Crude Economics
Bargain Oil Puts Petrostate Budgets in Peril

If you live by the oil price, die by the oil price, and with the price of crude more than 40 percent lower now than it was a year ago, the world’s petrostates are running in the red. Analysts say that if the price drops much further, the Middle East will have to start aggressively draining its rainy day funds. The FT reports:

More than a third of Middle Eastern sovereign wealth funds expect new funding to decrease as the region adjusts to a period of lower oil prices, research suggests. […]

If the oil price environment persists, there is a growing recognition that governments may need to tap into fund assets to finance sizeable spending programmes to deliver economic growth for growing populations.

[Invesco’s 2015 global sovereign asset management survey] found that 62 per cent of regional funds believed that they would have to liquidate assets to fund fiscal shortfalls if oil prices were to fall to $40 a barrel for two years — which, at least for now, seems a distant prospect.

After the price of oil crashed during the 2008 financial crisis it quickly climbed back above $100 per barrel and stayed there for more than three and a half years. If you were buying crude, this wasn’t a welcome development. If you were selling it however, these were heady days, and the world’s petrostates lived large. In the Middle East, many oil-backed regimes used these increased revenues to boost government spending, a largesse that was especially useful in helping quell social unrest during the Arab Spring.

And now the party’s over, and with U.S. shale proving surprisingly resilient and OPEC intent on keeping up output, it doesn’t look to be starting up anytime soon.

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