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Abu Dhabi, UAETuesday 18 December 2018

How GCC states’ break-even oil prices stack up

There are some straightforward reasons as to why the estimations can vary. For instance, historical numbers that are used to calculate break-even prices may differ.

The fiscal break-even price of oil is the price that balances an oil-exporting country’s budget.

Different institutions and assessors provide varying estimates of the BEP (break-even price), leading to confusion in the minds of many who track the metric.

The metric, at its core, is simple in terms of calculation. So why, then, the plethora of estimates?

There are some straightforward reasons as to why the estimations can vary. For instance, historical numbers that are used to calculate break-even prices may differ. Or, estimates can differ with respect to forecasts of oil production volumes, export volumes and the global oil prices. Also, differences in estimates with respect to future government spending or differences with respect to inclusion or exclusion of some revenue items can create variances.

Below are the break-even oil-price-per-barrel estimates for GCC countries this year, as calculated respectively by the IMF, the Institute of International Finance (IIF) and Deutsche Bank.

• Kuwait: $49.40 (IMF), $62.80 (IIF), $78.40 (Deutsche).

• Qatar: $60, $65.30, $76.80.

• UAE: $73.80, $73.60, $80.80.

• Saudi Arabia: $87.20, $109.40, $104.40.

• Oman: $102.60, $113.20, $110.00.

• Bahrain: $127.10, $130.20, $138.10.

BEP can be calculated using techniques such as taking a government’s expenditure plans for a given year plus an estimated level of production/exports, and then calculating the price level required to match the expenditure while taking into account other revenues, such as tax, from non-oil sources.

Also, there are more sophisticated and proprietary methods available such as those of the IMF or the IIF.

Without investment income, the UAE’s BEP would be higher by between 25 and 50 per cent. If investment income is considered as part of the non-oil revenues, then the BEP comes down to a large degree for both Kuwait and the UAE (see table below).

Broadening the general discussion to the GCC level, it is notable that oil-exporting countries have to keep a careful watch over their break-even prices. For instance, Oman and Bahrain, which have the highest break-even prices in the region, have been characterised as vulnerable to oil shocks by analysts. But overall, GCC governments are better placed to weather a sustained period of lower oil prices than most other exporters because of their robust reserve levels.

According to the IMF, Kuwait’s BEP for this year and next year is expected to be about US$49 a barrel (with investment income).

Our estimates show that for this year and next year, the values are $51.20 and $50.20 respectively. For 2020, we expect the value to rise to $54.10. However, estimates will differ with respect to how investment income is treated. The above table provides projections of the BEPs of Kuwait, Saudi Arabia and the UAE up till 2020, reflecting the usage or non-usage of investment income for the purpose of calculation.

BEPs tend to increase with time because of the cumulative effect of government expenditure increasing at a greater pace than non-oil revenues.

It is interesting to note that Kuwait’s BEP in 2020 compared to this year’s: the BEP with investment income is expected to rise 5 per cent, while the BEP without investment income is projected to rise 25 per cent. This indicates the reliance on investment income to compensate for the slower growth of non-oil income.

The addition or removal of sovereign wealth funds’ income plays a significant role in estimates of BEP, although much less so in the case of Saudi Arabia.

The metric of non-oil fiscal balance can be used to gauge the level of diversification. Analysis of the metric of non-oil fiscal balance reveals that growth of non-oil sectors is heavily dependent on government spending for Kuwait and Oman; while the opposite is true for the UAE and Qatar.

  

M R Raghu is the managing director of Marmore, a research house focusing on economies in the Middle East and North Africa.

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