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The Inevitable Outcome Of The Oil Price War


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The Inevitable Outcome Of The Oil Price War

 - Mar 19, 2020, 8:00 PM CDT

Putin MBS

 

One might reasonably posit that when Crown Prince Mohammed bin Salman (MbS) signalled that Saudi Arabia was once again going to produce oil to the maximum to crash oil prices in a full-scale oil price war, Russian President Vladimir Putin probably fell off the horse he was riding bare-chested somewhere in Siberia because he was laughing so much. There is a phrase in Russian intelligence circles for clueless people that are ruthlessly used without their knowledge in covert operations, which is ‘a useful idiot’, and it is hard to think of anyone more ‘useful’ in this context to the Russians than whoever came up with Saudi’s latest ‘plan’. Whichever way the oil price war pans out, Russia wins.

In purely basic oil economics terms, Russia has a budget breakeven price of US$40 per barrel of Brent this year: Saudi’s is US$84. Russia can produce over 11 million barrels per day (mbpd) of oil without figuratively breaking sweat; Saudi’s average from 1973 to right now is just over 8 mbpd. Russia’s major oil producer, Rosneft, has been begging President Putin to allow it to produce and sell more oil since the OPEC+ arrangement was first agreed in December 2016; Saudi’s major oil producer, Aramco, only suffers value-destruction in such a scenario. This includes for those people who were sufficiently trusting of MbS to buy shares in Aramco’s recent IPO. Russia can cope with oil prices as low as US$25 per barrel from a budget and foreign asset reserves perspective for up to 10 years; Saudi can manage 2 years at most.

A key reason why Russia can survive for so much longer than Saudis is actually thanks to MbS himself. Underlining this – and the fact that the Russians do have a very impish sense of humour, as they do – was that Russia’s Energy Minister, Alexander Novak, last week praised the co-operation of the OPEC+ grouping over the past three years, which, he added “had earned Russia 10 trillion rubles [US$140 billion].” Presumably just to highlight the irony of this further, Russia’s Finance Ministry then helpfully chipped in that the accumulated funds from the previous OPEC+ agreements will help Russia to support the ruble and will also help Russia to cope with oil prices as low as US$25 per barrel for up to 10 years. The metaphorical icing on the cake, though, was Novak adding that “we may reach new agreements [with OPEC] if needed”. In practical terms this means that if, in fact, it takes longer than originally thought by Russia for Saudi to go bankrupt and it starts to have any negative impact on Russia, then Moscow will just click its fingers together and Riyadh will come running to sign a new OPEC+ output cap deal. Related: Russia Sees Oil & Gas Income Fall By Almost $40 Billion

But surely, some may say, Saudi stands no chance of going bankrupt? In fact, as highlighted above, Saudi will absolutely go bankrupt if it continues this oil price war. As Saudi Arabia’s own deputy economic minister, Mohamed Al Tuwaijri, stated unequivocally in October 2016 last time that the Saudis tried this exact same ‘strategy’ from 2014 to 2016: “If we [Saudi Arabia] don’t take any reform measures, and if the global economy stays the same, then we’re doomed to bankruptcy in three to four years.” That is to say, that if Saudi kept overproducing to push oil prices down – just as it is doing right now, yet again - then it would be bankrupt within three to four years. The timeframe has halved for a variety of reasons outlined in my recent piece on this very subject here.

 

But what has Russia to gain from Saudi going bankrupt? Economically, it means that Saudi will default on sovereign and corporate debt, will not be able to service its key industries, and will be unable to meet the requirements for its major oil and gas contracts. Simply having less Saudi oil and gas competing in the same space as Russia and its allies – notably Iran and Iraq – would be benefit enough for Russia but there are even bigger added benefits too. One of these is the destruction of the already strained relationship between the U.S. and Saudi Arabia that has endured since 1945. At that time, as analysed in depth in my new book on the global oil markets, the deal that was struck between the then-U.S. President Franklin D. Roosevelt and the Saudi King at the time, Abdulaziz, onboard the U.S. Navy cruiser Quincy in the Great Bitter Lake segment of the Suez Canal was that the U.S. would receive all of the oil supplies it needed for as long as Saudi had oil in place, in return for which the U.S. would guarantee the security both of the country and of the ruling House of Saud.

