Cheap oil affects OPEC members petchem sector- OME director

Baku, Azerbaijan, Oct. 24

By Umid Niayesh - Trend:

The OPEC crude oil basket price has experienced a 24 percent drop since June. Oil price lowering has already caused some OPEC members' concern, and they have warned about the budget deficit and serious impact on their economy.

Because of the direct threats of selling cheap oil, for instance, Iran's revenues from petrochemical products export decreased significantly. The latest Custom Administration's report indicates that the price of Iran's exported propane, Butane and Urea decreased by 21.5 percent, 14 percent and 3.8 percent last month, compared to six months ago.

Sohbet Karbuz, Director of Hydrocarbons, France, Mediterranean Energy Observatory (OME) told Trend on Oct.24 that declining oil prices has affected petrochemical prices as well.

"Although dropping oil prices cut the cost for petrochemical raw materials, prices in the global petrochemicals market continued to fall in September according to Platts Global Petrochemical Index-a benchmark basket of seven widely used petrochemicals. Because supply exceeds demand," he said.

Karbuz says that in addition, global competition in the sector is increasing because the American petrochemical industry is going from strength to strength. At the same time the demand for petrochemicals in Asia is showing signs of weakening. This translates into falling margins.

Coming to Iran's economic loss due to drops in both crude oil and petrochemical products export revenues, the director of OME says that Iran has a very large petrochemical sector.

"This puts a double pressure to Iran. In other words, declining oil prices put not only pressure to its revenues from oil exports but also to its revenues from petrochemical exports. This means diverting production from crude oil and natural gas liquids to domestic petrochemical industry to produce more petrochemical products will not help," he said.

Below is a table, comparing Iran's oil and gas products' value, exported last month and six months ago. The table is based on Iran Custom Administration's monthly reports:

Except for three states OPEC members worry

Karbuz says that since the outbreak of the so-called Arab Spring, increased government spending in most Arab oil producer countries that are allocating higher funds for social sector activities has raised fiscal break-even oil prices (the oil price required to balance the state budget) in an oscillating but relatively stable price environment.

"Falling oil prices puts pressure on the state budget deficit and makes the economy vulnerable. If the share of hydrocarbon revenues to government revenues is very high, this means severe fiscal challenges," he said.

According to his opinion, one way to keep the revenue stream stable is to increase exports, something only a few OPEC members can do. Decreasing expenses may not be possible for many OPEC members because this would mean cutting expenditures allocated towards the social sector addressing the social challenges. Moreover, any attempt to curb subsidies could be a political suicide in many countries.

The dilemma is how to survive in a decreasing global oil price but increase the domestic fiscal break-even oil price environment.

"If the global oil prices drop below $80 per barrel, one way or the other almost all oil producers including OPEC members will feel the pain. Only Kuwait, Qatar, UAE and Yemen are expected to do still OK below that level in the medium term. None could withstand a drop into the $60s or lower. Iran is thought to require the highest price of any OPEC member to balance the state budget," he said.

Iran has set yearly budget based on $100 - crude oil, while Iranian fiscal year starts on March 21 and has 5 months until the end of year.

Edited by CN