Sunday , November 19 2017

Lower oil prices, incomes, more borrowings

This is the reality of the situation in all oil producing countries irrespective of how high or low their oil production rate is.

Following the OPEC decision in November 2014 to let oil production cut loose and allow every member to freely produce, the oil prices began to decline, reaching a bottom level of $30 per barrel.

Because of this, the oil organization lost more than $700 billion of income from its peak of $1.2 trillion. Saudi Arabia alone was generating income not more than $360 billion, while Kuwait was generating $100 billion annually along with other oil producing countries based on their maximum capacity of oil production.

Today, with the oil prices below $50 per barrel, all oil producers are losing incomes, revenues and foreign exchange, and are either borrowing from international finance houses and banks, withdrawing from their reserves or cashing their assets.

So far, about $50 billion has been withdrawn from sovereign wealth funds but more will be withdrawn, especially with the oil prices lesser than $48 per barrel.

This certainly means more borrowing and lesser financial indication ratings.

Borrowing will eventually lead to more difficulties as the oil prices sink further.

There are some countries that are more hurt than others and have lost more than 50 percent of their annual income. For example, Venezuela’s income decreased from more than $95 billion to $42 billion by the end of last year.

Iran’s income also fell from $102 billion to $41 billion by end of 2016 and that of Iraq reduced from $94 billion to $44 billion in the same period.

As a result, most oil producing countries are facing internal difficulties due to lower incomes. This led to reduction in domestic trading and lower property value.

In Kuwait, it is down by more than 30 percent while there is weak trading in the stock markets in most nations.

This will continue as long as the dependence on only one source of income continues without any other sources that can step up and help the annual budget by reducing the budget deficit.

This leads to one conclusion — selling oil assets of any form is not a good idea. A reasonable price cannot be expected when the oil prices at such a low level. This is certainly bad news and will be so for years to come.

Alternative sources of income besides oil represent the best solution currently, but none of us are taking any action in that regard.

email: naftikuwaiti@yahoo.com

By Kamel Al-Harami

Independent Oil Analyst

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