Tuesday, December 2, 2014

Dropping Oil Prices And Iraq’s Budget Woes


The sudden decline in world petroleum prices is proving a daunting challenge for Iraq. The country was never able to pass the 2014 budget due to the political maneuverings of Prime Minister Nouri al-Maliki before the national elections and then due to all the time it took to put together Premier Haider Abadi’s new government. Now with oil prices collapsing Baghdad has decided to draw up a new draft budget leading to another delay.

Iraq is one of the most oil dependent countries in the world, so when prices recently collapsed the country was put into a bind. In October for example, the Oil Ministry exported an average of 2.432 million barrels a day, which was just around the yearly average of 2.472 million, but down from September’s 2.542. The problem was prices dropped from $102.27 per barrel in July to $97.44 in August, $90.76 in September and then $81.12 in October. That meant in that last month the nation earned $6.12 billion, the lowest since February 2011’s $6.064 billion. It also brought down 2014’s average to $98.13 per barrel the first time it has been below $100 for several years.

Iraq Oil Exports And Profits 2011-2014
Month
Avg.
Exports
(Mil/
Bar/
Day)
Avg. Price Per Barrel
Revenue (Bill)
Jan. 11
2.16
$90.78
$6.082
Feb.
2.20
$98.44
$6.064
Mar.
2.15
$107.13
$7.167
Apr.
2.14
$114.26
$7.342
May
2.22
$108
$7.47
Jun.
2.27
$105.17
$7.173
Jul.
2.16
$108.79
$7.311
Aug.
2.18
$104.91
$7.124
Sep.
2.10
$104.89
$6.619
Oct.
2.08
$104.04
$6.742
Nov.
2.13
$106.59
$6.833
Dec.
2.14
$106.18
$7.061
2011 Avg.
2.16
$105.00
$6.913
Jan. 12
2.10
$109.08
$7.123
Feb.
2.01
$112.92
$6.595
Mar.
2.31
$117.99
$8.472
Apr.
2.50
$116.79
$8.795
May
2.45
$103.03
$8
Jun.
2.40
$90.09
$6.453
Jul.
2.51
$97.14
$7.577
Aug.
2.56
$106.22
$8.445
Sep.
2.59
$107.59
$8.371
Oct.
2.62
$105.51
$8.578
Nov.
2.62
$104.32
$8.200
Dec.
2.34
$103.72
$7.551
2012
Avg.
2.41
$106.20
$7.846
Jan. 13
2.35
$104.92
$7.672
Feb.
2.53
$107.66
$7.644
Mar.
2.41
$103.76
$7.772
Apr.
2.62
$98.70
$7.764
May
2.48
$97.23
$7.477
Jun.
2.32
$97.40
$6.799
Jul.
2.32
$101.00
$7.272
Aug.
2.57
$104.45
$8.356
Sep.
2.07
$104.87
$6.511
Oct.
2.25
$102.57
$7.160
Nov.
2.381
$102.57
$7.324
Dec.
2.341
$102.89
$7.470
2013 Avg.
2.386
$102.33
$7.435
Jan. 14
2.228
$102.37
$7.074
Feb
2.799
$102.05
$8.001
Mar
2.396
$101.03
$7.507
Apr
2.509
$100.69
$7.582
May
2.582
$100.69
$8.077
Jun
2.423
$102.96
$7.470
Jul
2.442
$102.27
$7.742
Aug
2.375
$97.44
$7.172
Sep
2.542
$90.76
$6.916
Oct
2.432
$81.12
$6.120
2014 Avg.
2.472
$98.13
$7.373

This has thrown the whole budget drafting process into chaos. To begin with the government was facing a huge deficit that could be as high as $65 billion. That meant the cabinet and parliament had to drastically cut spending, which had ballooned in recent years, as well as find an appropriate oil price to base the 2015 budget upon. The latter has been drastically revised in just the last few days. On November 27 Oil Minister Adel Abdul Mahdi said that the government would use $80 per barrel. Two days later the cabinet was thinking of anywhere from $64-$70 a barrel, while Finance Minister Hoshyar Zebari said that the total budget would be around $100 billion. Finally, on November 30 Premier Abadi let it be known that with falling oil prices the cabinet would have to draw up an entire new draft budget. The entire process has been plagued by problems from the beginning. Maliki stopped the 2014 budget from being passed so that he could use it against his opponents in that year’s election. Then it took several months for the new government to be formed. It quickly became apparent that the 2014 budget had to be scrapped and attention paid to 2015 instead. Things didn’t go any smoother however as parliament continually said they would bring a draft bill to the table, only to postpone it to another time. Then oil prices collapsed, and things had to start all over again.

The last several years Iraq has benefited from high petroleum prices, but that has now come to an end. Oil production has climbed slowly, and has even gone up this year despite the loss of the Kirkuk pipeline to the insurgency, while prices stayed above $100 per barrel for three years. As a result, Baghdad has passed larger and larger budgets each year. Now it has to deal with austerity as Maliki used up much of the country’s reserves to deal with the security crisis and oil prices are collapsing. That has thrown the entire drafting process out of whack resulting in delay after delay after delay. It’s unclear when a budget will actually be presented to parliament. That actually makes the current situation in line with previous budgets that have regularly been passed late. The questions now are when it becomes a reality will it be based upon realistic predictions about the country’s revenue or will it lead to a huge new deficit as many predict. If handled incorrectly this could create to a brand new foreign debt, which was largely taken care of after 2003.

SOURCES

Al Mada, “The new budget: 35.7 trillion for the army .. not all functions appreciated Minister,” 11/29/14

Ministry of Oil, “Iraq Crude Oil Exports – October 2014,” 10/25/14

New Sabah, “$ 6 billion in oil revenues last October,” 11/2/14

Radio Free Europe/Radio Liberty, “Iraqi PM Says Low Oil Prices Ruined 2015 Budget,” 11/30/14

Al Rayy, “Cabinet re-pricing of oil in the budget to $ 64 or less to cover the deficit,” 11/29/14

Reuters, “UPDATE 1-Iraq expects 2015 budget based on $80 per barrel oil price – minister,” 11/27/14

Shafaq News, “Parliament agrees to cancel 2014 budget and transfers employment grades and salar scale for 2015,” 11/5/14

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