by Dr Hessah Al-Ojayan
Since crude oil hit a recent high of $107.9 a barrel in June this year, the closing price has been gradually declining reaching $82.6 on October 16th. This level is the lowest since July 2012. The decline is driven by the increase in supply coupled with a weak demand. More supply is mainly coming from the the US and Libya, with the US oil production increasing by almost 14% compared to last year. Libya’s production, having recovered from the civil war, has also increased from 200,000 barrels per day (b/d) in April this year to reach about one million b/d in September. Further adding to prospective global supply, Paraguay announced this week that it has discovered oil for the first time. Weakening demand is also adding pressure on oil prices, with the Kuwait News Agency (KUNA) recently announcing that Germany cut its oil imports from the Organization of the Petroleum Exporting Countries (OPEC) by 2% this year. The International Monetary Fund (IMF) has cut its projection for global growth in 2014 from 3.4% in July to 3.3% and its forecast for 2015 from 4% to 3.8%, which also does not bode well for global energy demand. On the back of the IMF growth forecast revisions, the International Energy Agency (IEA) had to cut its estimate for demand for OPEC crude oil by 200,000 b/d for 2015.
With OPEC producing 43% of the world’s oil, falling oil prices will negatively affect the revenues of many of its member countries and will eventually force them to consider cutting down production; many of them have a national budget breakeven price of above $90/barrel. Officials in Saudi Arabia, Iran, Kuwait and the UAE showed no public intention of reducing production. However, confidential information was leaked from Kuwait, stating that Al-Khafji field, a joint venture between Saudi Arabia and Kuwait that produces 300,000 b/d, is being shut down due to environmental concerns. Also, the Kuwaiti Alqabas newspaper reported on October 20 the possibility of shutting down another joint field, Al-Wafra, which produces 110,000 b/d, because the Kuwaiti Labor ministry was refusing to renew the identification cards of Saudi Chevron company employees. These shutdowns would reduce Kuwait’s oil production by around 10%. Globally, the final decision on how many barrels to produce per day will be made during OPEC’s next meeting, on November 27.
Kuwait produces between 2.5 to 3 million b/d and exports 80% of them to East Asia, with the remaining 20% going to Europe and the Americas. 90% of Kuwait’s revenues come from oil. Annually, 75% of total revenues are used for national expenditures, which amounted to about K.D 23 billion for the fiscal year 2014-2015 (approximately $80 billion), with the remaining 25% allocated to the Kuwait Investment Authority (national sovereign fund) for the purpose of supporting future generations. The breakeven oil price for the Kuwait budget is $75 per barrel. Beyond that, national expenses would exceed revenues. The current oil price of $90 per barrel is alarming and it is critical that Kuwait starts putting forward a contingency plan in order to avoid a possible financial deficit. It is time to call for a radical transformation. Continue reading