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Feature Article
The Oil Price Collapse of 2014: Will Budget Shortfalls Alter The Succession Dynamic? 2015-01-01
Is Saudi Arabia's reluctance to take action to stem the collapsing price of oil part of a deliberate strategy to weaken regional foes, or is the Kingdom caught in the unpleasant position of having to weather a short- term economic storm in order to retain market share? Though all evidence points to the latter, the long-term fallout could yet be severe.

by Senior Analyst Talal Kapoor

As the price of oil has slid some 40% since June, Saudi Arabia has taken the blame for the collapse because of its refusal to bring down production from the current level of 10.5 million barrels per day (bpd). To prevent prices from falling even further, OPEC needed to cut output by about 1 million bpd, and not surprisingly, other oil producing nations want the Kingdom to act, given its outsize influence on the energy markets. Notwithstanding the short term loss of revenue, however, Saudi stands to benefit from the economic pain inflicted on rivals.

Iran, which has seen its oil production plunge from 4 million bpd to a mere 1 million bpd, has accused the West, and Saudi in particular, of using the tactic of lower oil prices to undermine its economy. Iran's current budget is based on an oil price of $100/barrel, and the country, already struggling under Western-imposed sanctions over its nuclear program, faces a significant shortfall. Even with a projected price of $80/barrel in 2015 (a very optimistic forecast), Iran faces a budget deficit of about $2 billion. Furthermore, expected belt tightening will affect spending on planned infrastructure projects, and a general climate of economic uncertainty has descended. This may influence the regime's posture as it engages in deliberations over its nuclear program.

For Russia, exports of oil and gas amount to 68% of total exports, and energy revenue makes up more than half the state budget. Already in 2014 Russia has spent $90 billion from its currency reserves to support the plummeting ruble. Even given an oil price of around $80/barrel, a recession for 2015 is expected, which will only worsen should the price fall even lower. A massive outflow of capital is now underway ($125 billion this year), and a "full-blown economic crisis" is predicted.

Syria, already under Western sanctions since the start of its civil war, is most immediately under pressure from collapsing prices. Oil production has fallen sharply, and while Iran has held out an economic lifeline to President Assad, the ability to continue to shore up the Syrian economy is clearly in doubt, despite the public assurances of ongoing support given by Tehran. Aside from the provision of almost $750 million to the Syrian Central bank last year to help stabilize the currency, and a credit facility worth billions extended in July to buy oil products, Iran has channeled financial support directly to militias involved in the fight against government forces. Thus far, Russia and Iran have been major and indispensable allies of Damascus, and with their unabated support now in question, the regime's very survival is at stake. Of course, Saudi and the Gulf States, bitter foes of Assad, could not be more pleased.

In North America, shale production has opened up new oil reserves, but this is only exploitable at a much higher market price. Already some regions are unprofitable at $75/barrel, and many companies, heavily indebted and forced to keep up with exploration for new wells as existing fields quickly run dry, will be forced out of business in the coming months.

No oil producing nation has been spared economic pain, so precipitous has the price collapse been. Saudi Arabia's recently unveiled 2015 budget projects spending to rise to about $230 billion, with a 16% drop in projected revenue, leaving it with a $38.6 billion deficit (and possibly much more). The Kingdom's breakeven price has risen $10/barrel in the last five years, but with foreign reserves standing at $750 billion, it can withstand lower oil prices for some time at least.

Traditionally, Saudi has played the role of swing producer, adjusting production as needed to stabilize world markets and set a price floor. The message this time, as stated by Oil Minister Ali al-Naimi, is that nothing will be done. Saudi will focus on keeping its market share rather than trying to prop up prices by cutting production.

upsetting the dynamic
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