In November 2014 the OPEC countries met in Vienna and agreed to keep pumping oil to maintain their market share rather than cut production to support the oil price. In a post written a month later I addressed the question of how these countries were positioned to withstand an extended period of low oil prices and high budget deficits. More than a year has now passed, so it’s time to take a look at how they have done so far and to see what their actions presage for the future.
Results to date:
OPEC is known to have suffered economic damage as a result of low oil prices, but exactly how much? I made the following estimates from the October 2015 IMF World Economic Outlook Database. They include all the OPEC countries except war-torn Libya, where the data are not particularly meaningful. All the figures given in this post are in (or estimated from) US dollars unless otherwise specified:
GDP, 11 OPEC countries combined: Down from $3,392 billion in 2014 to $2,849 billion in 2015, a decrease of $543 billion.
Budget deficit, 11 OPEC countries combined: Up from $17 billion (0.5% of GDP) in 2014 to $278 billion (9.8% of GDP) in 2015, an increase of $261 billion.
The economic damage has clearly been serious, but how much of it was a result of lower oil prices? Data from the 2014 OPEC Annual Statistical Bulletin indicate that OPEC exported about 8.5 billion barrels of oil in 2015 at an average “OPEC basket” price of $49.49/bbl. This is $46.80 lower than the $96.29/bbl average basket price in 2014 and represents almost $400 billion in decreased revenue. Allowing for the damping effect on other sectors of the OPEC economies it’s reasonable to assume that most if not all of the damage was done by lower oil prices.
The next question is, which countries have suffered the most? According to Figure 1, which plots the percent decrease in GDP between 2014 and 2015 by country, Venezuela, Iraq – and Kuwait suffered the largest GDP decreases and Qatar, Iran and Ecuador the least. The rankings are, however, potentially skewed by country-specific factors and by devaluations, as discussed later:
Figure 1: Percent decrease in GDP, 2014 to 2015.
The question of greatest importance, however, is the impact of low oil prices on OPEC budgets. The OPEC countries have historically used their oil wealth to keep their citizens happy by means of generous subsidies and handouts, and the Arab Spring highlighted the importance of keeping the citizens happy (as does the renewed unrest in Tunisia, where the Arab Spring began).
The impacts of the oil price collapse on OPEC budgets are summarized in Figures 2 and 3. Figure 2 shows budget balances in 2014 as percentages of GDP, calculated from IMF revenue and expenditure data. Kuwait, Qatar, the UAE and Saudi Arabia ran healthy surpluses – Kuwait and Qatar very healthy ones – and Angola, Algeria, Iran, Nigeria, Ecuador and arguably Iraq had small but manageable deficits. Venezuela alone had a budget problem, but this was a result of economic mismanagement, not oil prices:
Figure 2: Budget balance as percentage of GDP, 2014
Figure 3 now shows the 2015 data. Only Qatar and Kuwait were still in surplus. Iran, Angola, Nigeria, Ecuador and the UAE had small but probably still manageable deficits, but Algeria’s deficit had increased from near-zero to almost 15% of GDP and the deficits of Saudi Arabia, Iraq and Venezuela had ballooned to over 20% of GDP. Collectively the 11 OPEC nations went from a 3% budget surplus to a 10% budget deficit between 2014 and 2015 according to the IMF data:
Figure 3: Budget balance as percentage of GDP, 2015
Low oil prices have clearly left the OPEC nations with budget problems that pose a potential threat to their stability. In the next section we will look at what they have done about them.
OPEC’s actions to date
OPEC has had a number of budget-fixing options at its disposal, with the obvious one being to cut production to bring global oil supply and demand back into balance. This was of course politically impossible in 2015 but may become less so in 2016.
The second option was to increase government revenues. This, however, is also not a realistic solution in undiversified oil-dependent economies, where decreases in oil price inevitably send revenues in the opposite direction. Government revenues in fact decreased by more than 20% between 2014 and 2015 in all OPEC countries except Iran and Ecuador. The OPEC-wide decrease was 33% (Figure 4):
Figure 4: Percent change in government revenues, 2014 to 2015
The third option was to cut government spending, which is more easily done than increasing revenue although it does carry the risk of upsetting the public. As shown in Figure 5, however, results have still been mixed. Saudi Arabia and Iran actually increased spending between 2014 and 2015 and Qatar spent the same amount as it did in 2014. Modest cuts were achieved in Iraq, the UAE, Kuwait, Ecuador and Algeria but substantial ones only in Nigeria, Venezuela and Angola. Overall the OPEC governments cut their combined government expenditures by only 8% between 2014 and 2015.
