As we’ve pointed out before, one reason for the upheavals in North Africa and the Middle East in recent years is fiscal shortfalls. Apart from a few countries like Saudi Arabia and Qatar, an oil price hovering around the $100 mark isn’t high enough for many oil-producing governments to cover their outgoings. Brent crude dipped to a 12-month low of $101 a barrel earlier this week, as investor anxieties over Iraq and Ukraine eased while output from Libya started to improve.
Part of the problem is that the marginal cost of production has been rising – at least from conventional oil and gas sources. In North America cost structures vary, but burgeoning local production has rapidly pumped surplus crude into world markets. It has undermined demand for imports from US refineries, further eroding the ability of OPEC to stimulate prices artificially by constricting supply. The US glut also leaves OPEC with reduced headroom if members of the cartel should wish to boost output to cover their budget shortfalls by scaling up production.
OPEC ministers have voiced their confidence in the capacity of Saudi Arabia, Kuwait and the United Arab Emirates to trim supply informally if necessary. Maybe so; the cartel still accounts for about a third of the 92m barrels of oil used around the world every day. But the claim could eventually seem at odds with the gathering imbalance between supply and demand in a world in which the US is increasingly calling the shots. Paradoxically, perhaps the most important lever held by the oil-producing nations is the security risk faced by the US if their government finances collapse.
