OPEC States: $100 Oil Wanted by All, Needed by Some

The price OPEC needs to defend in order to assure macroeconomic stability for its member countries continues to steadily increase. Long gone are the days of price “hawks” and “doves.” Rather, all states face increasing financial burdens placed on their oil and gas sectors, to say nothing of the sharp increase in inflation hurting their non-oil sectors, which necessitates active market management in order to realize higher oil prices. Though the internal pressures of the countries differ, collectively this financial push has led intra-OPEC dynamics to focus on achieving the common goal of securing higher revenues.

OPEC External Account Price Thresholds

Since 2000, the threshold price has increased for every OPEC member, with the exception of Qatar, whose gas sales helped provide an alternative source of funds to finance imports. Venezuela and Nigeria top the charts, requiring $94/barrel and $68/barrel, respectively, in 2008. These increases reflect higher inflation, erosion of the US dollar, greater domestic consumption and, most directly, increased government spending.

Given Saudi Arabia’s position in OPEC, $55/barrel in 2008 is the “line in the sand” that OPEC must defend. Luckily for Iran, it has the same threshold as the Saudis. Nonetheless, in the Iranian case, weak private-sector investment has depressed the imports figure even though imports of gasoline have continued to swell the import bill. With oil at $100/barrel, the Saudis and the Iranians have significant head room to accumulate surpluses. In the Iranian case, this may be obviated if production declines even though prices remain high.

In sharp contrast, Venezuelan fiscal profligacy and its huge off-budget populist programs (some of which are not reflected in this threshold number because they only result in domestic demand and not imports), has left it very room for error. For 2008, Venezuela will require a WTI price of $94/barrel to meet its import needs. This factor, as well as a total lack of domestic capacity to deal with the critical oil and gas issues, are likely drivers behind the government’s February announcement of a new $4 billion agreement with Italy’s Eni to develop an extra-heavy project in partnership with PDVSA, reflecting a new willingness to deal with foreign oil companies.

In Nigeria, the threshold price has jumped to $71/barrel. Lost export revenues attributable to shut-in production, oil theft and project delays due to insecurity, along with ever increasing demands for spending and revenue distribution, are further pressures on the Nigerian government’s financial situation.

Even those Gulf Arab states with relatively small populations are seeing their price thresholds rise. The UAE, historically the state with the lowest financial burden on its oil sector, needs a WTI price threshold of $42/barrel, an increase from only $5/barrel in 2000. This rise is due to hyper levels of domestic investment which has sucked in imports.

The low threshold for Algeria is attributable mainly to low fiscal spending relative to others in the MENA region, as well as to the impact of natural gas exports which are an alternative source of financing. Although the government has embarked on a major capital investment program in 2005, Algeria will easily be able to sustain its public investment campaign. Its major challenge is not a lack of liquidity, but rather a primitive economy (absorptive capacity), poor infrastructure and a low skill base.

Key Conclusions

OPEC needs to defend higher oil prices in order to assure macroeconomic stability for its member countries.

Increased domestic consumption and spending on state capacity building programs make some countries even more acutely aware of downside price risks in global markets.

Intra-OPEC dynamics are focusing on the tactics of best managing markets, with a common goal of securing higher revenues.

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Fareed Mohamedi is a Partner and Head of the Markets and Country Strategies practice, which houses PFC Energy's expertise in country risk and petroleum sector policy. For further information on this article contact Enews_fmohamedi@pfcenergy.com.