Summary

• Public spending has risen sharply since 2009 in several key oil producers that depend on oil export revenue to balance their budgets. As a result, governments in oil exporting nations account for 45 percent of global oil supply will require an oil price in excess of $90 per barrel (bbl) to finance 2015 budget requirements. In 2014, the share was just 25 percent. in 2010, the share was less than 15 percent

• The recent decline in global oil prices below $90/bbl, if it persists, will expose weakening fiscal outlooks in OPEC’s highest spending members and Russia.

• Deteriorating fiscal outlooks will force oil exporters into a difficult position: reduce social spending, risking short-term political instability, or maintain social spending in favor of cuts to upstream capex, eroding long-term growth and risking longer-term economic and social stability. In the short term, we expect deficits to be financed by accumulated savings and possible increase in debt. However, only GCC counties, such as Saudi Arabia, are able to do this for more than a few quarters.

• This dynamic could pose broader market risks as major exporters become more economically fragile, adding uncertainty to both short- and long-term oil supplies. This fiscal environment will  put further pressure on national oil companies, many of which have already been forced to turn to the debt markets to finance capex.

• An OPEC supply cut appears unlikely given current market conditions, which would mute the effects of even a moderate cut, and the fact that most members will turn to Saudi Arabia, Riyadh appears willing to test the effect of sub-$90 Brent on high-cost U.S. supplies, a strategy it is uniquely positioned to afford. A drop in Brent closer to $70/bbl before the November OPEC meeting could change this calculus.