Transition to "stress" scenario

Baku, Azerbaijan, Jan.26

By Ilaha Mammadli - Trend:

Economy is like muscles that need stress and exercises to gain strength. The same thing happens in economy: to change the direction of development crisis is needed.

Not having time to recover from financial and economic crisis that covered the world in 2008, in the middle of last year global economy was grasped with new - more global - oil crisis. In countries where oil and gas sector stands locomotive of the economy, there's no stimulus for the development of other industries.

Drop of oil prices that began in June 2014 confirmed the fallacy of such policy. IMF analysts have estimated losses of exporting countries from the ongoing drop of prices of "black gold".

In general, loss of revenue from oil exports in 2015 to reach about 300 billion dollars (21 percent of GDP) in the member states of the Cooperation Council of Arab Gulf (GCC), about 90 billion dollars (10 percent of GDP) in countries outside the GCC and about 35 billion dollars (eight percent of GDP) in the oil-exporting countries of CCA.

According to expectations of International Monetary Fund, losses of Azerbaijan from oil prices drop could reach about 15 percent of GDP and 30 percent of exports this year.

The government has estimated their losses as well. According to specialists of SOCAR (State Oil Company of Azerbaijan), if oil price on world markets will be at the level of 60 dollars per barrel while in the state budget its price is at the level of 90 dollars, loss of State Oil Company from this difference is expected to reach 400 million manat. Meanwhile State Oil Fund of Azerbaijan expects reducing its assets by about three billion dollars this year.

Head of the Oil Fund Shahmar Movsumov hopes for stabilization of oil price this year: "Obviously, no one expects their [oil prices] rapid growth, as it was in 2009 and 2010, but they will rise from the level we see now," - he said.

Meanwhile, international organizations and leaders of major oil companies continue to deliver their pessimistic forecasts on oil prices amid statements about preservation of saturation of market at least until the second half of the year.

For example Fitch Ratings agency has revised assumptions in the base scenario for 2015 to "stress" scenario level: 50 dollars per barrel of West Texas Intermediate (WTI) and 55 dollars per barrel for Brent. Assumptions on price of oil in the baseline scenario for 2016 are lowered to 60 dollars and 65 dollars respectively.

According to IMF forecast, oil prices could rise to 72 dollars per barrel only in 2019, and it is expected to remain at the level of 57 dollars per barrel this year.

The head of BP, Bob Dudley, expects that oil prices will remain at the level of 50-60 dollars per barrel in the next three years.

"In my memory, this is the fourth strong decline in oil prices. We know what to do, the industry does well. We just need to count on lower oil prices in the next two or three years. I believe that oil quotes will be in the range of 50-60 dollars per barrel in the next three years, "- Dudley said to reporters on the sidelines of the World Economic Forum in Davos.

According to the head of "LUKOIL" Vagit Alekperov, an objective price of oil in the first quarter of this year is 50 dollars per barrel and 65-70 dollars per barrel for the whole year.

The International Energy Agency (IEA) expects global oil prices will be adjusted up by the end of this year. "In my opinion, the current price of 45 dollars per barrel is a temporary phenomenon, and we can see, in the worst case by the end of the year, upward pressure on prices," - said IEA chief economist Fatih Birol in Davos. According to him, investments in the global oil and gas industry will be reduced by 15 percent this year, which will cause reduction in the rate of production growth in the coming years, and subject to strong demand will be positive for commodity prices.

Thus, exporting countries will have to learn to live in a new environment with low oil prices, and hence with moderate incomes. It is clear that at this stage buffer reserves allow them to avoid sharp cuts in government spending, but they definitely have to strengthen control over them.

As for Azerbaijan, for which IMF has identified an acceptable level of oil prices at 80 dollars per barrel, it is going, despite the decline in revenue, not only to continue to fund social programs, but also to continue the support of major regional projects - the Southern Gas Corridor and the railway Baku-Tbilisi-Kars. The government of Azerbaijan is not in a hurry with the revision of the budget forecasts based on a real oil prices. According to the practice of previous years it is likely to happen in May.

Moreover, after the death of the King of Saudi Arabia Abdullah prices rose, although not essential, but it is to be seen for how long it remains.

Saudis, according to their leadership, are not going to reduce oil production at any level of oil prices, and this is being done in order not to lose their market space and do not let Russia and some Arab countries to take it. Currently, Saudi Arabia and Russia are in direct competition for the main oil market - fast-growing China. Azerbaijan also is preparing to enter the Chinese market in 2015, through investment in yuan and the stock market. These investments will amount a billion dollars - half by Central Bank and half by State Oil Fund of Azerbaijan. And the Chinese direction could be the start for the development of Azerbaijan's activity in the Asian markets.

Ilaha Mammadli is Trend's deputy editor-in-chief for economic issues