Caspian Report - Issue: 07 - Spring 2014

Luay Al-Khatteeb
108
for $1 of revenue, several major oil
companies have turned their backs
on shale in favor of expanding their
operations in the “easy” oil fields of
the Middle East. Despite the risks involved,
Iraqi oil pumped up at $20 a
barrel seems like an attractive prospect,
as do sources in Libya and Iran
when politics and security permit.
Still, will dumping more “easy” oil on
the market lower prices to the point
where shale oil production grinds to
a halt
Given the slow world economic recovery
and unexpectedly low growth
rates in India and China, lower oil
prices would seem a certainty. With
growth in demand lagging behind expanding
supplies, can the U.S. petroleum
industry weather the resulting
price fluctuations as it becomes increasingly
dependent on high prices
to stay profitable
Despite the low cost of Middle East
oil production, only a few of the
region’s smaller states could cope
Given the slow world economic recovery and
unexpectedly low growth rates in India and
China, lower oil prices would seem a certainty.
with an extended price drop below
$100. Most need an oil price of $90
or greater to cover current government
spending, with the IMF forecasting
fiscal deficits in nearly all of
the region’s oil-exporters by 2015 in
the event of a major price drop. Even
at $100 per barrel, public spending
is expected to slow down in the region.
These countries have grown
dependent on their high oil rents,
spending huge sums on unrealistic
energy subsidies to domestic consumers
and failing to invest in future
generations. Even Iraq, despite
experiencing the region’s largest
spike in domestic production, is running
up an ever-mounting deficit as
government spending outstrips expanded
revenues. Last year’s budget
reached $119 billion, a whopping
six-fold increase on 2004 spending
levels, while the government is
expected to spend upwards of $150
billion this year. While oil production
in Iraq is at its highest level in
decades (3.5 million barrels a day
in February, with some 2.8 million
destined for export ), increased revenues
are entirely dependent on
high oil prices. Any drop in prices
means that Iraq’s deficit - perpetually
hovering at around 17% would
spiral out of control. Worse, operating
costs for Iraq’s oil industry are
rising faster than its oil income, leaving
fewer and fewer funds for capital
investment, desperately needed
for true economic development. A
sharp drop in prices threatens political
stability in much of the Middle
East while potentially undercutting
the growing petroleum industry in
the United States. Yet higher prices
are also a threat to world economic
stability. In 10 out of the 11 US recessions
since World War II, according
to a study by economist James Hamilton,
economic downturns were
preceded by oil price hikes. Above all,
excessive price fluctuations interfere
with consumer’s spending plans and
producer’s business strategies alike.
Currently, OPEC is attempting serve
its economic interests by regulating
the market with its combined 30
million barrels per day in produc-