Oil prices have fallen dramatically in 2020, with dire consequences for some countries. The twin shocks of the novel coronavirus and a Russian-Saudi price war drove Brent crude to a low of about $25 a barrel in late March. Since then, prices recovered somewhat on rumors of an OPEC-plus production deal, but the outlook for oil prices remains low. Even if producers cut back significantly, oil prices are unlikely to return to $70 a barrel, as they were in January.
For some countries, an extended period of low prices could be crippling. Many oil exporters depend on oil sales for government revenue and their current account balance. But the pain will go beyond the headline oil states of Saudi Arabia, Russia and the United States.
Our research suggests that while most oil exporters now face an economic shortfall, it is the African oil exporters that are least capable of cushioning the economic shock. Figuring out which countries will suffer the most from low oil prices requires looking not only at the economics of oil production, but also the political consequences.
Here are three important questions:
1. Which oil fields are still profitable?
The first thing oil producers want to know when prices fall is which oil fields are still profitable. Profitability between oil fields varies a lot, depending on geology, local infrastructure and political risks.
Some fields, like those in Saudi Arabia, are profitable at a price as low as $10 per barrel; others, like U.S. shale producers, estimate a profit threshold of $40 per barrel.
Production costs consist of two basic components: the fixed cost associated with exploration and developing the oil field (e.g., building infrastructure) and the operational cost of actually pumping the oil.
In the short term, oil producers will keep pumping so long as they can cover their operational costs, even if they are losing money overall. In the longer term, if prices remain low, they will stop investing in developing oil fields.
As existing oil wells run dry, production will decline. Historically, that has created the conditions for the boom-and-bust cycle in the oil industry; low oil prices eventually reduce supply, so prices rise, creating investment in supply, until prices crash again.
2. How oil-dependent is the government budget?
The second factor that matters is an oil-exporting government’s budget. If the country is spending a lot on its public sector, it needs more revenue to balance the budget. That need for revenue implies the need for a higher oil price.
According to the International Monetary Fund, fiscal break-even prices vary considerably, from Russia at roughly $42 per barrel to Iran at roughly $195 per barrel. Saudi Arabia’s fiscal break-even point is $84, meaning that at any oil price lower than $83 per barrel, the country will run a fiscal deficit, unless it makes policy changes.
But governments also have ways to manage their budgets, including cutting expenditures or raising other revenue. So a low oil price does not necessarily imply a country will soon see a specific deficit amount. Instead, it means that oil-dependent governments will face hard choices, like unpopular spending cuts, raising taxes or borrowing.
Current budgets in Iran, Algeria and Saudi Arabia are all quite threatened by the current era of low prices.
3. Who has a financial cushion?
And there is a third factor to consider: the country’s financial reserves. All countries hold financial reserves of some form, whether it is gold or foreign currencies. They can use these reserves to cushion the economic pain of a sudden downturn, like an oil price shock.
This figure shows the per-capita financial reserves of each major oil producer, based on data from the IMF.
These data on financial reserves suggest that sub-Saharan African countries have the least cushion from low oil prices. Other countries, like Saudi Arabia, might face as large a budget shortfall — but have larger financial reserves. They can withstand low prices for years without making tough economic decisions. Not so, in much of Africa, as well as Ecuador and East Timor.
Economic hardship sometimes means social unrest
So how will newly low prices shake out for the world’s oil-producing countries?
All else being equal, countries suffering economic hard times are more likely to experience riots, protests and political instability. Yet a sudden dose of economic hardship is only one of many factors that will matter for politics.
Research on political instability by Jack Goldstone, Jay Ulfelder and others suggests that political conditions matter as much or more than economic circumstances. Further research by Erica Chenoweth and Ulfelder highlights demographic conditions (like a youth bulge), the extent of civil liberties and political institutions as key factors shaping what happens next.
The fuel subsidies that many governments have long provided are likely to prove a crucial factor for social unrest. Low global oil prices might force oil-exporting regimes to raise domestic prices on gasoline or diesel — which are often heavily government-subsidized. This makes these fuels more expensive for everyday consumers, who might revolt. Precisely because of that risk of revolt, subsidy reform campaigns often fail, research shows.
There is a potential silver lining, however. Low oil prices might mean fewer conflicts between nations, over time. Researchers (including the two authors of this article) debate the links between oil resources and war.
Yet at least some research suggests that oil wealth can make countries with aggressive intentions more likely to act on those intentions. That kind of “petro-aggression” can lead oil-rich nations into more military conflicts than typical countries. In the long run, lower oil prices might reduce that kind of conflict.
Jeff D. Colgan is the Richard Holbrooke Associate Professor at Brown University. He tweets at @JeffDColgan.
Emily Meierding is an assistant professor at the Naval Postgraduate School. She tweets at @EMeierding.