Source: PFC Energy
The oil prices needed for OPEC members to ensure macroeconomic stability continue to rise, according to a recent report by PFC Energy. Driven by populist spending policies in some states, and investment in infrastructure projects and rising private consumption in others, both the actual price levels required as well as the capability to respond to fluctuations in prices vary greatly among OPEC members.
PFC Energy's report calculates the oil price needed by each OPEC member to ensure the country's macroeconomic stability, in order to estimate the financing burden placed on the oil sector. The current account threshold, or break-even, reflects the price per barrel -- given an individual country's volume of crude oil exports -- needed to cover the value of imported goods and services, adjusted for the value of non-oil exports. PFC Energy's threshold prices offer an indication of the risk of financial stress or crisis the OPEC members face.
"The wave of Arab protest movements is leading to higher price requirements, as populist spending measures by Middle Eastern OPEC members are added to already significant outlays for infrastructure projects. Saudi Arabia and the UAE are now seeing a rising share of total expenditures accounted for by higher government salaries, subsidies and housing allowances, and pay-offs to the religious establishment," said Fareed Mohamedi, Partner and Head of the Markets and Country Strategies group.
PFC Energy expects a continued strong consensus among OPEC on the need to maintain high oil prices. The distinction between price requirements of some GCC members of OPEC and the rest of the member countries is gradually blurring. There are now a larger number of states within the organization that need higher oil prices. This group still principally comprises the populist states such as Venezuela and Iran -- but Saudi Arabia and the UAE are moving toward this camp. Kuwait and Qatar are the key outliers that can more comfortably continue to manage on significantly lower oil prices (and would still be capable of accumulating foreign exchange reserves at a rapid pace even if prices were to fall well below the current level). Saudi Arabia's original "fair price" for oil reflected not only the Kingdom's needs, but those of all OPEC states (and even private industry requirements for development of new oil projects). These considerations will see a preference for minimum prices steadily creeping upward, particularly if demand regains strength. Prices below $90/b would likely now be sufficient to elicit joint OPEC action to implement production cuts.
PFC Energy, headquartered in Washington, DC, is a leading strategic advisory firm in global energy with main offices in Houston, Kuala Lumpur, Paris, Beijing, and Lausanne.