DON’T GET MAD, GET EVEN

Kuwait 2016 | ENERGY | FOCUS: BREAK-EVEN

With the price of oil reaching record lows, Kuwait's ability to balance its budget has come under the spotlight, forcing a reexamination of the role that hydrocarbons play in the national economy.

With the US—the world's largest oil importing economy—adding American-produced oil to the world's supply, and a concurrent fall in demand from some of the world's largest consumer nations, the price of oil on the international market has hit record lows over the past year. Between June 2014 and January 2015, global oil prices decreased by a dramatic 57% according to the US Energy Information Administration, and 2016 kicked off with oil at its lowest price point since 2009. Many are now asking who is winning, who is losing, and who can afford to even play the game anymore?

Kuwait is a strong player, estimated to have over 6% of the world's oil reserves. Adding to that, state oil companies have ramped up exploration, discovering even more reserves in the country in early 2015. Historically, Kuwait's oil wealth has provided about 60% of its GDP and about 95% of its export revenues. Yet, as a result of cheap oil, for the first time in nearly 20 years, Kuwait could post a state budget deficit, with estimates by the National Bank of Kuwait in January 2016 stating that Kuwait's deficit would lie at around $12.8 billion, 9.8% of GDP, by the end of FY2015-16.

From Russia, to Saudi Arabia, Venezuela, and Kuwait, oil-producing economies dependent on oil revenues have begun to reassess their dependence, knowing that they must sell their oil at a certain price in order to balance their budgets. To Kuwait's benefit, its break-even price per barrel of oil has been estimated as the lowest of all oil producing states worldwide. While this puts Kuwait in a more comfortable position, important dialogue has begun about ways in which the state can raise cash or cut spending to close the budget gap and make up for revenues lost. Introducing corporate taxes, VAT taxes, reducing fuel subsidies, and liquidating state assets that generate returns below 9% are all on the table in order to fund the large infrastructure and construction projects that Kuwait has laid out in its national development plan.

While estimates of Kuwait's break-even oil price indicate that it may be in the best position to weather the low oil price climate, this measure is subject to several variations and changes over time, and is inadequate in and of itself when determining a country's fiscal strength. Nobody can predict what the precise breaking point will be for Kuwait. Kuwait's ability to see its way through the era of cheap oil does seem sound, thanks to a solid savings account. It appears that, if managed properly, Kuwait's fiscal position will remain sound for the long term. If and when the price of oil rises again, Kuwait will benefit in the short-term, but with the geopolitics of oil being as they are, the next oil bust could be right around the corner.

This puts Kuwait at an interesting crossroads. Kuwait can afford to stay in the oil game and is committed to doing so, with a strategy to increase domestic oil production capacity to 3,650 mbopd by 2020. However, a low oil price environment is also the ideal time to spur the non-oil economy, and rethink the role that hydrocarbons play in its economic growth. The stage is set for the importance of economic diversification and growing non-oil revenue sources to be at the forefront of Kuwait's strategic discussions and policy decisions.

The Kuwaiti dinar is consistently the world's highest-valued currency, pegged to a diversified basket of currencies. Just as with its currency, now is the time for Kuwait to apply a similar diversification strategy to the state's domestic economy, and let a low oil price environment be a blessing in disguise.