Oil producers from the Middle East, North Africa, Afghanistan, and Pakistan (MENAP) could be facing a decline in export revenues due to the continuing US fiscal crisis as well as debt struggles in Europe, according to a report by the International Monetary Fund.
"Looking ahead, MENAP oil exporters face considerable downside risks," the report said.
The report said the most immediate would be the "direct and widespread impact" of a sharp global slowdown resulting from a lack of effective action to confront debt and fiscal issues in Europe and the US.
It also said, "A downturn in key emerging market trading partners, and further political unrest in the region, could also dampen growth prospects for MENAP oil exporters."
In the event of a sharp downturn, the report says, "Global oil demand would contract substantially, possibly leading to a sustained drop in oil prices."
The Arab Spring has had "indisputable" benefits, the report says, but it cautions that in 2011 the region has witnessed "unparalleled uncertainty and economic pressures" and that the recent worsening of the global economy "will likely add to these pressures."
Downside risks
The IMF report characterized current risks to the region's oil producers as being "akin" to those in 2008 when the global economy began its meltdown with the collapse of Lehman Bros.
But it said fiscal vulnerability has increased substantially compared with 2008 due to spending in the region as well as break-even oil prices that have risen steadily and are now approaching spot market prices.
"Fiscal vulnerability has increased as a consequence of substantial spending packages that have been implemented over the past 3 years," the report said.
"In particular, fiscal break-even oil prices—the price levels that ensure that fiscal accounts are in balance at the given level of spending—have been trending upward in most countries and are gradually approaching the actual spot market price," the report said.
The report also said that capital flows to oil exporters are far below their levels in 2008.
"While international issuance of bonds, loans, and equity by emerging economies increased by 37% in 2010 and by 17% during the first half of 2011—compared with the first half of 2010—for MENAP oil exporters issuance of securities rose by only 6% in 2010 and declined by 38% during the first half of 2011," the IMF report said.
Improved activity
Meanwhile, despite the potential downside risks, the IMF report noted that "economic activity in the MENAP oil-exporting countries, along with their fiscal and external situations, has clearly improved, underpinned by high energy prices."
It said, "Real GDP growth is expected to pick up in 2011—to almost 5%—then moderate to about 4% in 2012," noting that for GCC countries growth was projected "at more than 7%."
It said that several countries, especially Saudi Arabia, stepped up production temporarily in response to higher oil prices and shortfalls in production from Libya, adding that this had given many countries the opportunity to "increase spending" and provide support to the non-oil sector.
According to the report, the oil exporters' combined current account surplus, with the exception of Libya, is expected to increase to $334 billion in 2011 from $202 billion in 2010. The GCC countries' external account surplus is expected to rise to $279 billion from $163 billion.
Looking forward, the report noted that global production capacity is expected to grow by 6.8 million b/d by 2016, with about 2.6 million b/d or 40% of the capacity increase expected to come from countries outside of the Organization of the Petroleum Exporting Countries, mainly Brazil, Canada, and the US.
"The remainder of the capacity expansion [of 4.2 million b/d] is expected to come from OPEC producers, with the largest share coming from Iraq as oil facilities continue to come back online," it said.
However, the report noted that despite this "relatively high increase" in production capacity, "OPEC's spare capacity as a share of global oil demand is expected to decline somewhat over the medium term, as oil demand growth outpaces the growth in non-OPEC supply."
The report observed that some of the increased demand growth comes from the Middle East itself, where oil consumption has been "increasing rapidly" over the past decade.
"Particularly striking has been the region's oil consumption over the past two years: oil consumption growth in the Middle East easily outpaced that of other regions in 2009 and was basically at par with Asia's consumption growth," the report said.
Thus, while the MENA region will remain a key player on the supply side of both oil and gas markets, the IMF report said that its "rapid increase in domestic energy consumption may subtract from the region's export potential."
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