Mariana Bazo / Reuters Empty oil barrels that are for sale are stacked outside a hardware store in Villa El Salvador on the outskirts of Lima, February 12, 2015.

Beyond Break-Even Prices

OPEC and the Geopolitics of Cheap Gas

Friday’s meeting of the Organization of Oil Producing Countries (OPEC) marks the one-year anniversary of the group’s now infamous decision to sit still as oil prices collapsed. The plunge, which took crude prices from a June 2014 high of $112 per barrel to an August 2015 low of $47 per barrel, set off wide speculation about which countries might face political instability or geopolitical pressure as their oil revenues ran dry. Central to much of that discussion was the concept of a break-even oil price—the price of oil at which an exporting country would be able to balance its budget. Breach the break even, the theory went, and all hell might break loose; governments of oil exporting countries would be forced to slash spending, crank up taxes, and even default on their debt, all sharply raising the risk of social and political unrest.

A year later, little of this has come to pass. Oil exporters no doubt face large new challenges. But even as oil prices have remained far below the break-even points of many oil-exporting countries, oil-dependent regimes from Saudi Arabia to Russia have weathered the storm fairly well. Why were analysts so wrong?

My Council on Foreign Relations colleague Blake Clayton and I recently concluded a study on the use and abuse of fiscal break-even prices in geopolitical analysis. Our findings help explain why the geopolitical results of the oil price plunge have so wildly defied expectations.

Police officers stand guard on the rooftop of Vienna's OPEC headquarters before the start of meeting of OPEC oil ministers, September 20, 2005.

Police officers stand guard on the rooftop of Vienna's OPEC headquarters before the start of meeting of OPEC oil ministers, September 20, 2005.

Perhaps the biggest blind spot in break-even analysis is countries’ fiscal reserves—the cash or other savings stored up in good times that provide a buffer in leaner ones. Those reserves are a significant factor in the economic health of wealthier Gulf countries, particularly Saudi Arabia. For 2015, the International Monetary Fund estimated that the kingdom’s fiscal-even oil price was $106.50 per barrel. With oil now less than half that, Saudi Arabia is running a deficit. But the country also has approximately $647 billion in the bank. In fact, it could run its current deficit for roughly four more years and still be in the black—and, even then, might be able to borrow money to sustain deficits even longer. That is just what Riyadh did that after the 1986 oil price crash, relying on savings and international borrowing to finance deficits in 16 out of 20 years between 1986 and 2005.

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