“Two men enter, one man leaves, two men enter, one man leaves, two men enter…”

Mad Max: Beyond Thunderdome

November 27, oil consuming countries will celebrate the first anniversary of the Saudi decision to let market forces determine prices. This decision set crude prices on a downward path. Subsequently, to defend market share, the Saudis increased production, which exacerbated market oversupply and further pressured prices.

While the sharp decline in crude prices has saved crude consuming nations hundreds of billions of dollars, the loss in revenues has caused crude exporting countries intense economic and financial pain. Their suffering has led some to call for a change in strategy to “balance” the market and boost prices. Venezuela, an OPEC member, has even proposed an emergency summit meeting.

In practice, the call for a change is a call for Saudi Arabia and Russia, the two dominant global crude exporters, which each daily export over seven-plus mmbbls (including condensates and NGLs) and which each see the other as the key to any “balancing” moves, to bear the brunt of any production cuts.

Both, it would seem, have incentive to do so, as each has lost over $100 billion in crude revenues in 2015—and Russia bears the extra burden of U.S. and EU Ukraine-related economic and financial sanctions. Yet, while both publicly profess willingness to discuss market conditions, neither has shown any real inclination to reduce output—in fact, both countries seem committed to keeping their feet pressed to their crude output pedals. In the course of 2015, both have raised output and exports over 2014 levels—Saudi Arabia by ~500 and 550~ mbbls/day respectively and Russia by ~100 and ~150. The Saudis have repeatedly cut pricing to undercut competitors to maintain market share in the critical U.S. and China markets, while the Russian Finance Ministry recently backed away from a tax proposal which Russian crude producers said would reduce their output.

This apparent bravado notwithstanding, the two countries’ entry into the low-price Crudedome is ravaging their economies. Should crude prices decline from current levels, or even just stagnate, it is possible neither country will exit the CrudeDomeunder its own power.

IMF WEO Data: Recessions as far as the Eyes can See

Both Saudi Arabia and Russia paint positive portraits on current and future economic performance. At a conference in Moscow on October 14, President Putin said that Russia had reached if not passed the peak of its economic crisis and predicted economic growth in coming years. Arab News announced in the first paragraph of its report on Q2 Saudi economic performance that Q2 GDP grew 3.79 percent year-over-year, up from 2.3 percent growth in Q1.

Yet IMF October 2015 and April 2015 World Economic Outlook projections for the Russian and Saudi economies a paint pessimistic portrait, as the following three tables, forecasting GDP through 2020 in current prices/national currency, constant prices/national currency, and current prices/US$ show (all data in billions).

– In each of the data series, except the April and October ones, Russian current prices/national currency and the Saudi constant prices/national currency series, GDP declines from 2014 to 2015. (When adjusted for estimated inflation, however, the forecasts for Russian GDP current prices/national currency show GDP declining from 2014 levels—to 64,039 billion Rubles given inflation of 17.943 percent in the April series; in the October series, to 64,463 billion rubles, given inflation of 15.789 percent. The growth shown in the Saudi constant prices/national currency series results from the reduction in the deflator, which the Saudi National Statistical Office, Central Department of Statistics and Information uses to convert current national currency GDP into constant national currency. For example, decreasing the deflator from 115.073 to 94.234 in the October series and to 97.066 from 115.889 in the April series turns a decrease in GDP in current prices into an increase in GDP in constant prices).

– Between the April and the October forecasts in most of the data series, GDP deteriorates (blue font). Crude prices bear much of the responsibility: the April forecasts were based on $58.14 and $65.65 per barrel oil in 2015 and 2016 respectively, while the October projections are based $51.62 and $50.36 respectively.

– The year in which GDP exceeds 2014 GDP is noted in red font. As a result of the deterioration in GDP forecasts between April and October in the Saudi current prices/national currency series, GDP does not exceed 2014 GDP until 2018 instead of 2017; in the Russian current prices, US$ series, GDP exceeds 2014 level after 2020 instead of 2019; in the Saudi current prices/US$, the recovery is pushed to 2018 from 2017. (In inflation adjusted terms, Russian GDP in current prices, national currency would be below 2015 levels in 2020).

Oil Market Showdown Russia

In Russia, the impact of low crude revenues on GDP has raised questions about Russia’s long term economic prospects. Some see Russia’s economic growth potential as 1 percent annually or less due to low energy prices, low productivity levels, and a shrinking population, while Alexei Kudrin, finance minister from 2001 to 2011, recently commented that Russia’s growth model for the last fifteen years—using income from energy exports to drive up wages, domestic demand and therefore growth—will no longer work. With the government strapped for funds, and energy income no longer supporting domestic demand, some see investment as the sole possible driver of growth.

IMF WEO Data: Budget Deficits as far as the Eyes can See

Both the Saudi and Russian governments depend on energy revenues to fund their budgets—oil funds ~90 percent of the Saudi budget and oil and natural gas ~52 percent of the Russian budget. With the decline in prices, the Saudi budget anticipates a deficit of 20 percent of GDP in 2015 and the Russian budget a deficit of 3.3 percent of GDP. The April and October WEO budget projections in national currencies (Rubles and Riyals) show the deficits decreasing, but continuing through 2020 for both countries:

Oil Market Showdown Russia

The following table shows that as a percentage of GDP, the deficits decline steadily through 2020. However, as a percentage of GDP, the WEO October projections show the Saudi deficits remain double-digit through 2020—the potential impact of which will be discussed in the section on currencies.

Oil Market Showdown Russia

As planning for the 2016 fiscal year proceeds, fiscal reality is forcing both governments to scramble for new sources of revenues and/or opportunities to cut spending to reduce their budget deficits. The Russian government suspended the budget rule using a long term average of crude prices to set spending, since the resulting $80 average price would have dictated unreasonable spending in 2016.

President Putin ordered a 10 percent cut in Interior Ministry personnel, imposed a one million headcount ceiling on this ministry, and planned cuts in Kremlin headcount. The Finance Ministry sought a change in the mineral extraction tax formula to generate an additional 609 billion rubles in 2015 and 1.6 trillion through 2018, but pressure from the Economic and Energy Ministries and Russian producers forced the Finance Ministry to consider alternatives with less negative impact on crude production. In addition, the government reportedly is taking some $13

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