A7
Persian Gulf Stales: Unequal Burden of Low Oil Prices
Tbe decline of oil prices ibis year it taking aloll oa Iran and Iraq than on otberproducers and. consequently, is Iodinelensions in the region. Iran aod Iraq,on oil. wan! higher prices lo financespending as well as reconstruction rtctds. PJS.iLdi -
joir.ed Iran and Iraq in increasing pressure oa Kuwait and the UAErim (heir production. In ligbt of tbis pressure, we believe tbal the OPEC producer! will agreeew produclion accord at Ibeuly ministerial in Geneva. Ncvcrtbeleu. (be continued differences in actual aod perceived revenue needs among (be Persian Gulf oil-producing Kate* dim prospects for production restraint over ihc longer tcrrr. to support higher pi
ependent oo Oil
Despite massive investment in nortoilthe pas!ears, most of the region'sto be dependent on oil revenues andhard bil by declining prices this year.oil prices tumbleder barrelto about SI4 per barrel daring (be firstJuly largely because of excess oil pioduciiooGulf
. revenue* for Ihe first six months0
idy lag behind budgetl^
Iran and Iraq Hurt ihe Moil
Tbe weak oil market conditions of thend economic toll of tne Iran-Iraq war has already sapped government coffers of theae iwo producers. Innis suffering the most from low oil prices. Iranian President Rafsanjam'splan assumes average annual
jvtriff mil'.'
OPEC tuikei
11
IlII H
Ha Feb Wj! Apt May
oil revenues ofillion, but carningi thii year will reach onlyilliontrong price rebound. The SS-per-barrd drop in prices for Iranian crude nr.ee January costs Tehran up5 million each month Iran it unable lo offset falling prices by increasing ciport volume because it is alreadynearroduclion capacity. Tehran also faces substantial unsold inventories of crude, which is working to further depress prices
Or0
(reporting indicates (bat ii hocks oao grown lo at leastillion barrels in June and led Tehran to offer some buyeis oiler barrel. We project Iran willurrent account deficit ibis year of around S2 billion that will severely impede its reconstruction efforts.
Tehran publicly has played down ihe burden of (he oil priceew Iranian newspaper articles have criticized OPEC overproduction and Iran's oilrecently traveled to ihe UAE, Algeria, and Libya to discuss oil market conditions. Nonetheless.eaction overall has been uncbaractcrisUcallj restrained .1
OPEC pcoduetten
Tbe decline in oil prices is also hampering Iraq's postwar economic recovery and ts worsening lis liqaid-ity problems. The price decline his already coat Iraq at leastillion in lost revenues this year. Like Iran. Baghdad is operating near its maximum sustain* able capacitynd cannot offset declining ci! prices with additional product ion .IJ^^H^
Iraq Increasingly is venting its frustration at Kuwait "afMaHHaHHTflHSH^aW
The governontrol led press hat accused Kuwait and ihe UAE of deliberately ovcrpfoducing to limit Iraqi rcvent.
Less Financial Pain for (he Peninsula States
Large financial reserves and considerable spatecapacity allow Saudi Arabia greater ty In dealing wiih current v.
reserves andncrease in Riyadh's OPEC quotahis year probably will compensate for lower prices and yield oil export receipts close to the
teb Mji Ape May
19S9 levelillion. Moreover, Saudi excess capacity oflso gives Riyadh the ability to offset declining prices by further boosting
production,
Kuwait and the UAE are blunting (he effect of lower oil prices by producing at levels significantly above tfceir OPEC quotas Kuwait and ihc UAE have exceeded in recent months their OPEC quotas by, respectively, but last week agreed to trim their production. In addition lo continued high oil revenues, both continue to earn significant income from their foreignihem lo enjoy large current account surpluses.^
_ oU production averageshis year fot both countries and prices average near SI7 per barrel, oil expormctipts are likelyemain9 levels*
Neai-Term Agreement But Long-Run Problems
Giowinf pressure being exerled by Iran. Iraq, and Saudi Arabia for production restraint will likely result in the OPEC members agreeingew pioductioc accord at the upcoming ministerial. As in the past, none of the producers wants to be held responsibleollapse in prices. Nonetheless, we believe producers with ciccss capacity also have incentive to resume overproduction down Ihe line. The press reports, for example, (hat several OPEC members have Hated lhat they will increase their production. It meets (heirJJJ
Both Kuwait and Abu Dbabi will argue (bat(heir quotas Is warranted by pressing
oes not include siub'e ir.xsimen; eaimji in (he national accounts (bat wouldubstantial budget surplus.!
[Abu
Dhabi, which finances virtually all of the UAE budget, claims the rightroduce close toevel because of (be similarity of its petroleum reserves and production capacity with (bote of Kuwait The total UAE quota. Dubayy bat not felt bound by OPEC rulings and produces a( masimum capacity, leaving Abu Dhabihare far short of its
Production constraints in Iran and Iraq sharplyopiions for dealing with low prices. In Iranregime has responded in (be pastallingby slashing civilian imports, but (hitbecome less viable after many years ofcapita imports9 were already down bycompared0 levels. Wc believewill have to increase iteep up with (he basic needs ofcrowing;ion-every seven monthsanother million people^
Iraq has begun cutbacksirumootts to offset (he fall in oil revenues,flindicate revenue problems caused Iraqan (he import of nearlynonessential" goods In Ju
Recipe for Rising Tensions
In light of (he prospectesumption infinancial shortfalls resulting from low oil prices will pose difficult challenges for Iran and Iraq. Ia Iran, where public tolerance of austerity is waning, lower revenues and continuing shortages could result in renewed public demonstrations against ibe clerical regime. Similarly. Iraq faces further postponement of importan( reconsUuction and dcvelopmen( projects and politically unpopular import cutbacks as long as oil receipts remain 1<
The uneven burden of the oil price decline also is likelyaise regional tensions In (he Persian Gulf if OPEC is unable to restrain ou(pu(rop up prices in the months ahead. Iran and Iraq willut political pressure on ovcrproduecrs to help boost prices and enable Tehran and Baghdadvoid imposing further domestic austerityime of popular discontent over economic conditions. Saddam Husayn,ecent speech, threatened (hat if words do not resolve overproduction and priceraq will take effective action lo rectify (he situation. Recognizing (be potential to become embroiled in regional disputes. King Fabd has warned publicly tha( Saudi Arabia will cot reassumc the rolewing producer in OPEC. And. according to press reports, the Saudis will boost oil production, if necessary.aintain lu share of nearlyercent of OPEC production and persuade recalcitrant cartel- the lineid6
Original document.
Comment about this article, ask questions, or add new information about this topic: