The Coming Petroleum Revenues Crisis in the MENA By Anthony H. Cordesman March 11, 2016 Please provide comments to acordesman@gmail.com Cover: Lt. Steve Gozzo, U.S. Navy
Cordesman: Coming Petroleum Revenues Crisis 3/11/16 2 The world is so focused on ISIS or Daesh and on the crises in Iraq, Libya, Syria, and Yemen that it is easy to forget that the political upheavals in the MENA region that began in 2011, and have become the Arab Winter, arose from other causes. Violent Islamic extremism, secular and ethnic tensions, and abuse by authoritarian regimes now drive the civil conflicts in the region. A decade before 2011, however, sources like the Arab Human Development Reports began to warn that growing population pressure, failed economic development, a lack of employment and meaningful careers for one of the youngest parts of the world s population, and failed and corrupt governance had created a mix of forces that were potentially explosive. The choice was reform or crisis. None of these issues were addressed by 2011, and war and crisis have since made them worse in most of the MENA region. Only a few of the wealthiest petroleum monarchies have made serious efforts to deal with these underlying causes, and their efforts have at best had moderate success. They also have been driven far more by a bubble in oil prices and petroleum export revenues than by reform. Moreover, the uncertain stability that many of the other countries in the MENA region have achieved is due more to outside aid by the petroleum states than to any success of their own. The Petroleum Bubble Has Burst The petroleum bubble, however, has burst. If one looks at oil prices, they have crashed to levels roughly a third of the peaks that helped fund some level of stability and have dropped 40% in less than a year. These price trends are shown in Figure One, and in the U.S. Energy Information Administration s (EIA) spring 2015 estimate of their impact on OPEC oil revenues, as shown in Figure Two. The EIA has not updated its past estimate, but things have gotten much worse over the course of 2015 and early 2016. No nation dependent on petroleum revenues can weather price drops from over $100 a barrel to between $30 and $40 a barrel without facing a crisis one that borrowing and buying time in terms of national budgets and debt can t solve. Fiscal measures of this kind don t create jobs, pay for marriage and housing, or create careers. They don t compensate for failed governance, corruption, or repression. Buying time from bankers doesn t buy time from a nation s people. While MENA states can always hope for recovery, hope is no substitute for reality and reform.
Cordesman: Coming Petroleum Revenues Crisis 3/11/16 3 The Rise and Fall: 2007-2016 Figure One: Bursting the Oil Revenue Bubble The Current Crash: 2014-March 2016 Source: NASDAQ, http://www.nasdaq.com/markets/crude-oil.aspx?timeframe=7y
Cordesman: Coming Petroleum Revenues Crisis 3/11/16 4 Figure Two: An Early Estimate of the Crisis in Petroleum Revenues: The Warnings as of March 2015 Source: EIA, OPEC (excluding Iran) net oil export revenues, https://www.eia.gov/beta/international/regions-topics.cfm?regiontopicid=opec, March 31, 2015; and Oil and Gas Journal, http://www.ogj.com/articles/2015/04/eia-opec-s-net-oil-export-revenues-declined-11- in-2014.html.
Cordesman: Coming Petroleum Revenues Crisis 3/11/16 5 The Size of the Crisis There is no way to estimate how bad things will be for any given country. Figure Three, however, makes a guesstimate of the drop in national oil revenues based on data from the EIA, and while it is labeled as a worst-case, that could be an act of optimism. It warns that much of the MENA region faces a near term crisis as do all major petroleum exporters around the world. Revenues in countries whose budgets are 45-80% dependent on petroleum revenues will now have to deal with revenues some 30% to 40% of what they were in 2013-2014. Figure Three: Real World Limits of OPEC Oil Wealth (Less Iran): A Crude Worst Case (?) Guesstimate (Assumes EIA share of $380 billion in 2015 and 35% of 2013 revenues in 2016) Source: Based on 2013-2015 data in EIA, http://www.eia.gov/beta/international/regionstopics.cfm?regiontopicid=opec, 21.5.15. The Human Impact Challenge A few countries on the list in Figure Three Saudi Arabia and the UAE have taken aggressive steps to deal with the potential fiscal impacts, and Qatar is rich enough to ride out almost any near term price crash. The problem is, however, that human impacts are very different from fiscal impacts. The same problems that drove the upheavals in 2011
Cordesman: Coming Petroleum Revenues Crisis 3/11/16 6 remain in place even in the most stable states, and are far worse in most particularly the conflict states like Libya, Iraq, Syria, and Yemen. Figure Four puts the human impact into perspective. It shows the massive levels of population increase that have taken place in selected countries and that are still to come with some estimates putting growth between 2010 and 2050 at over 70% in spite of much lower birth rates. Figure Four: MENA Demographic Pressure: 1950-2050 (In Millions)
