Oil prices have been falling – and plummeting, spiraling, nose-diving and just generally heading downwards – over the past few months. From a 52-week high reading of $102.53, oil futures were last clocked at $57.81 as of this writing, registering a 44% drop over the past year.
A combination of faltering demand and what The New York Times dubbed a “frenzy of American oil production” has contributed to this decline. The production of shale oil in the United States has been increasing supply steadily, albeit up and above what is required by contemporary markets. This occurred in tandem with a recent decision by OPEC not to readjust quotas and maintain output levels – a decision that was met with derision from several sources.
Numerous theories have risen as to why OPEC decided to remain idle. These range from a faceoff between leading producer Saudi Arabia and arch-foe Iran to President Putin’s suspicions of a conspiracy against the Russian economy. Only one thing is certain for the time being – oil producers around the world have buckled down for what is sure to be a turbulent journey.
Some, however, are more concerned than others as to their current fiscal situation. It is evident that the more a state is dependent on its oil revenues, the more the drop in the crude price will sting. Here is a look at three of the Middle East’s most affected economies – some of which are already on the brink of a serious crisis.
Iraq has recently been in the news, except this time the update is actually positive. Iraq’s central government and the semi-autonomous Kurdish region of Kurdistan reached a temporary agreement on revenue sharing and oil production. Under the accord, the Kurdish government will continue to produce 550,000 barrels per day while receiving approximately 17% of the national budget as well as other transfer payments totaling $1 billion.
This agreement, however, will not circumvent the effects of a plunging oil price for Iraq. According to the Joint Analysis Policy Unit, of Iraq’s 119.3 trillion Iraqi Dinar budget for the year 2013, 93% is derived from its oil revenues, making it one of the most highly commodity-dependent producers in the world. As per the IMF, Iraq’s breakeven oil price, or the price of crude necessary for the budget to be balanced and not recede into a debt-inducing state, was $106.1 in 2013. Now that oil futures have reached nearly half that amount, Iraq’s finances are soon to be in turmoil and a solution needs to be formulated by policymakers.
Iran is currently making headlines in the political arena, claiming that the drop in oil prices and OPEC’s reticence in scaling back its production are part of a grander conspiracy against the Islamic Republic. President Rouhani explained to the world that “this is not due to only global recession” but the main reason is that it is a “political conspiracy by certain countries against the interest of the region and the Islamic world.”
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Regardless of where the blame goes, the combined effect of economic sanctions and a falling crude price is more than palpable for Iran. According to Deutsche Bank and Thomson Reuters, Iran’s breakeven oil price was reported to be $135 – a figure higher than most in the region. That is just the tip of the iceberg – Iran has been facing an inflation level that reached just over 40% in mid-2013. While this may have been halved as of October, it remains markedly high.
In addition to having budgetary and inflationary issues, the effect on the economy has turned out to be even more multifaceted. Iran’s currency, the Rial, for example, has declined substantially against the US Dollar. Under normal circumstances, this would make Iranian exports more competitive, but given the economic sanctions and general restrictions placed on its markets, the outcome has been dismal.
"The combined effect of sanctions and a falling crude price is more than palpable for Iran"
Nuclear negotiations do not seem to be as fruitful as many officials hoped - Nomura's senior political analyst Alastair Newton warned in a note that Iran “could bring politics very much to the fore again in determining the price of Brent crude before year-end.” While Iran may have much to lose in this debate, it most assuredly still holds its own in the international political influence game. Nevertheless, the abrasive machine that is the Iranian economy is certainly feeling the burn.
Although perhaps not to the same degree as the two mentioned above, Oman is also poised to face a significant blowback from the falling price of crude. The Sultanate of Oman is often quoted as being the first member of the Gulf Cooperation Council projected to have its oil wells run dry. In light of this prospect, the Sultanate’s leadership has been working tirelessly towards diversifying its economy as much as possible. This took the form of a privatization push as well as the propping up of key non-oil industries, such as the Islamic finance sector. As of now, these efforts have been relatively successful – Islamic banking assets are set to exceed $778 billion this year in Oman.
Unfortunately, these initiatives may not be enough. According to sources, the Omani government’s budget last year accounted for 75% of its revenues coming from the sale of oil. Furthermore, the budget was drafted under the assumption that oil would be priced at $85 per barrel, well above current levels. A member of Oman’s Majlis Al Shura even expressed his concern on social media – Mohammed Al Busaidi, a member of the council, tweeted that “the honeymoon is over” and belts needed to be tightened.
In October, Goldman Sachs predicted that the average price of crude would be $75 in 2015, already substantially below the breakeven oil price of several Middle Eastern nations. Oil revenues, however, may not be the most devastating loss faced by the region. The potentially dwindling influence of OPEC, in light of a reduced global reliance on oil and gradually increasing American shale production, may prove to be even costlier.
In the end, Mr. Busaidi’s foreboding tweet seems to be fitting – the honeymoon may indeed be over.