Support in the U.S. for the continuation of this relationship has already diminished markedly in the past few years. This change in attitude began in earnest when it came to the U.S. public’s attention that 15 of the 19 hijackers who flew the aeroplanes involved in the ‘9/11’ terrorist atrocity on the U.S. were Saudi nationals. The extent of the Saudi government’s involvement in funding such terrorism appeared front and centre following the overriding on 28 September 2017 by the U.S Congress of former President Barack Obama’s veto of the Justice Against Sponsors of Terrorism Act. That made it possible for families of the victims of the ‘9/11’ terrorist attack to sue the government of Saudi Arabia for damages. Within a short space of time after this reversal, there were seven major lawsuits in federal courts alleging Saudi government support and funding for the ‘9/11’ attack, and more lawsuits are expected.

Subsequent events have not softened this negative view, with ongoing pressure from the U.S. Congress over the Saudi-led war in Yemen, the cosying up of Saudi to Russia in the OPEC+ grouping, and Lebanese President Michel Aoun’s allegation in 2017 that then-Prime Minister Saad al Hariri had been kidnapped by the Saudis and forced to resign. Matters grew worse with the murder of dissident Saudi journalist, Jamal Khashoggi, on 2 October 2018 at the Saudi consulate in Istanbul, Turkey, which even the CIA concluded was personally ordered by MbS. Such was the shift in sentiment away from Saudi over these years that the U.S. Presidential Administration has come under growing pressure to finally implement the  ‘No Oil Producing and Exporting Cartels Act’ (NOPEC). This bill – which can still be implemented, incidentally (apparently something else that MbS has not taken into consideration) - would make it illegal to artificially cap oil (and gas) production or to set prices, as OPEC and Saudi Arabia do. Related: Russia Needs Higher Oil Prices, But Won't Surrender

The bill would also immediately remove the sovereign immunity that presently exists in U.S. courts for OPEC as a group and for its individual member states. This would leave Saudi Arabia open to be sued under existing U.S. anti-trust legislation with its total liability being its estimated US$1 trillion of investments in the U.S. This, and all of the other aforementioned events, resulted in MbS being completely unable to find any international listing destination for the Aramco IPO. As highlighted ahead of the IPO in previous articles published in OilPrice.com, Aramco shares are now haemorrhaging value for precisely the key reason cited: that the company would be used as an instrument of government policy - however ill-considered - regardless of the considerations of shareholders.

 

Moreover, at the weekend, Aramco posted figures showing a 21 per cent fall in 2019 ‘due to a drop in oil prices’ – and this is before the new price-crashing strategy was put in place by MbS! After the ‘strategy’ announcement, the shares were trading at 15 per cent less than the offer price. In addition, again making a lie of its previous statements, it emerged at the end of last week that, despite its proven ridiculous claims by the Kingdom to boost supplies to levels never before even vaguely attained. Aramco rejected at least three Asian refiners’ (one Korean, one Taiwanese, and one Chinese) requests for additional crude for April, on top of their long-term supply deal.

So Russia, with Saudi Arabia either in the oil price war or better still bankrupt, benefits either way. The long-term goal of Russia is to control directly or indirectly all of the key players in the Shia crescent of power in the Middle East, including most immediately Lebanon, Syria, Iraq, Iran, and Yemen (via Iran). All of these countries have vast oil and gas reserves and/or useful coastlines for Russian military and commercial needs (Mediterranean access or access to the Arabian Sea). To do this, Russia’s core foreign policy strategy is to create chaos and then project Russian solutions and therefore power into that chaos. In this respect, again, MbS is being very ‘useful’ to the Russians.

 

 

https://oilprice.com/Energy/Oil-Prices/The-Inevitable-Outcome-Of-The-Oil-Price-War.html

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Will Putin Risky Oil Gamble Pay Off?

Every gambler knows That the secret to survivin’

Is knowing what to throw away

And knowing what to keep

‘Cause every hand’s a winner

And every hand’s a loser

And the best you can hope for is to die

In your sleep.

Source: LyricFind Songwriters: Don Schlitz The Gambler lyrics © Sony/ATV Music Publishing LLC

After much rumour and speculation surrounding the OPEC+ meeting, the commencement of a global oil war was confirmed by Russia’s Energy Minister Alexander Novak when he said post meeting “Considering the decision taken today, from April 1 of this year onwards, neither we nor any OPEC or non-OPEC country is required to make (oil) output cuts.”

