The ‘New Normal’: The Era of Low-Cost Oil

12.21.15

The ‘New Normal’: The Era of Low-Cost Oil

12.21.15
Google

By Dr. Samuel Greene and Kiani Raets for Gulf State Analytics

Global oil prices have decreased significantly since their 2014 peak on June 19, when the price of Brent crude stood at $115.19 per barrel of oil. Only six months later, the price fell to just $58.87 on December 19, 2014. Throughout 2015, the price of a barrel of Brent crude has ranged from about $45 to $65, closing at $49.45 on October 9. Futures prices for delivery of Brent crude in October of 2020 show that the markets expect oil prices to remain low for the following five years. Its October 13 price of about $64 stood in the middle range of expected 2020 prices between $60 and $70 per barrel in September and October. Thus, in the near term, low oil prices are expected to be the new normal.

Low Oil Prices and Budgeting in the Gulf

These prices will put considerable pressure on the budgets of most Gulf Cooperation Council (GCC) members, given their dependence on oil revenue. Although most states in the Gulf have attempted to diversify their economies, funds from oil remain a vital component of government budgets. In 2014, every state except for Qatar, which also has large reserves of natural gas, relied on oil revenue for more than 75 percent of government revenue.

Further, most states in the region have increased their public spending over the past six years. Fiscal break-even prices, which refer to the price of oil required for a balanced budget, have risen significantly in most Gulf States since 2009. In 2009, Kuwait and Qatar both had breakeven points below $30 per barrel. Currently no Gulf state has a projected 2016 breakeven price below $60 per barrel, with the exception of Kuwait’s projected breakeven price in the $47 range, while three states, Bahrain, Oman, and Saudi Arabia, have projected breakeven prices of $89 per barrel or higher in both 2015 and 2016.

Read the rest at Gulf State Analytics.

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