Business | Oil & Gas
Oil producers continue spending, but more warily
A deep drop in oil prices has sapped the confidence of producer nations as even top exporter Saudi Arabia faces the prospect of a financial deficit next year.
- Reuters
- Published: 23:23 November 28, 2008
Dubai: A deep drop in oil prices has sapped the confidence of producer nations as even top exporter Saudi Arabia faces the prospect of a financial deficit next year.
But they are still expected to carry on spending for as long as possible and the core Gulf producers can draw on healthy cash reserves accumulated during the price boom.
International benchmark US crude has lost around two-thirds of its value since hitting an all-time high of $147.27 in July and many are predicting the price will stay low because global economic weakness has choked off fuel demand.
"Depending on where prices stabilise you will see a deterioration in current accounts, moderation in spending growth and restructuring of projects," said Monica Malek, economist at EFG-Hermes in Dubai.
"But Gulf states are in a much better position than other oil exporting countries as they were so much more cautious on expanding spending when the price was on the way up."
Members of the Organisation of Petroleum Exporting Countries (Opec) face a double hit as their finances have been eroded by a fall in volume as well as in value.
To match depleted demand and to try to stave off any further price collapse, Opec meets today in Cairo for an informal debate on how much more oil it needs to remove from the world market.
Citigroup economist Mustaq Khan said that if oil averaged $50 next year, Saudi Arabia's external deficit could reach more than a quarter of its gross domestic product (GDP) and even oil at $75 would leave it with only a small surplus.
"This is not a disaster," Khan said. "They have enough liquid assets to be able to fund their deficits."
In a sense, falling into the red is only a return to the norm. Saudi Arabia ran consecutive deficits from 1983 to 1999.
Better placed
After the boom, it is much better placed for bust and needs to spend to create jobs for a youthful and growing population.
The kingdom's finance minister said last week there were no plans yet to retrench. "I project public spending in 2009 to be higher than in 2008," said Finance Minister Ebrahim Al Assaf Assaf. "There will definitely not be any impact from the oil price decline in the government's development plan."
What has changed, however, is the appetite for risk.
The value of assets held by sovereign wealth funds has been pummelled by huge falls on world financial markets, notably in US equities, adding to the appeal of more alternative investments.
"Countries that are less integrated into the global financial system are ... likely to become more appealing," Saudi bank Samba said on Wednesday.
The Gulf, which invested $912 billion in foreign assets in the five years to June, would probably focus $430 billion of new investments up to June 2010 in the Middle East, China, and "ultra safe" securities.
While the Gulf economies are still relatively comfortable and their conservative budget price assumptions have left them margin for error, other producers are more nervous.
Nigeria has cut its budget plan for 2009, basing it on an assumed benchmark price of $45 a barrel down from the previous assumption of $62.50.
Iraq, which needs billions of dollars of investment to rebuild its shattered economy after years of sanctions and war, has also cut its budget to an assumed price of $62 from $80.
Those who have been most vociferous in their demands for Opec action to boost the price are Iran and Venezuela, which are widely regarded as dependent on prices of close to $100. In line with fellow producers, they have said they can manage on the profits of the boom, but their plans look shaky.
Analysts say Iran, Opec's second biggest producer, will almost certainly have to cut spending in the budget starting in March unless oil bounces back to at least $70 a barrel.
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