Brent crude oil price has dropped from a 2014 high of US$115 a barrel in June to just above $80 before rising at the end of last week to $87.
As prices fall, heads are turning in the GCC states, home of four members of the 12-member Organisation of the Petroleum Exporting Countries (OPEC) bloc, where a sustained lower price could have dramatic impacts. The International Monetary Fund (IMF) estimates that the six member states of the Gulf Cooperation Council stand to lose a total of $130 billion in annual revenues if the oil price is maintained at its current level.
The IMF figures show that the total revenue of the GCC states — 90 percent of which comes from oil and gas — more than doubled from $317 billion in 2008 to $756 billion in 2012, while declining slightly last year to $729 billion, the IMF estimates.
However, Saudi Arabia, Kuwait, Qatar and the UAE, all members of OPEC, have accumulated vast sovereign reserves, with billions of dollars in foreign assets and minimal state debt. The strong reserves and assets portfolio would allow the governments in these countries to withstand an oil price of between $80-90, or even lower, for a prolonged period of time.
Ministers of both Saudi Arabia, the largest oil exporter in the world, and Kuwait have stated they have no short-term interest in reducing production and would rather maintain market share. Saudi Arabia even increased output in September by 50,000 barrels per day.
After several years of prices hovering around $100 a barrel, seemingly entrenched at that level, the sudden decline has exposed how volatile Gulf budgets remain. The states are facing an almost inevitable change of course in how they balance their budgets. Government subsidies are already on the line in Kuwait and Oman and a sustained lower oil price could force them to be reassessed in other Gulf countries as well.
Billions of dollars worth of infrastructure projects, from new rail lines and airports to hospitals and sporting stadiums, also could be either delayed or scaled back. Contracts of around $180 billion for new construction projects were expected to be awarded by Gulf nations this year.
While it may take some time for governments to adjust to their new income levels, a sustained oil price of $80 a barrel is not going to break the bank in Saudi Arabia, the UAE, Qatar or Kuwait.
The average oil price needed to break even in those countries is between $53.30 in Kuwait and $90 in Saudi Arabia, according to the IMF. The average price for the first nine months of this year was $106. Bahrain and Oman, however, are in far more serious situations, with their break-even prices more than $100 a barrel, while their sovereign savings are also much smaller.
For the time being, the Gulf oil exporters, led by Saudi Arabia, appear comfortable to simply ride the rollercoaster. Whether the ride becomes too scary, and they reduce production to maintain prices, may become clearer when OPEC meets on November 27.