The Oil Crisis

How the Middle East is being badly hit; and it is showing…

Recently, the IMF downgraded the growth forecasts of MENA region from 2.7% to 2.5%. That may not appear to be too scary, but scratch the surface and the Middle East is beginning to feel the pain of cheap oil. The vicious cycle of low oil prices and rising debt is gradually stifling the Middle East.

Since late 2014, when the price of crude oil started falling, it was clear the Middle East problems had begun. With the US pumping shale oil with no upper limits, the OPEC had little choice. They chose to forsake their price regulatory role and instead concentrate on market share. The message from OPEC was clear, “Capture market share, even if it means selling below break-even.”

Initially they could afford it…

Not all Middle East nations, but Saudi Arabia could surely afford it. With the world’s 3rd highest forex chest in excess of $700 billion, Saudi Arabia was in a uniquely comfortable position. It could easily draw down on its blue chip investments and use it to finance the under-recovery in price of oil. Sadly, the battle of low oil has gone on for over a year now and still shows little chance of relenting. That is becoming a problem!

The US, on the one hand, continues to pump more oil output from just 40% of shale wells that are active. Russia is also at peak output and it only means that Saudi Arabia and the entire Middle East will have to fund these under-recoveries for some more time. That is where the core problem arises!

It is not growth; it is debt…

Middle East nations may still manage to live through lower growth. But the real problem is that levels of fiscal deficit have already risen to alarming levels. Oil exporters in the MENA region are likely to report a fiscal deficit of 12.7% this year, while the leader Saudi Arabia is likely to report a fiscal deficit of a whopping 21.6% of GDP in 2015. That is hardly sustainable. So what is the way out from this mess?

Adjust your expenses, rapidly…

That is probably, the only conceivable answer to the problems of the Middle East. At the current levels of spending and oil prices, Saudi Arabia with over $700 billion of forex reserves is likely to run out of cash in 5 years. The situation is obviously much more precarious for other MENA countries who are also selling oil below budget balancing levels.

For long, MENA countries have used oil prices to balance their budgets. That is no longer possible. These nations need to sharply cut down on their infrastructure costs, housing costs, social security spending to bring their budgets to more realistic levels. The sooner the MENA nations start this cost cutting exercise, the better! ©

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