Figure 5: Percent change in government spending, 2014 to 2015
Or did they even do that well? The Figure 5 numbers are in US dollars but national budgets are done in national currency, and when we convert to national currency we get the results shown in Figure 6. The numbers change for the four OPEC countries whose currencies are not pegged to the US dollar and which have responded to low oil prices by devaluing their currencies or by having the market it do it for them. The countries are Iran, which now shows a 26% increase in government expenditure between 2014 and 2015 rather than the 2% increase shown in Table 5, Algeria, which now shows a 9% increase instead of a 12% reduction, Nigeria, which shows a 7% reduction instead of a 22% reduction and Angola, whose spending reduction is now 27% rather than 40%. OPEC’s total 2015 spending now shows effectively no change over 2014:
Figure 6: Percent change in government spending, 2014 to 2015, national currency.
There are of course questions as to what these devaluation-adjusted numbers signify (Angola, which has an active black market that values the kwanza well below the official exchange rate, is a borderline case, and the devaluation-adjusted results for Venezuela, where the bolívar is officially at parity with the dollar, are effectively meaningless and are omitted for this reason.) Taken at face value, however, they indicate that the OPEC nations have so far made little real effort to reduce expenditures, possibly because they believed Saudi assurances that the US shale producers would soon be driven under and that no belt-tightening would be necessary. Certainly none of the delegates who attended the November 2014 OPEC meeting foresaw that the oil price crash would be as deep as it was or last as long as it has. But devaluing a currency after unpegging it from the dollar does offer an option for managing a budget deficit, and OPEC countries with dollar-pegged currencies are coming under increasing pressure to consider it.
The fourth option is to draw on foreign reserves. Saudi Arabia is understood to have financed most of its official $99 billion 2015 budget deficit with gradual foreign exchange reserve withdrawals, as shown in Figure 7. (The data are from Trading Economics and Knoema/World Bank. The two data sets give very similar numbers and combining them maximizes monthly coverage, so both are plotted in the following figures):
Figure 7: Monthly foreign exchange reserves, Saudi Arabia
As far as can be gauged from the incomplete data plotted on Figure 8 Algeria also probably financed its deficit with gradual foreign reserve withdrawals (Algeria’s 2015 budget deficit is reported as being around 12% of GDP, which with a GDP of $175 billion works out to about $20 billion. Despite its pleas for help Algeria’s healthy foreign reserve balance in fact puts it in a better position to withstand an extended period of low oil prices than most other OPEC countries):
Figure 8: Monthly foreign exchange reserves, Algeria
Angola also slowly drew down its foreign reserves by about $5 billion between December 2014 and July 2015 (Figure 9), which would have financed some of its budget deficit over this period:
Figure 9: Monthly foreign exchange reserves, Angola
But not all OPEC countries show clear evidence of systematic reserve withdrawals. As shown in Figure 10 monthly foreign exchange reserves in the UAE have remained essentially unchanged while reserves in Kuwait and Qatar have oscillated up and down with no clear trend visible. Nigeria’s reserves declined through March 2015 but have remained stable since. (Monthly reserve data for Iraq are incomplete and there are no data for Iran):
Figure 10: Monthly foreign exchange reserves, Kuwait, Nigeria. Qatar and United Arab Emirates
Finally we have Ecuador and Venezuela (Figure 11). If Ecuador continues to deplete its foreign reserves at post-July 2015 rates it will run out of cash by May. Venezuela, on the other hand, has somehow managed to leave its foreign reserves intact since June despite its accelerating economic meltdown:
Figure 11: Monthly foreign exchange reserves, Ecuador and Venezuela
Ecuador and Venezuela now bring us to the fifth budget-balancing option – borrow money from China, OPEC’s lender of last resort. Venezuela’s oil industry has been kept afloat by the $46 billion in oil-for-cash it has received from China over the last decade. So to a lesser extent has Ecuador, whose foreign reserves dwindled rapidly in the second half of 2015 most likely because it expected to receive $4.2 billion from China this year but as of May had received only $900 million (although having just signed a $970m credit line with the Industrial and Commercial Bank of China it has now “breathed a sigh of relief”.) When “a halving of oil prices left a gaping hole in Angola’s finances in this year President Jose Eduardo dos Santos knew exactly where to turn ”. And Algeria , “hit by oil price drop”, is now seeking Chinese help too. (Nigeria has also received loans from China, but for infrastructure development, not oil.) Whether China plans to continue bailing out OPEC countries is uncertain, but its bailouts to date have given it some measure of control over a substantial fraction of the world’s oil reserves.
What will happen in 2016?
The table below compares the oil prices assumed by OPEC countries in their 2016 budgets with the prices they assumed in their 2015 budgets (data from numerous sources). If nothing else the numbers will be of interest to those in the oil price prediction business. No data are available for Libya or the UEA, which notes only that a 2016 price of $80/bbl would be “ideal” and leaves it at that.
If the 2016 OPEC basket oil price does average around $35/bbl it will be about $15/bbl lower than the $49.49/bbl average basket price in 2015, meaning that OPEC will lose yet another $130 billion in annual oil revenues if it maintains production at current levels. Can OPEC survive another hit like this? Well, those waiting for a prediction are going to be disappointed because I’m not going to make one. There are just too many unknowns. We’ll just have to wait and see.