With this action, Russia signalled its intentions to take on OPEC, its leader Saudi Arabia and to attempt to deal a death blow to a US shale industry that is already on its knees.

Russia has long been negative towards OPEC+ production cuts. Whilst it has provided an environment of stable higher oil prices that have allowed it to become debt free and return to budget and trade surplus, the higher prices has also provided a free pass to the debt fuelled US shale industry to keep increasing production unfettered, to the point of overtaking Russia and Saudi Arabia and becoming the world’s largest oil producer.

Recent actions though have no doubt stoked Russia’s grievances to the point that it is willing to risk a protracted and all-out oil price war against two superior opponents.

On the Saudi side, Russia has long felt that artificially propping up oil prices by the Saudi led OPEC has given its old foe the US the ability to become an oil exporter for the first time in decades and thus become a serious competitor to traditional export markets. Secondly, rather than the mooted investment in Siberian gas projects, Saudi Arabia announced the Jafuria Shale Project – the biggest shale project outside the US, which would allow Saudi Arabia to become a net gas exporter whilst freeing up oil supplies for export that had previously been used for domestic power generation.

At the same time, Putin is pressuring Riyadh (and indirectly Abu Dhabi) to get more in-line with Russia’s operations in MENA, especially Syria and Libya. By “breaking OPEC+”, Putin has shown his willingness to take high risks to support his other strategic goals too.

On the US side, aside from the shale industry’s continued existence, Russia has felt aggrieved at the meddling of the US and the sanctions imposed by them on state-backed enterprises of Rosneft for trading with Venezuela and Nord Stream 2 to supply gas into Europe.

As most aggrieved parties do, Russia believes that it has ‘right’ on its side and views itself as being in a relatively strong position. Three years of stable oil prices has provided the Russians with a certain amount of firepower and the belief that it can withstand oil prices at between $25 to $30 per barrel for the next 6 to 10 years.

In taking this view, Putin is gambling on a couple of assumptions.

Related: WTI Rallies 24% In Panic Stricken Markets

Firstly, that Saudi Arabia, who is embarking on large and expensive structural changes to the country and its economy, lacks the ability to maintain a protracted price war when they need $80 per barrel to balance their budget and fund their expensive structural changes. With ‘perceived internal pressure’ on MBS continuing from inside the Royal Family, Putin may believe that the time is right.

Whilst true that the Saudi budget requires $80 per barrel to balance its budget, it is not a requirement that it does so. Saudi Arabia has deep cash reserves, a cashed up Sovereign Wealth Fund, the Public Investment Fund (‘PIF’), which is owner of SABIC and Aramco, and a far greater ability than Russia to borrow in the global financial markets. The Saudi Government has been gaming scenarios where oil drops to $12 to $20 per barrel and has been making its moves accordingly.

Secondly, Putin plays on Trump’s view that the key to his re-election is the performance of the US economy and the living standards of ‘his’ voters

Trump has always been very vocal fan of lower gasoline prices as a ‘free tax cut’ to the US economy. Trump, whilst being a vocal supporter of the US Energy Industry, also feels no pressure to immediately ride to their rescue, as he is safe in the knowledge that he will always have their support whilst a Democrat White House would mean industry Armageddon. 

 

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And by some perverse circumstance, Putin has an accomplice in Saudi Arabia, who having tried and failed between 2014 and 2016, is not against piling on the US shale industry and having a free-kick whilst Russia shoulders the blame.

Remembering back in June/July 2018 we saw that Saudi Arabia was a victim of the ‘Trump two-step’ when encouraged to pump more oil by Trump to drive prices down and help out him domestically, as he placed sanctions on Iran. Saudi complied, only to see immediate and significant waivers granted to purchasers of Iranian oil and the oil price collapse from $75.

 

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The Saudi response has been one of ‘shock and awe’ – with Saudi immediately offering barrels into the market with discounts of between $6 and $10 per barrel and Aramco’s  announcement yesterday to the Saudi Stock Exchange that from the 1st of April they will provide customers with 12.3 million barrels a day – and additional 2.6 million barrels per day (~27% increase) from current production levels.

