Oil prices drop can adversely affect economy of Kazakhstan, expert says

Oil prices drop can adversely affect economy of Kazakhstan, expert says

Baku, Azerbaijan, Nov.28

By Elena Kosolapova - Trend:

After the OPEC countries decided not to reduce the quota for oil production, a further drop in oil prices can adversely affect the economy of Kazakhstan, the expert of the Institute of Political Solutions of Kazakhstan Sergey Smirnov told Trend.

"Kazakhstan's economy is based on selling raw materials - oil and metals," he said. "If the prices for raw materials reduce, therefore, revenues will also drop. First of all it will affect the state employees, and we will have to cut social programs. This may cause a delay in the increase of wages, rise of inflation."

Smirnov said that Kazakh President Nursultan Nazarbayev has already given the order to use the funds of the National Fund for economic development.

But if the average price is below $80 per barrel, it may be needed to additionally borrow savings from the National Fund, according to expert.

He recalled that the prime cost of oil production in Kazakhstan is quite high. In October, the First Deputy Energy Minister of Kazakhstan Uzakbay Karabalin said that the prime cost is around $50 per barrel.

"And it is not taking into account the transportation, but it is necessary not only to produce oil, but also to send it to the markets," said Smirnov. "If the low prices remain, the cost of production and transportation of oil (in Kazakhstan) will be equal to the cost of oil."

In Saudi Arabia, oil production prime cost is low, and they can afford to hold the prices at $70 for a year, said the expert.

But in general, the impact of low oil prices on the economy of Kazakhstan depends on how long they will remain at this level, Smirnov said.

"It is quite possible that in the next year OPEC will agree to cut production volumes," he said.
"If the prices begin to rise by spring 2015, nothing bad will happen then."

The expert said that oil prices can fall to $70 a barrel, but then they will grow. At the same time, he said that it is difficult to predict for how long oil prices will remain low, because no one can clearly explain the reasons for their fall.

"It is clear that supply exceeds demand, so prices fall," said Smirnov. "But why does it exceed the demand? Someone said that it is the result of actions of the Americans who want to affect the Russian economy, trying to repeat the 80s. Or maybe it's the influence of the United Arab Emirates, who want to eliminate a competitor in the form of US shale oil. The US increased production by 6 times at the expense of shale oil, and thus competes with Saudi Arabia."

He said that the threshold of profitability of shale oil is at $80 per barrel. Therefore, if low oil prices remain yet for another year, many shale projects in the US will have to be closed due to unprofitability.

This is while Saudi Arabia can afford to sell oil at $70 per barrel as well by taking into account its low prime cost, the expert added.

Smirnov added that currently, it is important for Kazakhstan to diversify its economy and develop the non-oil sector in order not to depend on oil prices.

He said the new economic policy declared by Kazakh president envisages these measures.

However, the diversification of economy and the development of infrastructure were among the issues discussed during the crisis of 2008 as well.

"But none of this happened. Last time the intentions were forgotten as soon as the crisis ended," said the expert.

However, this time the impact of the crisis can be more noticeable, since the period of low oil prices can be protracted.

On Nov.27, OPEC member countries during the meeting in Vienna decided to maintain oil production quota unchanged at the level of 30 million barrels per day.

For any questions or feedback, follow the author on Twitter: @E_Kosolapova

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