Wrestling the Bear Market
Crashing Crude Crunches Petrostate Coffers

Many of the world’s major oil-producing countries have grown fat on the profits that resource has brought, relying on crude sales for the lion’s share of their government budgets. But if you live by the crude, you die by the crude, and the price crash over the past year has pushed many of these petrostates into the red and increased alarm about their rainy day funds. Reuters reports:

Governments want to make sure they’re getting maximum returns from their funds. The public, facing the prospect of slower growth in social welfare spending, is more sensitive to the idea that some national resources might be wasted. […]

Earlier this year Bahrain’s parliament launched an investigation of state fund Mumtalakat…looking at allegations of “administrative” violations at the fund after an audit report revealed a series of irregularities at Bahraini state companies, said member of parliament (MP) Isa al-Kooheji. Mumtalakat didn’t respond to a request for comment.

It isn’t clear whether the investigations will unearth any serious wrongdoing, but at the very least they could encourage funds around the Gulf to operate more cautiously and conservatively for a while.

Many petrostates boosted state spending in the wake of the Arab spring as a way to tamp down social unrest. Ballooning government expenditures were fiscally justified by sustained high oil prices, but in today’s bearish market those levels are no longer sustainable.

Sovereign wealth funds are the stop-gap measure, but they’re not inexhaustible, and with the global oil glut showing no signs of abating, it seems at some point these regimes will have to choose between cutting production to boost prices—a move Saudi-led OPEC has so far been reluctant to embrace—and cutting funding to social programs and risking the potential unrest that may arise.

In the meantime, petrostates are will be going over the investments made by these funds with a finer-toothed comb. The heady days of $100+ per barrel oil are already a distant memory.

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