As we know, Aramco has never been seen to be producing more than 12 million barrels per day. Increasing production by 2.6 million barrels per day requires some technical issues not yet solved. Whilst there is doubt as to whether these numbers can be achieved (and for how long), it is our expectation that they will dip into their reserves to meet these targets – a sign of the commitment to their ‘shock and awe’ tactics.

Whilst this ‘shock and awe’ tactic taken to be a direct response at the Russian oil industry, with the aim of bringing Russia quickly to heel, Russia may see this as somewhat of a tactical victory.

With Russia only able to increase their production modestly (between 200,000 and 500,000 barrels per day), they may see that Saudi’s 27% increase in barrels offered as being able to deal the fatal blow to the US shale industry that it can’t. They would certainly have been encouraged by the report by Lloyds overnight that Saudi state run shipping company Bahri has been active in procuring 10 VLCCs for late March loading (with a combined capacity of 20 million barrels), in addition to its own 41 tankers, on rates of up to $197,500 per day, to flood the US market.

Appreciating his best chances lie in a quick victory, Russia has kept the doors of communication open with high ranking officials on both sides are continuing discussions to find a solution. Former Saudi Minister of Energy Khalid Al Falih and his Russian counterpart Novak are still not intending a full-scale crash of oil in the end. But, as Putin hopes to turn the short-term tactical successes of destroying production curtailments, pressuring MBS and the Saudi budget and killing US shale into long-term strategic victories, significant risks abound for all players, especially Russia in a protracted war.

Whilst steady oil prices has seen Russia’s budget and trade surplus build up cash reserves in excess of $500 billion, combined with structural changes that has seen the budget break-even lowered to between $40 and $50 per barrel, Russia’s weak currency and still greater than 40% dependence on oil income, poses significant risks if this oil war is protracted. Since the oil price slide commenced, the Rouble has depreciated 23% against the US dollar. Related: U.S. Oil Industry Could End Up Losing More Than 200,000 Jobs

Far from being a coalition builder, Russia is a lone wolf on the world stage. No longer the super-power it once was, it has been reduced to being a big player on the sideline - meddling in the affairs of the world’s problem children such as Syria, Venezuela, Libya and Ukraine. Military is prohibitively expensive and with military intervention in multiple locations, Russia will soon realise that the cost of budget promises combined with military intervention hubris, will bring significant pressure quickly on the seemingly rosy budget position. The same can be said for Saudi Arabia’s Yemen excursion.

Russia’s lack of allies that have the capacity to trade with them, invest in them or provide financial assistance to them will be telling on Russia. Saudi Arabia has the much greater position of being able to rely on allies and to being able to borrow in the global financial markets at a much cheaper rate and with greater capacity. Russia’s dwindling reserves of hard currency, dwindling oil receipts and lack of financially viable allies that can assist will be telling as this crisis continues.

Russia’s greatest risk is that, in an attempt to kill the US shale industry, that the damage done in the short-term effects the overall economic narrative of Trump, and for the sake of his re-election prospects he is forced into intervening on behalf of the US shale industry.

In this, Trump has the flexibility of direct or indirect action, both of which would have a devastating effect on Russia.

Trump has the ability to intervene directly by providing direct subsidies, loans, assistance or even equity purchases to support the shale industry participants. Direct action such as this would signal to Russia (and Saudi Arabia) that the shale industry will survive and “perceived” energy independence is a cornerstone of his economic agenda. Russia (and Saudi Arabia) will then have to consider the position of going to war to kill an industry that has the support of the one player with deep and limitless pockets.

But, more devastating to Russia still, would be the indirect actions that Trump could take – which would completely take down Russia on a structural level.

Trump could begin with strategy right from his play-book and enforce a round of trade sanctions on imported oil. This would in the short-term shore up the local shale industry and curtail capacity dumping on the US.

But, the nightmare scenario for Russia would be that Trump imposes economic sanctions on Russia, similar to Iran and Venezuela, that would limit or completely stop its ability to sell oil and gas, trade, borrow and receive at both a country and a personal level.

This would be the smart play by Trump, which would use the least political capital, would provide a nationalistic argument to support and protect the Energy Industry and US sovereignty from attack and blunt any environmental flack for supporting the Energy Industry.

This is a tool that is being used in limited circumstances by Trump now, with sanctions on Rosneft’s trading arms, sanctions on Nord Stream 2 and the banning of US nationals from buying or dealing in Russian Sovereign Debt. We have seen the response of Russia to this limited action – one can only imagine a widescale imposition of economic sanctions.