Cordesman: Coming Petroleum Revenues Crisis 3/11/16 7 Figure Five shows the sheer pressure in terms of youth seeking jobs and careers. The current reports from the World Bank, IMF, UN, and Transparency International make it brutally clear that governance, barriers to business development, and progress in human development indicators has fallen far short of what is needed. Figure Five: The Youth Bulge (Percentage of Native Population Below 25) Source: Central Intelligence Agency, World Factbook, https://www.cia.gov/library/publications/the-worldfactbook/ Iraq as a Test Case Iraq makes a brutal test case. The central government and Kurdish zone are already effectively bankrupt, and Iraq like Libya, Syria, and Yemen has long been rated as one of the most corrupt and incompetent governments in the world. Figure Six shows the
Cordesman: Coming Petroleum Revenues Crisis 3/11/16 8 World Bank rankings over time. While Prime Minister Abadi has sought real reforms, other Iraqi politicians have blocked him, and no such reform has affected the Kurdish zone. Figure Six: Iraq: Decades of Miserable Misgovernment Source: World Bank, World Wide Governance Indicators, Syria: http://info.worldbank.org/governance/wgi/index.aspx#reports.
Cordesman: Coming Petroleum Revenues Crisis 3/11/16 9 Figure Seven shows a current EIA estimate of the crisis in Iraqi petroleum revenues few countries face more serious problems. Iraq has never been a wealthy oil state either in terms of meeting government needs or the needs of its population since the Iran-Iraq War in 1980-1988. Figure Seven: The Crisis in Iraq Petroleum Revenues
Cordesman: Coming Petroleum Revenues Crisis 3/11/16 10 Source: EIA, Iraq was second-leading contributor to global oil supply growth during 2014, February 9, 2015, https://www.eia.gov/todayinenergy/detail.cfm?id=19911 and Iraq was second-leading contributor to global oil supply growth during 2014, February 26, 2016, https://www.eia.gov/todayinenergy/detail.cfm?id=19911. A recent article by Loveday Norris in the Washington Post notes that, Iraq has predicted a budget deficit of about $25 billion this year, but that was based on an oil price of $45 a barrel. The shortfall could be double that To cope in the short term, Iraq is dipping into its foreign reserves, saying it expects them to fall to about $43 billion this year from $59 billion in October Abadi has expressed confidence that the government can overcome the crisis, but some are more pessimistic. They are burning through their reserves faster than anticipated now, which could lead to a point where it would be difficult to continue imports and run a modern state economy, a Western official said, speaking on the condition of anonymity because he was not authorized to comment publicly about the issue. Iraq is seeking more financing from the International Monetary Fund after receiving a $1.24 billion emergency loan last year. The United States is offering a $2.7 billion loan for military spending, and Germany has lent the country just over 500 million euros ($550 million) for reconstruction. The government is also trying to issue bonds and treasury bills. But a bond issue last year was halted because of the high yields demanded by investors. (Loveday Norris, Iraq is broke. Add that to its list of worries, Washington Post, https://www.washingtonpost.com/world/middle_east/iraq-is-broke-add-that-to-its-list-ofworries/2016/03/04/2cf42594-d4af-11e5-a65b-587e721fb231_story.html.) More broadly, Iraq has long had one of the lowest per capita incomes in the Gulf region. Its government and state-owned enterprises are corrupt, mismanaged, overpriced and lack productivity. Its agriculture sector has been mismanaged by various governments for decades, has lacked capital investment, and there are far too many Iraqis working far too little land with increasing problems with water. Iraq is in a state of low-level sectarian and ethnic civil war. Far too many of Iraq s political leaders lead only in terms of corruption and factional self-interest. Iraq, however, is only one warning of what may be coming in the near future. Add Algeria, Iran, Libya, Syria, and Yemen to the list of petroleum exporters. Add virtually every other state to the list of MENA nations threatened with cuts in aid and expatriate income. Once again, civil war and ISIS/Daesh are only part of the rising crises in the region. Anthony H. Cordesman holds the Arleigh A. Burke Chair in Strategy at the Center for Strategic and International Studies (CSIS) in Washington, D.C. Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s). 2016 by the Center for Strategic and International Studies. All rights reserved.