Tumbling oil prices might be a double-edged sword for Jordan.
By Yusuf Mansur
Jordan, which imports 97 percent of its energy, and the wider Middle East are bound to feel the impact of falling oil prices soon. The price of crude oil in mid October reached $84.54 per barrel for Brent, and $82.75 per barrel for US crude, its lowest price since 2012. The price is expected to fall in the short to medium-term to as low as$80 per barrel.
Before gauging the impact this is having on Middle Eastern economies, it’s worth addressing why oil prices are falling. Cited reasons for the fall include both supply and demand factors, which seem to be conspiring to lower prices.
In terms of supply, the United States has been increasing its supply of oil since 2005 (a period when it imported 60 percent of its oil needs). It’s achieved this through hydraulic fracking or fracturing, a process for drilling oil and gas from rock formations far underground. It’s expected to go into levels of production of 13 million barrels per day by 2019which will make it the world’s largest producer of oil, surpassing Russia and Saudi Arabia.Moreover, political turmoil in the Arab world seems to have little in terms of reducing the supply. Iraq’s oil supply is growing despite the presence of the Islamic State or ISIS, which itself is producing oil from the Syrian and Iraqi territories it has captured. Libyan oil production rose from the 240,000 barrels per day to 810,000 barrels per day last month. All of this while OPEC leader Saudi Arabia decided not to cut production in order to increase the price, or at least stop its downfall. Instead it offered a discount of $1 per barrel to Asia and $0.4 to the United States, thus signaling that it’s increasing its supply.
On the demand side, the EU and Chinese markets haven’t been doing as well as earlier predicted. Consequently, their demand for oil is lower than anticipated.
But while these major global economies are showing signs of slowing down, the US economy is continuing its recovery this year, and, interestingly, the one factor missed by most pundits has been the strength of the US dollar. The US economy is expected to grow at 4.6 percent this year, the highest growth rate in 30 months. Furthermore, unemployment is down from 7.3 percent a year ago to 5.9 percent this year. Based on the strength of the US economy, the dollar has gained against major currencies such as the yen and euro. As the US dollar (and with it the Jordanian Dinardue to the peg of 1994) becomes more expensive relative to other currencies, oil prices fall. The reverse is also true. Therefore, the continued strength of the US dollar should continue to drive oil prices downward.
Another factor that recently surfaced in an article by Thomas Friedman in the New York Times is to do with politics. Friedman claimed the United States and Saudi Arabia are conspiring to hurt the economies of Russia and Iran by increasing their production levels. As oil prices continue to fall, and provided they do so for a long period of time, both Russia and Iran will feel the brunt of falling revenues and change their political stances on the Ukraine and Syria. This reasoning may have some merit.
In the midst of all this, Jordan finds itself in an enviable position for once. The fall in oil prices translates to a fall in the energy bill, and thus less debt as the government is given a chance to lower its power subsidy. At $80 per barrel, Jordan stands to save $27 per barrel, or $4 million per day, which translates to $1.5 billion a year.
If the government keeps prices as they are, which I think it will do and may even still increase electricity prices by 15 percent early next year, then it will in theory result in a budget surplus, while the economy continues to hobble along. Short of an absolute need to change direction, the government will not be swayed from raising energy prices or raising taxes and fees.
On the other hand, though, aid from the GCC may decrease as budgets there witness downsizing as oil prices continue to fall. Gulf countries’ budget reservation or breakeven prices (around $80 for Saudi Arabia, $90 for UAE, and $70 for Kuwait) may easily be reached by next year. Should prices reach these levels, Jordan shouldn’t expect to get the same amount of aid from these countries as they hit their own budget crunches.
Jordan should therefore quickly spend the GCC funds it already has and ask for the remainder. Unfortunately, the government appears unwilling or unable to do so. One last strategic factor may come into play: Jordan’s active role in the war on ISIS may trigger greater aid inflows, which would save the day. Alas, as ever, Jordan must look to international financial assistance for survival.