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Al-Ahram Weekly 8 - 14 April 1999 Issue No. 424 
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Published in Cairo by AL-AHRAM established in 1875 |
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Al-Ahram Weekly 8 - 14 April 1999 Issue No. 424
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| Published in Cairo by AL-AHRAM established in 1875 |
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Egypt Region International Economy Opinion Culture Focus Profile Features Travel Living Sports People Time Out Chronicles Cartoons Letters Tough times for OPEC
By Aziza SamiIn a fresh attempt to stem plummeting world oil prices, the Organisation of Petroleum Exporting Countries (OPEC), in concert with non-member oil exporters, has approved a new round of cuts -- 2.1 million barrels of crude oil a day, effective 1 April.
Saudi Arabia, the world's largest crude oil producer, which for a long time had been adverse to production cuts, supported the step, along with Venezuela, Mexico and Iran. Tehran has conventionally pursued a policy of increasing its oil output as a hedge against other major oil producers, including Saudi Arabia, Kuwait, the United Arab Emirates (UAE) and Iraq.
The six Gulf Cooperation Council (GCC) countries, which alone account for more than 45 per cent of the world's reserves, announced cuts in their oil production from 1 April reaching 933,000 barrels. As a result of optimism over the new round of cuts, the price of benchmark Brent blend rose by $4 to $15 a barrel in little over a month. Nevertheless, there is scepticism as to whether the oil producers, whose adherence to previous cuts has been by no more than 77 per cent, will comply fully with the new cuts.
The GCC members have borne the brunt of the oil crisis, suffering a drastic decline in revenues, with no immediate relief in sight or prospects that their economies will return to where they were before the crisis started in 1997. Budgets announced on 1 April by several Gulf oil-producing countries for the fiscal year 1999-2000 reveal sizable deficits, reduced expenditure and slowed-down economic growth. Several projects have been stalled due to a shortage of cash inflow derived directly from oil export revenues.
Saudi Arabia, Kuwait, the UAE, Qatar and Oman, in addition to Bahrain, a non-OPEC member, have, since 1998, cut more than 1.9 million barrels daily off their production. Saudi Arabia has been one of the countries hardest hit by the crisis. As a result of declining oil export revenues, Saudi Arabia's budget deficit reached 9.4 per cent of GDP in 1998, against 1.1 per cent in 1997. Expenditure in the budget for the fiscal year 1999-2000 has been cut by 12 per cent, and further significant cuts are expected in Saudi Arabia's military purchases over the next few years. The Saudi-American Bank estimates that Saudi Arabia's military budget, currently assessed at between $15 billion and $20 billion, will witness cumulative cuts ranging from $7 billion to $8 billion in the period from 1997 to 2001. Although arms deals signed after the 1991 Gulf War are unlikely to be affected, it is not expected that Saudi Arabia will make new orders.
Another effect of declining oil export earnings has been the decline of the value of the Saudi currency, the riyal, which is tied to the US dollar. The riyal has plunged to its lowest rate in recent months, leading to speculation that the government might devalue it if crude oil prices remain depressed.
However, according to Mohamed El-Erian, an expert with the London-based brokerage firm Salomon Smith Barney, Saudi Arabia has a clean balance sheet on external debt and can release funds through syndicated loans, making possible a sizable reduction in public spending. Nevertheless, since Saudi Arabia will be bearing most of the cuts, no improvement in its revenues is expected in the foreseeable future.
Qatar, one of the world's largest natural gas producers, has also been directly affected, specifically in its capacity to fund its ambitious "north field gas export project", which, if it materialises, would make the country the world's largest exporter of liquefied natural gas.
On 1 April, Qatar's finance minister, Youssef Hussein Kamal, announced a 9.7 per cent decrease in his country's public expenditure for the fiscal year 1999-2000, with expectations that oil revenues would recede by 14.7 per cent, based on an estimate of $10 a barrel. Expenditure has also been restricted to ongoing projects and those assessed by the government as urgent.
Iraq is another major oil-producer and non-GCC member whose plight is exacerbated by its political conditions coupled with the world oil crisis. As a result, Iraq's oil export earnings have declined. In addition, by virtue of the UN oil-for-food arrangement, Iraq is allowed to export $5.2 billion worth of oil every six months, yet 30 per cent of its oil production revenue is directed to compensation for war victims and so its revenues fall short of its needs. At this point, Iraq, which is basically dependent on oil, cannot expand its export because of the severely-weakened condition of its oil industry as a result of the Gulf War bombings. Added to this, the United States and Britain have been pressuring against foreign investments being directed to support Iraq's petroleum sector.
The latest cuts have also left the UAE, Kuwait and Bahrain with over 500,000 barrels a day of unmarketable oil, against a backdrop of sharply-depleted revenues which reached $55 billion for the three countries in 1998, compared with $180 billion in 1980. At the best assessment, if oil prices remain bolstered at approximately $14 a barrel, the three countries predict that their income will increase to over $60 billion dollars in 1999, compared to $55 billion in 1998, an improvement which should alleviate the deficit in their budgets, estimated at $11 billion in the current year, provided they succeed in keeping their expenditures at low levels.
But the situation is still precarious, depending not only on production, but also on the level of demand which could flag over the summer. Given that oil revenues are not expected to rise significantly in the near future, GCC members are coming to grips with the fact that in addition to setting realistic price targets for their oil production, they have to diversify their revenue sources through industry and export, expand their privatisation and fiscal reform programmes, restructure their economies and eliminate inefficient spending.