Of course, Russia may choose to ignore these risks, as they have been doing, taking the view that the tactical considerations take precedence over the strategic ones as the effects of these sanctions have not been strongly felt whilst the oil price has been supported by OPEC+ and receipts have plentiful.

But that would be a grave error as we have seen the effects of total US economic sanctions on Venezuela and Iran – the incessant constriction of every facet of the country’s fabric of society. And, unlike Russia, the US is in the unique position to enforce its will on the global community – cutting Russia off – with no coalition supporters with the means or will to help break any sanctions imposed.

Russia will then realise that strategic errors cannot be overcome by tactical victories. Russia has a short-term window before The Gambler’s words ring true:

Son, I’ve made a life

Out of readin’ people’s faces

Knowing what the cards were

By the way they held their eyes

So if you don’t mind me sayin’

I can see you’re out of aces.

 

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Oil Nations Could See Income Crash By Up To 85 Percent In 2020

By Tsvetana Paraskova - Mar 17, 2020, 12:00 PM CDT

The coronavirus pandemic and collapsing oil prices will slash the oil and gas revenues of vulnerable oil-reliant developing economies by up to 85 percent, the heads of OPEC and the International Energy Agency (IEA) said in a joint statement as a growing number of countries are going into lockdown and oil demand is set to take an unprecedented hit.  

Fatih Birol, the Executive Director of the IEA, and OPEC’s Secretary General Mohammad Barkindo spoke on the phone to discuss the current oil market situation and the potential impact of depressed demand and low oil prices on the global economy and on oil-producing nations with vulnerable economies.

f current market conditions continue, their income from oil and gas will fall by 50% to 85% in 2020, reaching the lowest levels in more than two decades, according to recent IEA analysis. This is likely to have major social and economic consequences, notably for public sector spending in vital areas such as healthcare and education,” OPEC and the IEA said in a joint release.

Last week, both OPEC and the IEA slashed their projections for oil demand this year, expecting zero and even negative growth in demand amid significant economic slowdown as the coronavirus spreads around the world. Global oil demand is set to drop this year for the first time since the financial crisis in 2009, the IEA said as it slashed its demand outlook by 1.1 million bpd. The IEA now sees global demand falling by 90,000 bpd year on year in 2020. Related: Largest Oil Glut In History Could Force Crude Prices Even Lower

OPEC, for its part, now sees global oil demand rising by mere 60,000 bpd in 2020 after it slashed its forecasts by 920,000 bpd from last month’s assessment.

On Friday, Birol tweeted that “Recent history shows that playing Russian roulette with the US shale industry through an oil ‘price war’ can backfire. The major victims are likely to be people in developing countries that still rely heavily on oil & gas revenues to fund their social & economic systems.”

The oil price war that OPEC’s top producer and de facto leader Saudi Arabia started will hurt the fiscal revenues of the oil producers in the Persian Gulf too, including those of Saudi Arabia, analysts say.

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OPEC+ Scraps Meeting As Oil War Heats Up

By Tsvetana Paraskova - Mar 16, 2020, 11:00 AM CDT

Attempts by some OPEC members to mediate between the cartel’s leader, Saudi Arabia, and Russia have failed and this Wednesday’s meeting of an OPEC+ technical committee has been scrapped amid the “full on war” between the friends turned foes, sources told Reuterson Monday.

The meeting of the Joint Technical Committee (JTC) of OPEC and non-OPEC countries, which monitors the oil market and producers’ compliance with quotas, was scheduled to take place on March 18.

But after the collapse of the OPEC+ production cut deal on March 6, reports started circulating that the previously scheduled meeting of the technical panel would not take place.

OPEC’s top producer and de facto leader, Saudi Arabia, signaled as early as last week that it would not attend the panel meeting, regardless of its format, a source told Reuters last week. There were ideas that the meeting could be a teleconference considering the spreading of the coronavirus in Europe and Austria, home of the OPEC headquarters in Vienna.  

After Saudi Arabia and Russia broke up their three-year-long bromance and started an oil price war for shares in all regional markets, any mediation attempts in recent days have failed as the two sides are not backing down, according to Reuters’ sources.

It’s a “full on war”, a source told Reuters about the price war.

