Who is Prepared for an Oil Price War?

March 9, 2020

When oil prices collapse, as they have today, there is a rush to understand how low oil prices will affect hydrocarbon producers. Analysts typically look at “fiscal breakeven” prices, the oil price at which a government’s budget clears (they also look at external breakeven prices, which look at the oil price at which a country’s current account clears). The “fiscal breakeven” price is a useful single-point metric, but it can also obscure the broader context of where an economy stands. The graph below looks at the general government balance of a select number of oil producers, which underscores several dynamics (based on data from the International Monetary Fund).

First, some countries ran budget surpluses, and others ran deficits in 2019: Algeria had an 8 percent of GDP deficit in 2019, while Kuwait had a 6.7 percent of GDP surplus. Saudi Arabia has been in deficit for six years, and its gross government debt had risen from almost zero in 2014 to over 23 percent of GDP in 2019. Russia, by contrast, ran a surplus in 2018 and 2019 and has kept gross debt at the same level as in 2014 (about 16 percent). Countries are not starting from the same point.

Second, some oil-exporting countries are already in the midst of a multiyear austerity process. Angola, Nigeria, and Gabon stand out for their deep cuts in expenditures, although countries like Algeria, Oman, and Kuwait had to pull back spending after a stimulus that lasted for a few years. And some countries, like Saudi Arabia, have kept spending at near-record levels despite a sharp decline in revenues. As a result, countries have unequal space for further adjustments.

Of course, all economies have multiple levers to adapt. Some countries, like Russia, have flexible exchange rates and oil production costs denominated in local currencies. Some countries have ample reserves, including Saudi Arabia, which can provide a cushion in tight times. Governments can extract more rents to pay the bills or give relief to their oil sectors in order to ensure competitiveness. And cutting expenditures is always an iterative process that tries to minimize political fallout. But not everyone starts at the same point in an oil price war—and the cost of producing oil is just one of many variables that will determine who gains and who loses.