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Monday, September 22, 2008

A new Middle East philosophy: Oil must pay for entire economy.

This article introduces a new, totally extraneous and dangerous consideration into petroleum finances. The price of oil should depend on supply and demand. The "break even" point should depend on the cost of extraction, which in the worst case might be about $20 a barrel in the USA or Russia, and is around a dollar a barrel in the Gulf states.
However, the OPEC countries and Arab IMF personnel have made a different calculation entirely. Some gulf states have used unrealistically high oil prices to fuel development. Now the reckoning is based not on the extraction price and fair profit, but on how much oil must cost in order to pay for the development without requiring loans or higher taxes. For most countries, there is still a huge safety margin. Saudi Arabia will still have a budget surplus if oil falls to $50 a barrel, others need less. Nobody even questions why development cannot be funded by bonds or loans as it is funded everywhere else, or what terrible tragedy might befall Saudi princes if they gave a bit more of their wealth to the budget and spent a bit less in casinos.
But the most interesting case is Iran. Iran spends a fortune on developing nuclear weapons, and has not done much petroleum exploration. The result is that it must keep the price of oil over $90 a barrel or over $110  in order to pay for its nuclear toys. We can expect that it will contrive to find ways to do so.
Ami Isseroff
Saudi needs oil above $ 49 to avoid deficit; Qatar break-even $ 24: IMF
Gulf Times - 21 September, 2008

Saudi Arabia, the world's largest oil exporter, will need crude prices to remain above $ 49 a barrel to avoid a fiscal deficit, a senior International Monetary Fund official has said.

"If it goes below that level we would start seeing a fiscal account  deficit," Mohsin Khan, director of Middle East and central Asia at the IMF, told Dow Jones Newswires.

Oil prices have fallen drastically in the past two month, shedding over $ 50 in value since they hit $ 147 a barrel in July, raising concerns over the continued strength of Persian Gulf Arab economies.

Saudi Arabia, the Middle East largest economy, depends on oil and gas sales for 90% of its export income.

"Saudi Arabia's break-even price is the highest among the Gulf Co-operation Council Countries because they are spending on a lot of projects right now, and oil money is used to fund these projects," he said. Further declines in oil prices could tip the region's economies over the edge as they continue to spend heavily on infrastructure projects.

According to Middle East Economic Digest, Gulf states are spending about $ 2.3tn on projects.

Other Gulf states with smaller populations and lower government spending like the UAE are able to run a fiscal surplus as long as oil prices are
above $ 23 a barrel.

"The UAE will have a fiscal balance at an oil price of $ 23, if it goes below they would run a deficit. For Qatar, the break-even price is $ 24 a barrel," Khan said. Kuwait's break-even price is $ 33 a barrel, he added.

The figures, to be published in the IMF's next regional outlook for the Middle East and Central Asia, also show that other countries in the region are already running a fiscal deficit with current oil price levels.

"Iran's break-even price is $ 90 a barrel, and that is a big issue in Iran right now," Khan said.

"If prices dip below $ 90 a barrel, and we have seen it touch $ 89 earlier this week, then they would have to tighten their public expenditure policy, and probably cut subsidies, which would be an issue for the government there - the public would not be content," he said.

Iraq has the highest break-even price in the region, according to the IMF figures. The war-torn country needs prices above $ 110 a barrel to balance its books.

"They are almost starting from scratch, so it's normal... it won't be normal if the break-even point is lower because that would mean no work is being done," he said.

Algeria, whose minister is acting as the president of the Organisation Of Petroleum Exporting Countries this year, will be able to balance its budget with oil above $ 56 a barrel, Khan said.

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