OPEC members Saudi Arabia and the United Arab Emirates (UAE) are flooding the oversupplied market with oil, going for Russia’s market share, while Russian oil firms also plan to boost production as of April 1.

Russia’s President Vladimir Putin doesn’t have immediate plans to contact either the Crown Prince or the King of Saudi Arabia, the Kremlin spokesman Dmitry Peskov said on Monday, as carried by TASS.

This could be another sign that mediation between the two oil powerhouses may be nearly impossible right now.

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Iraq faces calamity as oil prices crash amid protests and coronavirus crisis

 

BAGHDAD – Between plummeting oil prices, political deadlock and reduced global appetite for a bailout, Iraq is on the cusp of financial calamity that could force austerity measures and renew anti-government protests.

But officials appear remarkably optimistic, a view that experts described as being “in denial” given forecasts of oil crashes that would cost Iraq two-thirds of its net income this year.

 

Brent oil prices tanked this week to $26 per barrel, the lowest since 2003, following a hit to global oil demand from the novel coronavirus outbreak and a price war between major producers Saudi Arabia and Russia.

Iraq, which relies on oil revenues for more than 90 percent of its revenues, is set to face “vast economic pressures,” said Fatih Birol, head of the International Energy Agency.

 

The president on Tuesday named a pro-Western lawmaker and former Najaf city governor, Adnan Zurfi, as the next prime minister.

The nomination came as Iraq faced two separate rocket attacks, one near the high-security Green Zone in Baghdad late Tuesday after a dawn attack hit a military base hosting U.S.-led coalition and NATO troops.

Zurfi pledged elections within a year of forming his Cabinet and vowed to respond to the demands of protesters over government graft and inefficiency.

Zurfi once belonged to the Dawa party, an opposition force to dictator Saddam Hussein, who was ousted in the 2003 U.S.-led invasion, and has spent years in the United States.

Respected as a statesman focused on improving public services and security, many hope he can shelter Iraq from the spiraling tensions between Iran and America.

The dual national would have to renounce his American citizenship to take up the premiership.

Zurfi has 30 days to pull together a Cabinet, which would be put to a vote of confidence in parliament.

While normally divided Shiite parties quickly voiced their support, and he also is likely to have the backing of the Kurdish and Sunni factions, he was quickly spurned by the powerful Fatah bloc, parliament’s second-largest.

Iraq is the second-biggest crude producer in the OPEC oil cartel and typically exports around 3.5 million barrels per day. Its draft 2020 budget was based on a projected price of $56 per barrel.

With prices slashed, Iraq’s net income would drop 65 percent compared to last year, incurring a monthly deficit of $4 billion just to pay salaries and keep the government running.

“In the current crisis, Iraq’s oil revenues will struggle to break $2.5 billion per month,” said Birol, appealing to Iraqi officials to find “urgent solutions.”

That projection was based on a price of $30 per barrel before the latest drop, making it a bullish outlook.

Top officials said the finance and oil ministries, the central bank and state-owned banks are exploring ways to trim costs and find financing.

“There is some anxiety, but it’s not acute,” Central Bank of Iraq Gov. Ali Allaq said. “Oil prices will not stay at this level. We don’t expect them to go up a lot, but enough to secure the required amount.”

Still, Allaq said, officials are closely reviewing the 2020 draft budget, one of Iraq’s largest ever, at around 164 trillion Iraqi dinars ($137 billion).

More than 75 percent had been set aside for salaries and other running costs, with the rest spent on capital investments.

Salaries jumped from $36 billion in 2019 to $47 billion for 2020, after 500,000 new employees were hired to appease months of anti-government rallies.

The government employs about 4 million Iraqis and pays pensions to 3 million and social welfare to 1 million.

“Based on our preliminary indications, we will be able to cover the external debt and the salaries,” Allaq said, while trimming subsidies and services that were not “economically efficient.”

But slashing any benefits at a time of a global economic contraction could send more people back into the streets.

Other options include recapturing “trillions” of dinars from accounts in state-owned banks where ministries had stashed years of surplus funds, as well as issuing bonds to the public and rescheduling internal debt payments, Allaq said.

New talks are also underway with the International Monetary Fund, but they may not go far with an unpassed budget and no new government, he said.

The government has no plans to devalue the currency, take out new external loans or halt payments to international oil companies, which amount to about $1 billion per month.

