Looking back to 2015, we can deem the oil price decline as one of the most significant changes in the global economic landscape. The commodity’s evolution prompted changes in both private sector investments as well as in government spending.
Changes were due to two key factors that interfered with the supply on one hand – the international supply glut, and with the demand on the other hand – key countries registered a demand decrease, especially China which was hit by an economic slowdown. The attention was shifted towards the GCC (Gulf Cooperation Council), these countries being almost entirely dependent on oil revenues.
Since June 2014, oil prices fell from around $115 per barrel to around $40 per barrel at the end of 2015. Analyzing the chart below, we can see that June’s reading this year has the highest closing price at 60.3, but there is a steep fall in the July-August period, when prices hit the $40 per barrel psychological threshold, managing to break under in December.
The problem that lies ahead now is that all GCC countries cannot balance their budget if the prices will not hike up. According to latest analysis released by the IMF (International Monetary Fund), UAE’s (United Arab Emirates) break-even price for oil is $73.60 per barrel, Bahrain’s is $127.10, Oman is at $102.6, Saudi Arabia stands to gain over $87.20, Qatar $60 per barrel and Kuwait closes with zero gain at $49.40.
The supply glut is mainly a result of a big number of suppliers, in the United States alone the growth being quite high. This boom although being the major factor, oil prices also went down due to the nuclear agreement that Iran stroke with the world’s powers, which brought the probability of Teheran’s sanctions being abolished – increasing the oil output in an actual or potential scenario.
In this wild competitive jungle, OPEC (Organization of Petroleum Exporting Countries) decided, at its yearly meeting, that in order to protect their share of the market, the output will be maintain at 30 million barrels per day, in spite of the supply glut. In the light of this decision, prices fell even more and oil revenues dropped accordingly.
S&P’s (Standard and Poor’s) reviewed Saudi Arabia’s rating downward, from AA-/A-1+ to A+/A-1 in October. In order to cover its loss, Saudi Arabia also issued bond this year but the GCC countries do have substantial foreign reserves, meaning that they can survive the oil prices decline. However, UAE Energy Minister Al Mazroui stated that they (the GCC) are expecting an upward correction in 2016, uncertain though of the level of this correction.
Low prices in oil also hit the US energy companies, which have seek mergers in order to survive, while others filed for bankruptcy.
Russia was also hit hard, losing approximately $2 billion for every $1 fall in the oil price.
Looking from a different perspective, the oil price drop didn’t seem such a “bad” outcome: it prompted change in how countries view their government spending, changes that are bound to develop in the year ahead.
