Why Even Produce Oil When Its Below $40 (Revised)

Click on the link to get the latest breakeven oil price for major oil exporting nations. We do feel sorry for them, don't we?!! Summary:

2008 breakeven px / 2009 breakeven px
Bahrain $75 / $84
Kuwait $33 / $34
Oman $77 / $78
Qatar $24 / $24
Saudi Arabia $49 / $54
UAE $23 / $24
Algeria $50 / $60
Azerbaijan $40 / $35
Iran $90 / $90
Iraq $111 / $94
Khazakst $59 / $67
Libya $47 / $53

http://www.cnbc.com/id/27355967/


Venezuela depends on oil revenue for half of its public spending and more than 90% of its exports. It is the largest exporter in the Western hemisphere. The budget for 2009 was based on the assumption that oil price would be at $60. Can Venezuela stop exporting now that oil is below $40? The country is too reliant on the revenues. It cannot stop exporting as that would mean 90% of export revenue will be gone. Though Venezuela's cost of production might be on the lower side of $25, but the country is already too dependent on oil revenues.

Major flaw, the government did not invest oil proceeds properly over the last 20 years. If they used the bulk of funds by investing into education, infrastructure and broadening FDI base - now they would have moved up the economic ladder already instead of being primitive drillers-exporters with limited value-add industries.

Its the similar story for many of the oil exporters. The following countries also have a very reliance on oil as a percentage of total exports (2007 figures):
Algeria 98.5%
Libya 97.5%
Nigeria 88.3%
Russia 48.8%
Kuwait 95%
Saudi Arabia 89%
UAE 50.8%

Although oil prices have plummeted to below $40, most OPEC countries are still OK with it as the sharp correction has been counterbalanced by a 30%-60% depreciation in their own currencies vis-a-vis the USD. 14 out of 24 fuel exporters (where fuel is 50% of GDP or more) have a conventional peg to the US dollar, seven oil exporters peg to a basket of currencies including the US dollar and the euro or have a managed float regime, usually de facto targeting the US dollar and the euro. Three oil exporters in the CFA franc zone peg to the euro.

There is also geopolitics consideration. Kuwait, Saudi Arabia and UAE are "friends" of the US and would be more or less influenced by the Americans global strategy. Low oil prices are needed to bring about some support to stave off a global recession.

On the other side - Iran, Russia, Venezuela and Libya would be more inclined to pursue differing political ambitions. They are also more inclined to use oil proceeds to further exert their influence on "weaker nations" so as to support regimes aligned to their own interests. Its a generalised statement but has more truth to it that it appears. Hence Saudi Arabia would be more interested to have a lower oil price for now, one to help the global economy, two, to lessen the monetary might of the Iran, Russia, Venezuela and Libya - ceteris paribus, the latter 4 countries would have things a lot tougher than say Saudi Arabia, UAE or Kuwait with presnt oil price levels. That is also why the "rogue nations" will always be clamouring for OPEC to cut production to boot oil prices. We should be thankful that we have Kuwait, UAE and Saudi Arabia on the side of democratic nations.

Iran has the second largest known conventional crude oil reserves in the world, and it has used them in the past four years as a political and economic weapon to defy and undermine the West while promoting its own agenda. Oil money helped Iran spread its influence in Iraq. Oil money helped it challenge Arab political dominance in the Middle East. Oil money helped spread its influence in Lebanon, through Hezbollah, and in the Israeli-Palestinian conflict, through Hamas. IMF has stated that Iran would face unsustainable deficits if price of oil falls below $75. Iran now has to contend with 30% inflation and its economic status is now extremely fragile. Suffice to say that its political influence has be halted and its domestic economy is crumbling fast.

Russia was still willing to use its vast energy reserves to try to reassert the dominance it lost with the Soviet Union’s collapse.

If you look at the breakeven price for most countries, they are operating at a loss. Oil might be more valuable to be kept in the ground for many of the nations whose breakeven is more than $50 - but they cannot just stop all production: one, exports of oil make up 80%-90% of all export proceeds; two, you still have a substantive number of workforce dependent on the oil industry; three, there have been a lot of sunk cost, infrastructure and supporting industries built around the oil industry in their respective countries, long term supply contracts, etc. - switching things off will basically decimate and destroy the economy. Arabia’s king noted that they need $75 a barrel oil in order to meet their budgets and in order to open up new fields. That’s an important comment since they are the largest of the OPEC countries. Qatar and Kuwait only need $55 a barrel oil. However, even that is still 38% above the current price of $40 a barrel. Hence oil below $40 would result in a massive cutbacks in expenditures, investments, curtailing of seeking new oil fields, going into massive budget deficits, or a combination of these cited effects. In other words, the depressed oil prices actually will see a lot less reinvestment into new oil fields which will come back to bite us a few years down the road.

p/s photos: Lynn Hung Doi Lum