Allaq was hopeful that the pressures could push the government to introduce long-awaited financial reforms. “What doesn’t kill you makes you stronger,” he said.

Some officials acknowledge privately that they do not share Allaq’s optimism.

One senior Iraqi adviser described the situation as a “dangerous crisis.”

Another said it would be impossible to trim the budget in a country ranked by Transparency International as the world’s 16th-most-corrupt.

“Some ministers are against cuts because it would hack at their patronage networks,” the adviser said.

The official added that the government was assuming oil prices would normalize within two months, a forecast not shared by the IEA.

“Sticking your head in the sand is not a policy,” said Ahmed Tabaqchali of the Iraq-based Institute of Regional and International Studies.

Although Iraq faced price crashes in 2014 and 2016, it did not see the current drastic drop in global demand — particularly from virus-hit China, Iraq’s main importer.

And leaning on the international community is less viable than in 2014, when world powers were keen to help Iraq fight the Islamic State group.

Iraq may have to dip into reserves worth about $60 billion to cover the deficit, Tabaqchali said, but would inevitably have to slash salaries and perhaps even borrow internationally.

Even if markets eventually stabilize, Iraqi crude would struggle to compete with the glut produced by Saudi Arabia.

“There are painful readjustments that we need to do now — not for our grandchildren and people that you cannot see,” said Tabaqchali.

 

 

https://www.japantimes.co.jp/news/2020/03/19/world/iraq-oil-price-coronavirus/

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A few years ago, Iraq made several deals with Asiatic countries. Among those countries were the likes of China and South Korea in which Iraq would sell and deliver Iraqi oil to them. At that time South Korea imported 74% from the ME. In January of this year it was reported South Korea is now going to import more oil from the United States in 2020 per the article below. The drop in the dependance on ME oil is not boding well for Iraq who needs the sales to boost their economy. Has China followed suit? All of this is before the coronavirus hit its full stride. Their "painful readjustments" come from their competitors that are highly visible and flush with cash rather than being flush with a fever from an invisible opponent. They will most undoubtedly blame this on the coronavirus but the deeper one goes into the sales of oil by Iraq, one finds those countries that are reducing their dependance on Basra and other ME oils in favor of source that has shown more stability in its production and delivery mechanisms. The United States has done so, so why not the rest of the world follow suit? 

 

South Korea To Boost US Oil Imports In 2020

By Tsvetana Paraskova - Jan 16, 2020, 10:30 AM CST Oil storage

As South Korea is looking to reduce its over-reliance on crude oil imports from the Middle East, it has increased its oil imports from the United States in recent years, which mitigates, to an extent, Korea’s exposure to a potential disruption of oil flows through the Strait of Hormuz, IHS Markit said on Thursday.   

 

South Korea’s diversification from oil supplies from the Middle East intensified as the U.S. slapped sanctions on Iranian oil exports and South Korea stopped importing oil from Iran.  

 

Meanwhile, after the U.S. lifted a ban on oil exports at the end of 2015, American oil has started flowing to destinations in Asia.

 

South Korea’s plan to diversify its oil supplies and to reduce its reliance on the oil flows in the Strait of Hormuz has started to take shape faster than previously expected, Fotios Katsoulas, Liquid Bulk Principal Analyst, Maritime & Trade, IHS Markit, said in an analysis.

 

Yet, South Korea has a long way to go to diversify and any disruption in the Strait of Hormuz will have the Asian oil importer struggling, Katsoulas noted.

 

The Strait of Hormuz is the most important oil chokepoint in the world with daily oil flows averaging 21 million bpd, or the equivalent of 21 percent of global petroleum liquids consumption. According to EIA estimates, 76 percent of the crude oil and condensate that moved through the Strait of Hormuz in 2018 went to Asian markets, with China, India, Japan, South Korea, and Singapore the top destinations.

 

Just three years ago, South Korea imported 74 percent of its crude oil from the Middle East. In 2018, this share dropped to 68 percent and then further down to 64 percent in 2019, according to IHS Markit data.

 

Last year, South Korea was Asia’s major importer of crude oil from the U.S.

 

This year the trend is set to continue, unless the U.S.-Asia route becomes uneconomical, due to rising freight rates after the U.S. sanctioned Chinese shipping firms for knowingly dealing with Iranian oil, IHS Markit’s Katsoulas says.

Edited by Theseus
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