Why Egypt, of all places, is keeping a wary eye on falling oil prices.
The bears that barged into the oil market and knocked crude prices down one-quarter from their summertime highs appear to be hunkering down for a lengthy stay. Big investment banks, including Goldman Sachs and Barclays, have just slashed their forecasts for next year's oil price. Energy analysts Wood MacKenzie said Tuesday that a sluggish economy could keep oil benchmark prices around $80 a barrel unless OPEC makes production cuts. That means the oil-price slump of the last four months may not be a bug, but a feature of frothy, oversupplied markets.
The bears that barged into the oil market and knocked crude prices down one-quarter from their summertime highs appear to be hunkering down for a lengthy stay. Big investment banks, including Goldman Sachs and Barclays, have just slashed their forecasts for next year’s oil price. Energy analysts Wood MacKenzie said Tuesday that a sluggish economy could keep oil benchmark prices around $80 a barrel unless OPEC makes production cuts. That means the oil-price slump of the last four months may not be a bug, but a feature of frothy, oversupplied markets.
That’s clearly not good news for some spendthrift oil producers, especially Iraq, Iran, Russia, and Venezuela, whose distorted economies require ever-higher oil prices to balance the budget. But a looming question is how a prolonged drop in oil prices will affect their better-off brethren, especially the rich petrostates of the Persian Gulf.
There are two things to keep an eye on. First, these countries have enormous and costly domestic obligations, like generous energy subsidies and social spending meant to forestall the kind of public discontent that simmered in nearby countries for years and which boiled over in the Arab Spring.
If oil prices keep falling, the Gulf states may also be unable to keep splashing massive amounts of foreign aid to teetering states in the Middle East and North Africa that aren’t blessed with bottomless reserves of oil and gas, like Egypt and Morocco. For decades, in some cases, rich Gulf states have propped up distant neighbors, both to parry excessive European influence and to ensure political stability in a region historically lacking it.
That makes the fiscal health of the Gulf states a prime concern for Cairo, Rabat, and Amman — especially since the economy of the Middle East was wheezing even before oil prices went on a walkabout. The one consolation for Egypt and others is that the core Gulf states are still rolling in cash, which should be just enough to let them maintain their domestic and foreign spending priorities — at least for now.
The International Monetary Fund said on Monday that the Middle East and North Africa is poised for another year of disappointing growth; Masood Ahmed, the IMF’s Middle East director, warned that even flusher countries like Saudi Arabia could slip into deficits as soon as next year if oil prices stay low. For Gulf countries as a whole, the IMF said, lower oil prices could wipe $175 billion off their projected fiscal surpluses.
That would put additional pressure on those countries to overhaul their unsustainable budgets, which use energy subsidies that encourage waste and which cost governments billions of dollars each year. In Kuwait, fuel at the pump cost just $0.19 a liter before recent reforms; Saudis notoriously leave their cheap but oil-fueled air conditioning running while on vacation.
Indeed, the worse-off countries in the region have already had to go that route. Egypt, Morocco, Jordan, and Tunisia have all recently announced plans to cut energy subsidies to save money. Now, even oil-rich states are mulling similar steps.
Kuwait’s finance minister called spending cuts "inevitable" over the weekend, while Oman’s finance minister echoed the sentiment, calling subsidies "wasteful" and saying that spending reforms were necessary at a time of falling oil prices. Tiny Bahrain has spent all year trying to roll back subsidies, but faces a great deal of political opposition.
But there is another big potential risk to the region: The budget impacts of falling oil prices could percolate down to countries that don’t even export the stuff. Belt-tightening in petrostates, in other words, could curtail the generous foreign assistance that Saudi Arabia, the United Arab Emirates, and others have showered on Egypt, Jordan, and Morocco to keep their economies afloat and stave off the specter of unfriendly governments steeped in Islamist ideology.
For years, Riyadh and other flush capitals in the Gulf have poured billions of dollars into countries across the region. Since the fall of Saddam Hussein in 2003, Jordan has become increasingly reliant on Saudi aid, though the erratic nature of that aid unnerves plenty of folks in the Hashemite kingdom. Jordan and Morocco each got a $2.5 billion pledge last year to help develop their economies and tackle endemic unemployment that could undermine their ruling monarchies. The Gulf states are particularly generous with Jordan because they are trying to help the country deal with the costs of absorbing hundreds of thousands of refugees fleeing the Islamic State’s advances in Syria and Iraq.
The Gulf states, Jordan, and Morocco have also discussed trading financial aid for closer military ties. A prolonged slump in oil could force Gulf States to rein in their foreign assistance budgets, some observers fear, with nasty consequences for their neighbors.
"Most of my conversations seem to indicate that it would be the ‘far periphery’ that gets cut first, likely very soon — that is, the promised Saudi funding to Jordan and Morocco for their urgent infrastructure and job creation projects," said Christopher Davidson, a specialist on Middle Eastern politics at Durham University and author of After the Sheikhs.
He said there are indications that the Saudis have supplied more foreign funding than what appears on official budgets. That means that the "break-even" price for oil could be even higher for Saudi Arabia than public figures suggest, he said. The Saudi Embassy in Washington did not respond to requests for comment.
Perhaps more important is the aid that Saudi Arabia and the UAE have thrown at Egypt to prop up strongman Abdel Fattah al-Sisi since he ousted Egypt’s former leader, the Islamist Mohamed Morsi. Together, the Saudis and Emiratis have pledged $20 billion to keep Egypt’s economy from flatlining, and have so far delivered almost $17 billion, including cash and oil products.
Moody’s Investors Service, a debt-ratings agency, recently revised its outlook for Egypt upwards from negative to stable and said that external aid from the big Gulf states was one of the main drivers of the improvement. The aid initially helped compensate for Qatar’s withdrawal of financial support for Egypt (it had backed Morsi) and later helped forestall a massive energy crunch.
"Taken together, they’ve played an important role in shoring up confidence and giving the government some breathing space to start enacting reforms," Steffen Dyck, Moody’s lead Egypt analyst, told Foreign Policy. Egypt slashed fuel subsidies in the summer, and just laid out ambitious plans to overhaul tax collection and other areas of its struggling economy.
U.S. Treasury Secretary Jack Lew, in Cairo Monday, praised those reforms, but stressed that external assistance, including aid from the United States and multilateral financial institutions, is still key to helping Egypt get back on its feet and attract more private investment.
For Sisi, overflowing Gulf coffers after a decade of relatively high oil prices are welcome news. The six states of the Gulf Cooperation Council — Bahrain, Kuwait, Oman, Saudi Arabia, Qatar, and the Emirates — together have about $2.5 trillion stashed away. Saudi Arabia alone has more than $740 billion, while Kuwait more than half a trillion dollars in reserve. People close to the UAE stress that the Emirates is not in danger of a cash crunch anytime soon: It has massive oil reserves, low oil-extraction costs, and the world’s biggest sovereign wealth fund.
That, plus the existential risk that an imploding Egypt would pose should keep Gulf checkbooks from slamming shut anytime soon.
"They know Egypt is too big to let it fail, and that’s why there’s a commitment to support it," Dyck said. "I don’t think the three countries that are the main supporters are facing any critical pressure yet from falling oil prices."
Keith Johnson is a deputy news editor at Foreign Policy. Twitter: @KFJ_FP
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