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Monday, December 16, 2013

Cheap Mexican Oil--This Could Be the Death Knell of the Middle East

Bloomberg News reports:
The flood of North American crude oil is set to become a deluge as Mexico dismantles a 75-year-old barrier to foreign investment in its oil fields. 
... That boom would augment a supply surge from U.S. and Canadian wells that Exxon Mobil Corp. (XOM) predicts will vault North American production ahead of every OPEC member except Saudi Arabia within two years. ... 
... An influx of Mexican oil would contribute to a glut that is expected to lower the price of Brent crude, the benchmark for more than half the world’s crude that has averaged $108.62 a barrel this year, to as low as $88 a barrel in 2017, based on estimates from analysts in a Bloomberg survey. Five of the seven analysts who provided 2017 forecasts said prices would be lower than this year.
This would undercut Middle East regimes that need high oil prices to sustain extraordinary social programs. As Johnny West points out in this October 2013 article:

The autocracies of the region, scared by the Arab Spring, have locked themselves into a dependence on historically high prices just to achieve what economists call "fiscal break-even", the oil price they need to be able to cover their budgets. Saudi Arabia famously threw $130bn at public services in 2011 to forestall unrest, and this year has a fiscal break-even of $98 per barrel, compared to just $74 three years ago. Previous efforts at developing the private sector have been quietly abandoned and the latest attempt at a social contract has involved hiring large numbers of young Saudis into civil service jobs of questionable value. 
Continued high prices would keep that situation going, albeit precariously. Governments would stumble on with a mixture of repression and patronage networks, with poverty, discontent and extremism lurking at the edges. 
Low prices on the other hand, would lay the fragility bare. As budgets plummet, services and jobs would be cut and unrest would rise - in conditions far less benign than 2011. An "Arab Spring 2.0" might harness rage without the hope of its predecessor, and with the spectre of sectarian divisions hanging in the air.
 The same article notes that Russia's break-even is $125 per barrel.

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