As oil prices bottom out, it’s not just fragile petro-states in trouble

As oil prices dip to a 13-year low of about $30 per barrel, many of the world’s petro-states could see hundreds of billions dollars shaved off their revenue streams in the coming months. The question now is, how long each of these countries can sustain their economies and stave off political unrest — a calculation that is about more than just oil.

Traditionally, the producers under the most pressure from oil price dips are those that are already facing domestic political turmoil and have few fiscal buffers at their disposal — such as reserve funds, the ability to go to international markets and raise loans, and a credible currency. By that measure, the worst-hit countries would be Algeria, Iraq, Libya, Nigeria and Venezuela — the “fragile five,” as analysts at RBC Capital Markets called them in a report last August.

But it isn’t just fragile countries that are on edge. Increasingly, even the traditionally stable Gulf Cooperation Council (GCC) countries appear insecure. In the past weeks, Gulf states have made unprecedented cutbacks to fuel and water subsidies, undermining the social bargain by which these regimes govern their populations. For Saudi Arabia, in particular, austerity will compound rising domestic tensions stirred by its costly and unpopular interventions in Yemen and Syria.

“Even Saudi Arabia and the Gulf states are having to make quite traumatic cuts to their budgets,” said Richard Mallinson, a geopolitical analyst with the Energy Aspects consultancy in London. He noted that Saudi Arabia, Oman and Bahrain have all announced austerity measures in recent days. “They’re looking at the whole range of ways to cut their spending, and particularly to slow the growth of domestic demand and the subsidy bill, while also drawing heavily on reserve funds.” 

Just how long these countries calculate they can outlast their economic and political rivals — Iran and Russia — will be critical to figuring when the slide will end. The current decline is widely interpreted as the dual product of increasing U.S. shale-oil output, which is driving up supply, and declining demand from major consumers like China, where economic growth has slackened. For months, analysts have speculated that the GCC could eventually be forced to slash production to stabilize prices – a risky move given that the last time Riyadh cut its production amid a price decline, in the 1980s, it lost market share.

The Gulf states have several cards to play. Its production costs, for example, are lower than competitors in the U.S. shale oil industry, and it has deep foreign currency reserves and high credit ratings that enable them to borrow internationally. And they know that Iran and Russia, too, have been hurt badly by low oil prices.

But Iran's economy is expected to get a boost from the phasing out of decades-long sanctions after a nuclear deal with the West. Things are looking far worse in Russia, where the ruble has taken a steep dive since the U.S. and its allies imposed sanctions over Russia’s intervention in Crimea. Last month Moscow was forced sell off $700 million in the foreign exchange market. Still, economic turmoil in Russia has not yet translated into significant domestic unrest, with President Vladimir Putin’s approval rating still hovering above 80 percent.

In the meantime, the “fragile five” face the most acute crisis. Venezuela, in particular, has seen a spate of protests over hyperinflation, the rising prices of basic goods and empty shelves at supermarkets, piling pressure on the administration of President Nicolás Maduro. And with a triple-C credit rating, borrowing cash from the international community may not be on the table. When it comes to fears of imminent collapse, “Venezuela is at the top of the list,” said Mallinson.

For already strife-torn states like Iraq, Libya and Nigeria, “fragile” is perhaps putting it mildly. Iraq has still managed to keep production relatively high — 3.6 million barrels projected for February — despite its ongoing struggle with the Islamic State in Iraq and the Levant (ISIL), which has captured critical oil infrastructure in the country’s west. But the drop in oil prices will only shrink Iraq’s crisis-strained budget and swell its deficit even further, both of which will make it harder for Baghdad to maintain social services and pry Sunni support away from ISIL.

Even the semiautonomous Kurdish regional government in the north, which has won global support for its military successes against ISIL and its inclusive approach to governance, faces a looming economic crisis that will be exacerbated by oil prices. Barred from exporting oil independent of Baghdad, the Kurdish authorities in Erbil are forced to pipe oil out through Turkey for sale at a reduced rate. So severe are its budgetary shortfalls that the Kurdish government has periodically cut off pay to civil servants and even its peshmerga fighters for months at a time.

Libya finds itself in similarly dire straits due to an ISIL incursion in the port city of Sirte and a stalemate between two rival governments that has tied up the country’s currency reserves and caused oil production to plummet. And in Nigeria, oil prices won’t help President Muhammadu Buhari quell public outcries over the government’s failure to address the simultaneous challenges posed by the armed group Boko Haram, rampant corruption, and financial mismanagement. Nigeria’s oil minister over the weekend called for an emergency meeting of OPEC — only to be rebuffed by more powerful Gulf states who are trying to downplay any talk of panic.