Exploring the Impact of Much Lower Oil Prices on Middle East Stability

Some economic and financial commentators are concern that the situation in Greece, the European sovereign debt crisis, and European banking crisis could lead to a repeat of fall 2008 when global asset prices and the global economy plunged following the collapse of Lehman Brothers.

• The price of oil was not exempt from the global meltdown following the collapse of Lehman Brothers. The price of oil fell from $100 in mid September 2008 all the way down to $30.28 on December 23, 2008. This represented almost a 70% decline in the price of oil in about three months.

Some commentators even warn that a major global economic downturn and a major decline in price of oil could lead to unrest in major Middle East oil producing countries, which really have not seen a lot of unrest compared to other Middle East countries partly due to the fact that the rulers of these countries spent a lot of money on new programs and benefit increases aimed at combating economic discontent.

• You can read an article about how the rulers of Saudi Arabia, Kuwait, and Qatar spent money to keep unrest from exploding at the following link: Link

I do not know if we will get an exact replay of fall 2008 if an event like a Greek debt default occurs (which is looking more likely as time progresses). However, I think it is a good idea to explore what could happen to major oil producing countries in the Middle East and elsewhere if a repeat of fall 2008 happens since it is a possibility given the severity of the ongoing crises.

Before I begin with the substantive parts of this article, I want to clarify my position on the issue of oil to avoid any confusion in future articles. I am not predicting that the price of oil will plunge. I actually believe the price of oil is going to rise significantly in the long-run. However, there is a chance in the short-term for the price of oil to decline, especially if we experience a period like fall 2008 to early 2009 in the global economy.

Deutsche Bank recently conducted a study on how several major oil producing countries are impacted by the price of oil. One of the things that Deutsche Bank calculated was the “breakeven” WTI (West Texas Intermediate) oil price that enables major oil producing countries to afford their growing spending promises.  The following table shows the breakeven oil price for these countries:

Country	Breakeven Oil Price Per Barrel (WTI)
Bahrain	$102.8
Kazakhstan	$77.1
Kuwait	$59.7
Nigeria	$102.8
Oman	$74.6
Qatar	$44.8
Russia	$96.2
Saudi Arabia	$81.9
United Arab Emirates	$85
Data from a Deutsche Bank report found from: “The Gulf’s Dilemma” 12 Jun 2011. 29 Sept 2011. http://www.zawya.com/story.cfm/sidZAWYA20110612052939/Gulf_Dilemma

The 2011 average price of WTI oil through September 29 is above $95 per barrel, so the price of oil has not been a problem for most of the countries on this list thus far. However, Deutsche Bank sees Middle East oil producing countries being “increasingly vulnerable” to corrections:

"As oil prices remain close to current elevated levels (as we expect), the region's oil producers will be in a comfortable position. But the continued ratcheting up of breakeven prices in recent years has left them increasingly vulnerable to a correction in prices,"

Deutsche Bank also conducted a sensitivity analysis to see how a $10 change in the price of oil would impact the fiscal balances of major oil producing countries. The results are in the table below. The following is an example of how to read the table:

• Saudi Arabia would be on pace to see a $24.5 billion deterioration in its fiscal situation if the price of oil decreased by $10 per barrel. This decline represents 4.2% of Saudi Arabia’s GDP. Conversely, Kuwait would be on pace to see a $9.4 billion improvement in its fiscal situation if the price of oil increased by $10 per barrel. This increase represents 5.3% of Kuwait’s GDP.

Country	Annual Change in Fiscal Balance (Billions $)	Annual Fiscal Balance Change % of GDP
Bahrain	0.6	2.5%
Kazakhstan	1.8	1.2%
Kuwait	9.4	5.3%
Nigeria	5.4	2.2%
Oman	3.1	4.2%
Qatar	4.6	2.2%
Russia	26.7	1.5%
Saudi Arabia	24.5	4.2%
United Arab Emirates	7.8	2.1%
Data from a Deutsche Bank report found from: “The Gulf’s Dilemma” 12 Jun 2011. 29 Sept 2011. http://www.zawya.com/story.cfm/sidZAWYA20110612052939/Gulf_Dilemma

Kuwait, Oman, and Saudi Arabia appear to be the most vulnerable to a major decline in the price of oil. This is unsurprising because each of these countries is heavily dependent on their oil sector. Unsurprisingly, Deutsche Bank issued the following warning about these Gulf Cooperation Countries:

“Overall, increasing oil sensitivity for GCC will likely be a source of risk…a potential correction will likely be felt more than ever by the regional countries."

