For the first time since 1998, OPEC ran a collective budget deficit last year. The cartel’s members have struggled mightily in coping with a bearish crude market which has seen prices fall from more than $110 per barrel two years ago down below $28 in January, before recovering to what looks to be a new equilibrium around $50 per barrel today.
That price collapse was precipitated by a global glut of oil. But rather than playing their typical swing producing role and curtailing their production, OPEC’s petrostates chose instead to endure the fiscal pain bargain crude inevitably brought in an attempt to out-compete upstart American shale producers for market share. Not surprisingly, that put the group in the red last year, as the WSJ reports:
In its annual statistical report, the Organization of the Petroleum Exporting Countries illustrated how an oil rout that has cut prices in half since 2014 has weighed on the economies of crude-dependent states. OPEC members ran a combined deficit of $99.6 billion in 2015, compared with a surplus of $238.1 billion in 2014.
The last time OPEC ran a collective deficit, in 1998, a financial crisis had slammed Asia’s economy and competition by Iran and Saudi Arabia for market share drove OPEC’s oil prices down to about $10 a barrel. […]
[P]etroleum export revenue for OPEC countries fell by 45.8% from 2014 to $518.2 billion last year. Petroleum revenue last year was the lowest since 2005.
Venezuela has been hardest hit, as it is estimated to require an oil price somewhere near $120 per barrel to balance its national budget. The country is already locked in an economic death spiral, and on top of the lower prices it’s now fetching for its most important export, its oil production is waning as well. It’s not surprising that Venezuela’s oil minister has recently taken to flying to meet his counterparts of OPEC’s other members in an attempt to rouse the cartel into action.
But Saudi Arabia is the only petrostate whose opinion really matters when it comes to OPEC cutting production, and thus far Riyadh has been content waiting things out. The new Saudi oil minister believes supply and demand have now rebalanced in the oil market, but with American shale producers appearing to now get their second wind, there’s not much further oil prices can rebound (barring some sort of catastrophic supply disruption). And let’s not forget that the Saudis are hurting, too, having run a budget deficit equal to roughly 15 percent of their GDP last year.
These petrostate regimes are stuck between a rock and a hard place, and have been for the past 18 months: in the wake of the Arab Spring many of these governments significantly increased social spending to appease civil unrest. With oil now worth less than half of what it was, they’re having to look at cutting those programs. And all the while, U.S. frackers have been refining (no pun intended) their techniques, cutting costs and innovating impressive new ways to produce more oil from shale for less time and money.