social programs for citizens were expanded after the Arab Spring in order to co-opt support for the ruling establishment.

Other oil producers are in an even tighter bind.  Iran uses its funds from oil revenues to keep its economy afloat.  Because international sanctions have left Iran largely unable to interact on global markets, it needs oil prices to be closer to $140 a barrel to meet its fiscal requirements.  Despite the additional funds Iran is able to capture after agreeing to an interim deal on its nuclear negotiations, its net revenues are still are still down because it is getting less from the oil and condensate it is able to sell.  In terms of the P5+1 negotiations, lower global oil prices my work against reaching a deal, because Iran may have less financial gain from returning to global oil markets that are already faced with a production glut. 

Russia is also suffering with the drop in oil prices.  Nearly half of their budget is derived from oil and gas proceeds.  Effects from sanctions and dropping oil prices have resulted in a shrinking economy, currency decline, and basic commodity inflation.  Thankfully, they have a large economy and significant foreign exchange reserves to help prop their economy. 

Venezuela is already facing civil unrest and higher inflation.  Loss of their oil revenue for the near term may be destabilizing to both the current leadership and the region.

All of this makes geo-politics more interesting for the rest of us, at least until the inevitable price hike returns.  In the meantime, the US/Canadian shale oil boom seems to really have shaken up the global status quo.

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