I utilized Deutsche Bank’s findings to calculate how much the fiscal situation in major oil producing countries would deteriorate if the average price of oil were to severely correct to around $47 per barrel for a six month period (as it did between November 2008 and April 2009) from September 29's closing price of $82.14. The following is an example of how to read the table:

• Saudi Arabia’s fiscal situation would decline by $43.11 billion if the average price of oil fell to $47 per barrel over six month period. This decline represents 7.39% of Saudi Arabia’s GDP.

Country	6 Month Change in Fiscal Balance at $47/b (Billions $)	% Change in GDP at $47/b
Bahrain	-1.06	-4.40%
Kazakhstan	-3.17	-2.11%
Kuwait	-16.54	-9.33%
Nigeria	-9.50	-3.87%
Oman	-5.45	-7.39%
Qatar	-8.09	-3.87%
Russia	-46.98	-2.64%
Saudi Arabia	-43.11	-7.39%
United Arab Emirates	-13.72	-3.69%
Note: I assume the price of WTI oil falls from $82.14 (the closing price on September 29, 2011) to $47 a barrel.

The price of oil is a double-edged sword for major oil producing countries: Major oil producing countries can earn a lot of money from their oil when the price of oil is high. Conversely, major oil producing countries can face major challenges when the price of oil declines significantly like in the scenario above.

• A repeat of November 2008 to April 2009 could put significant fiscal pressure on major Middle East oil producing countries and stoke significant unrest in major Middle East oil producing countries if action is not taken to mitigate the economic damage.

One major caveat to this analysis is that many oil producing countries have saved and invested some of their excess oil revenues over the past several years. The excess oil revenue could play a role in a time of crisis by providing a country with a potential source of funds to make up some of the revenue shortfall from an oil price decline or even help finance new efforts to keep unrest from exploding. The following table shows an estimate of how much money each country included in this study has set aside:

Country	In Billions $
Bahrain	13.8
Kazakhstan	78
Kuwait	296
Nigeria	See Note 2
Oman	8.2
Qatar	80-85
Russia	92.6
Saudi Arabia	525.3
United Arab Emirates	342-627
Source: “The Largest Sovereign Wealth Funds”. 16 Sept 2011. Last Accessed 29 Sept. 2011 http://www.sovereignwealthfundsnews.com/ranking.php Note 1: I assume that rulers will attempt to access money from sovereign wealth funds regardless of whether the funds’ objectives are for stabilization or not because rulers often seek political survival by any means necessary. Note 2: Nigeria is trying to launch a $1 billion sovereign wealth fund. The move is controversial in Nigeria. It’s unclear at the time of this writing whether the fund has actually been launched. Note 3: Saudi Arabia’s Value = SAMA Foreign Holdings + Public Investment Fund

Every country included in this table except for Nigeria appears to have enough money set aside at the moment to offset a large decline in oil revenue following a major decline in oil prices. However,

• It is important to recognize that the amount of the money many of these countries have available could decline significantly during a period of rapid asset price decline like fall 2008 to early 2009 because they have invested a portion of their money in things like stocks and real estate.
• Another consideration is that some countries have invested a portion of their excess oil revenue in assets which cannot be easily sold in a short amount of time. Consequently, some countries may not be able to readily access all the money they have set aside.
• A third complication is the issue of whether rulers can access and deploy their funds effectively before unrest percolates in their countries. An uprising can quickly build momentum once it begins, so a ruler may only have a short amount of time to deploy their funds before an uprising becomes too difficult to stop.

Another major caveat is that regardless of how much money a country has at its disposal to pay unhappy people, there comes a point when political reform becomes more important to people than receiving additional money or receiving increased benefits.

• For instance, the Gaddafi regime attempted to mitigate the rapidly rising unrest in Libya in late February by offering to give Libyan families $400 each and dramatically increasing the salaries of government workers. We know seven months later that Gaddafi’s money could not save his regime.

Conclusion
A major decline in the price of oil will pose serious challenges for major oil producing countries in the Middle East. However, the rulers of many major Middle East oil producing countries possess the financial means (in form of excess oil revenues saved over the years) to mitigate much of the impact of a major decline in the price of oil. Yet, as we have seen in Libya, possessing substantial oil wealth does not necessarily guarantee regime survival. Therefore, it is not completely out of the question for uprisings to occur in major oil producing Middle East countries if the price of oil declines significantly, especially if rulers take too long to deploy their funds or if people’s grievances become concentrated around the issue of political reform.