$30 a Barrel Finance & Development, March 2016, Vol. 53, No. 1
Oil exporters in the Middle East and North Africa must adjust to low oil prices
In early 1986, following a decision by some members of the Organization of the Petroleum Exporting Countries (OPEC) to substantially increase the supply of oil, the price nose-dived from about $30 a barrel to roughly $10 a barrel. Already feeling the adverse effects of earlier price declines and oil production cuts, the Middle East and North Africa (MENA) region—home to 6 of the world’s 10 largest oil exporters—faced a pressing need to adjust their budget policies. A difficult decade followed: policymakers had to make tough choices, some of which, such as cuts in public investment, had a long-lasting impact on the region.
Almost 30 years later, oil-exporting countries in the MENA region and elsewhere face a similar plunge in oil prices—which declined from roughly $110 to about $30 a barrel owing to sluggish global growth, high OPEC production, and the surprising resilience of shale oil supplies. More important, no one expects a return to triple-digit oil prices for the foreseeable future, so oil exporters must adjust to a new reality rather than wait for these low prices to come to an end. At F&D press time, futures markets were pointing to an average oil price of about $35 a barrel this year and $40 a barrel in 2017. With many MENA countries also confronting violent conflict and a growing refugee crisis, getting policy responses right and avoiding a repeat of the poor performance of the 1980s is paramount.
Last year, the oil price decline cost MENA oil exporters $360 billion—one-sixth of their total output. The losses are projected to deepen this year, with oil prices falling again in late 2015 and early 2016. So far, the oil exporters have, as a first line of defense, sensibly used their sizable financial savings to limit the impact of declining oil prices on growth, buying themselves time to devise adjustment plans. The clock, however, is ticking because most countries cannot sustain large budget deficits indefinitely. Half of MENA oil exporters posted double-digit deficits as a share of GDP in 2015, notably Algeria, Bahrain, Iraq, Libya, Oman, and Saudi Arabia (see chart).
Difficult choicesTo balance their books, MENA oil exporters must make difficult choices: cutting expenditures by roughly one-third, substantially increasing non-oil revenues (multiple times in some countries)...