The Fuse

How Are MENA Oil Exporters Faring With Lower Oil Prices? It’s Not Good

by Matt Piotrowski | October 21, 2015

OPEC’s strategy of not cutting output to shore up prices is hurting its own members and other oil-producing countries in the Middle East North Africa (MENA) region, according to new forecasts from the IMF.

Bloomberg posted a piece on Tuesday headlined “OPEC Is About to Crush the U.S. Oil Boom,” which has some validity in it, but OPEC’s strategy of not cutting output to shore up prices is also crushing its own members and other oil-producing countries in the Middle East North Africa (MENA) region. Besides the low oil price, which will have knock-on effects for the economies there beyond this year, the region’s economies are taking major hits from ongoing conflicts.

The economic numbers are daunting for MENA producers, based on an International Monetary Fund’s (IMF) report released this week. Almost all are expected to see GDP growth slow this year and fiscal balances go into the red by next year. War-torn countries are of course suffering the most, but even the financially strong are hurting.

As a whole, the economies for oil-exporting countries in MENA should grow by 1.8 percent this year, down 0.8 percentage points from last year and well off the 5.5 percent growth seen from 2000-11.

Saudi Arabia’s GDP is forecast to grow by 3.4 percent this year, down from 3.5 percent in 2014, but it’s expected to fall to 2.2 percent in 2016. The Kingdom’s fiscal deficit is forecast to balloon to beyond 20 percent of GDP in 2015 and improve only marginally next year. The IMF warned that Saudi Arabia, OPEC’s largest producer and the architect behind the cartel’s current strategy, may run out of financial assets in five years if the government continues with current policies. As seen in the graphic below, the current oil price is well below what Saudi Arabia and most others need in order to breakeven on their budgets. The IMF’s outlook is clearly a dire warning, but how the situation plays out depends largely on the oil price—current market conditions are not likely last for the next five years, given that non-OPEC supply growth is slowing and demand is to continuing to rise.

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Even the economies weathering the current conditions better than others are taking hits.

Even the economies weathering the current conditions better than others are taking hits. Kuwait’s GDP should rebound in 2015, but grow at only 1.2 percent, while UAE and Bahrain are forecast to see relatively strong growth, though at lower levels than last year. Oman and Qatar are bucking the trend and will actually see their economies strengthen this year with GDP jumping to above 4 percent. All exporters in the region except for Kuwait will have to deal with fiscal deficits next year (see graphic below), a clear sign of how low oil prices are straining budgets.

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War takes heavy toll on economies

War-torn countries are particularly under strain, and the IMF highlights how dramatically the conflicts are undermining economies in the region. “Conflicts in the MENA region have, increasingly, been domestic, rather than interstate, in nature,” the IMF said. “With the expanding role of non-state violent actors such as the Islamic State of Iraq and the Levant (ISIL), violence increasingly affects civilians, and has a particularly adverse effect on confidence and expectations, and consequently on economic activity.”

Current conflicts are not impacting global oil prices at the moment because supply is well ahead of demand and inventory levels are ballooning, but in a tighter market, they would push up prices and spur volatility.

The conflicts are reducing human capital, destroying infrastructure, interrupting trade, bringing about a lack of confidence for consumers and investors, and causing spillover effects in neighboring countries. Three major MENA oil producing countries—Yemen, Iraq, and Libya—are dealing with explosive conflicts. They are not impacting global oil prices at the moment because supply is well ahead of demand and inventory levels are ballooning, but in a tighter market, they would push up prices and spur volatility.

In Yemen, the economy will fall by 28 percent this year, according to the IMF, versus a contraction of just 0.2 percent last year and growth of 4.8 percent in 2013. Libya’s economy is forecast to decline for the third straight year, before rebounding to 2 percent growth in 2016. Iraq’s economy, meanwhile, will not grow this year, despite a sharp rise in crude output.

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Who is losing less?

“The whole confusion in the market is indicative of how both sides of the equation are getting hurt. It’s like a boxing match in the 9th or 10th round and both fighters are getting bruised.”

There is a lot of back and forth in the media about which producers are “winning” in the current low oil price environment. From one perspective, as the Bloomberg article pointed out, with U.S. shale output declining and the demand for OPEC crude set to rise, the cartel’s strategy is working to rebalance fundamentals and bring a tighter market down the road. From another perspective, however, signs of economic stress in OPEC countries, stronger-than-expected resiliency and flexibility in U.S. shale, ballooning U.S. crude inventories, rising output on the U.S. Gulf of Mexico and in the North Sea, and Gulf countries undercutting each other with their selling prices suggest it is still open to debate how successful OPEC has been.

To be sure, Saudi Arabia, when it decided last November to favor market share over cutting back to support prices, understood that there would be fiscal pain amid lower prices and the goal was to curtail supply growth while meeting increases in demand. The Saudis are taking the long-term view. “Saudi Arabia’s strategy is slowly but surely hurting the market,” Matt Smith of ClipperData told The Fuse. “As long as demand grows and they can keep other producers in check, they will see full implications of the strategy in 2017.”

As for who is winning in the current competition, it’s clear that all sides are losing, some just more than others. This is the first time a free oil market is truly playing out as OPEC fails to respond to low prices by cutting output. “The whole confusion in the market is indicative of how both sides of the equation are getting hurt,” said Smith. “It’s like a boxing match in the 9th or 10th round and both fighters are getting bruised.”

If one thing is clear from the current low prices, it’s that MENA oil exporters need to diversify their economies, particularly in the private sector, and take measures such as scrapping subsidies for energy consumption.