The recent plunge in oil prices threatens to trigger unexpected financial headaches for top producing nations, especially Iran and Venezuela.
No major oil producer is in immediate danger of slipping into the red. But if the decline in oil prices — they're down more than 50% since July — isn't reversed, several could soon confront politically problematic belt-tightening. "The world has changed in the last month or so," says Mohsin Khan, the International Monetary Fund's director for the Middle East and Central Asia.
Today, the IMF is scheduled to release a new regional economic forecast, which concludes that free-spending Iran needs average annual oil prices to remain above $90 a barrel to avoid a budget deficit, and to remain above $75 a barrel to cover its import bill. Last week, oil — which peaked in July at $147 a barrel — traded below $70.
On Monday, crude oil bounced higher, trading above $73 a barrel.
The oil producers' plight is another sign that the global economic slowdown could become self-reinforcing. As their oil revenue falls, producing nations will cut back or delay new infrastructure projects and reduce purchases of goods made abroad. "They're going to have to re-evaluate their spending plans," Khan says.
Most Middle East oil exporters, including Saudi Arabia and the United Arab Emirates, don't have to worry unless prices drop much further. The Saudi budget remains in balance until oil dips below $50 a barrel. Algeria needs $56 oil, Kuwait, $33, and the UAE, $23 a barrel, the IMF says.
But under populist President Mahmoud Ahmadinejad, Iran's government spending has jumped 89.6% in the past three years, with the budget for big-ticket capital projects more than doubling in that period. Cutbacks could come when next June's presidential elections are past. "With the fall in oil prices, we may be hitting very hard times," says Heydar Pourian, editor of Iran Economics magazine in Tehran.
Venezuela, Nigeria and Russia also could be vulnerable, says David Kirsch of PFC Energy. If oil prices stay low or fall further, any country that runs a budget deficit would need to cut spending or raise taxes to balance its budget books. Countries that run a current account deficit would need to borrow in tight global credit markets to finance that gap or slash imports.
Oil's sudden fall is being driven by the slowdown in global demand caused by the financial crisis. Alarmed, the Organization of Petroleum Exporting Countries has called an emergency summit for Friday to consider output cuts. "They're not just going to roll over and let oil prices go to $20 a barrel," Kirsch says.