CRUDE OIL - GETTING CRUDE FOR OIL PRODUCING COUNTRIES

By Research Desk
about 4 years ago

 

By Ruma Dubey

 

The scene for crude oil just got even more slippery. Prices as such have been sliding oil and now there is fear looming large of a world-wide oil glut. Who would have thought in 2008 that in 2015, we would actually be talking about an oil glut, where supply is exceeding demand? At that time, we were looking at alternatives to oil but now that talk seems to have receded into the background.

This glut fear is on the back of China’s economic slowdown and Iran’s oil ministry saying that his country could boost the oil output to 500,000 barrels per day within a week of lifting of sanctions and by one million barrels a day within a month after that. Worried about this, brent tumbled down below $50/barrel. There is worry now that it could dip below $50 and rule at much lower levels if Iran starts pumping oil. News is that sanctions could get lifted by November this year and that is something which the oil producing countries are now bracing for. Saudi Arabia’s ploy of pumping more supply and making shale gas unviable has worked, but Iran is all set to pump oil like never before.

Naturally, oil producing countries are worried. In our part of the world, falling oil price is very good news and we are seeing prices coming down for our petrol and diesel. But in the Gulf, prices are actually being hiked. UAE became the first country in the Gulf to deregulate price of fuel. Starting 1st August 2015, petrol prices in the region have been increased, on an average, by around 24%. The Govt has removed subsidies on fuel and made the price of petrol and diesel variable in line with average global prices. This is at the behest of the IMF, which predicted that for the first time since 2009, UAE could see a budget deficit of 2.3%

his year, IMF projections predict, for the first time since 2009, a budget deficit of 2.3%. Last year GDP showed a surplus of 5.0%.Rating agency, Fitch said it forecasts budget deficits of 13% and 10.9% of GDP for Saudi Arabia and Bahrain respectively. IMF had predicted that UAE needs a break even price of oil at $75/barrel and the price is similar in the entire Gulf region. But that price may not happen for some time now, at least not in this year. And with these countries planning major infrastructure and realty projects, with oil exports not fetching it as much as it should, plus the prospect of Iran pumping oil and pushing down prices further, deregulation was probably the best way ahead. Other GCC countries are sure to follow; there is simply no other way.

Saudi Arabia has said that it can continue at the same pace with low oil prices for the next eight years. None of these countries have announced any stalling or cancellation of major projects but if the same trend continues, with budgets getting into deficits, how long can they run on momentum alone? Something will give way. When current price is so much below the breakeven of $75, how will these countries – Oman, UAE, Saudi, Bahrain, Kuwait and Qatar go ahead? The Government’s there could be looking at various options to increase revenue beyond oil – increased water and electricity bills which the expats will bear, privatization of non-essential public assets, increased pressure on the private sector to employ more locals and there is even talk of introducing a tax on remittances. Yes, those in the GCC countries, enjoying tax free income, could be looking at taxes if crude continues to remain low.

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