Accessibility links

Middle East: Low Oil Prices Hit Middle, Near Eastern Economies

  • Charles Recknagel

Prague, 18 November 1998 (RFE/RL) -- As OPEC oil ministers prepare to meet next week to seek ways to raise world oil prices, many Middle and Near Eastern countries are reeling from a record slump in their oil revenues.

The oil ministers of the Organization of Petroleum Exporting Countries are tentatively scheduled to meet November 25 in Vienna. The meeting is expected to weigh whether to cut OPEC output further to try to boost prices or to enforce greater compliance with cutbacks already agreed upon earlier this year.

OPEC decided in June to lower production by 1.37 million barrels per day (bpd), raising total cuts since March to 2.6 million bpd. The cut comes as the cartel tries to cope with a continuing slump in demand following the Asian financial crisis.

Despite the cuts -- which have not been uniformly observed by OPEC members -- the benchmark Brent North Sea Crude price again sank below $12 a barrel this week as it has repeatedly done during the year. Prices under $12 are the lowest seen by oil producers in 10 years.

Julian Lee, a senior analyst at the London-based Center for Global Energy Studies, says oil prices on the average have dropped by 30 percent this year compared to last. That has cost OPEC exporters an estimated $48.3 billion in lost revenue. Lee says that the biggest oil producing countries have been the hardest hit.

"We're looking at Saudi Arabia's oil revenues in 1998 being something like $16 billion less than they were in 1997. That's almost a 40 percent drop. In percentage terms, most of the other producers in the region are suffering more than that. For Iran, we see revenues there dropping by just over 43 percent, the equivalent of $6 billion. Kuwait is 42 percent down on last year (which is) equivalent to about $5 billion. So, all the producers are (experiencing) a 40 to 45 percent drop in revenue."

The cuts in oil revenues have caused some producer countries to slash government spending and to put off major investment projects.

Correspondents say that Saudi Arabia, the worlds largest oil exporter, has cancelled a multi-million dollar refinery project and may put off building a big petrochemical plant.

Kuwait has slashed its budget, frozen government hiring and announced it will sell more state-owned companies to raise revenues.

Qatar, OPEC's smallest producer, has cut its budget this fiscal year by 35 percent.

Even the Middle East's non-oil states are feeling the pinch as Gulf states begin sending home Egyptian, Jordanian and Palestinian workers who supply much of their workforce. Traditionally, the money those workers earn in the Gulf and repatriate is a top source of foreign currency for their homelands.

In Iran, the plummeting price of oil -- which normally generates some 80 percent of the Islamic republic's hard currency -- has exacerbated a recession that is well into its second year. Iran now faces a $6.3 billion deficit, which is roughly a third of the annual budget.

Correspondents say the Iranian government has been forced to borrow money from the central bank as well as take advances on future oil sales in an effort to pay wages and finance the development projects it needs to create new jobs.

The country's official unemployment rate has jumped from 11 to 13 percent in recent months. Independent estimates put the figure higher.

Sanctions-hit Iraq has also felt the slump in oil prices. The lower prices mean it has to pump and sell more oil to earn its allowance under the UN approved oil-for-food deal, which permits Baghdad to sell over $5 billion worth of oil every six months to buy humanitarian supplies.

So far, Iraq's dilapidated oil infrastructure has been unable to keep up. Oil experts estimate its oil revenues will reach only some $3 billion by the time the current semester of the oil-for-food program ends November 25.

Experts disagree on how long and deep the global downturn in oil prices will be, but few see any relief for oil producers coming next year. Julian Lee says:

"I think the general outlook for next year, barring an exceptionally cold winter (and) 100 percent compliance with the agreed output cuts by OPEC for the whole of next year ... barring those two things happening ... we (should) actually see average prices in 1999 being about the same if not lower than in 1998."

Still, if the glut of oil on the market is not likely to dry up soon, experts say that prices are unlikely to decline much more. They say OPEC's strategy of self-imposed cutbacks in production appears to be halting the trend. The benchmark price of Brent North Sea Crude has hovered around $12 to $13 a barrel now for some six months.

Many analysts predict the upcoming OPEC ministers' meeting will not call for any new production cutbacks. Instead, they expect it to concentrate on the tough task of trying to ensure all OPEC members comply with existing cutback accords.

Lee says Middle Eastern producers have complied fairly well, and they will insist other members do at least as much before they consider any further cuts themselves. He lists the biggest current abusers in exceeding their quotas as Indonesia, Iran and Libya.

"Indonesia is really in percentage terms the big transgressor here. Indonesia has met (only) 50 percent of its promised cutback....Given the economic and political situation there, I think it will be very difficult to see more of an output cutback coming there. The others that are not performing quite so well, in our estimation are Iran and Libya. Both of those have compliance a little under 80 percent."