Low Oil Prices Could Break The “Fragile Five” Producing Nations
Persistently low oil prices have already inflicted economic pain on oil-producing countries. But with crude sticking near six-year lows, the risk of political turmoil is starting to rise.
There are several countries in which the risks are the greatest – Algeria, Iraq, Libya, Nigeria, and Venezuela – and RBC Capital Markets has labeled them the “Fragile Five.”
Iraq, facing instability from the ongoing fight with ISIS, has seen its problems compounded by the fall in oil prices, causing its budget to shrink significantly. The government is moving to tap the bond markets for the first time in years, looking to issue $6 billion in new debt.
Revenues have been bolstered somewhat by continued gains in production. Iraq’s oil output hit a record high in July at 4.18 million barrels per day, up sharply from an average of 3.42 million barrels per day in the first quarter of this year. But with Brent crude now dropping well below $50 per barrel, Iraq’s finances are worsening. According to Fitch Ratings, Iraq may post a fiscal deficit in excess of 10 percent this year, and all the savings accrued during the years of high oil prices have been depleted.
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Other political problems loom for Iraq. The central government and the semiautonomous region of Kurdistan have been unable to resolve a dispute over oil sales. With revenues running low for the central government, it has failed to transfer adequate funds to the Kurdish Regional Government (KRG). That led to the breakdown of a tenuous deal between the two sides that saw Kurdish oil sold under the purview of the Iraqi government. The KRG is selling oil on its own now in an effort to obtain much needed revenue in order to pay private oil companies operating in its territory.
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