Even after falling 60,000 barrels in September, OPEC oil production remains strong. Saudi Arabia was the only OPEC member to reduce supply last month, cutting back to 10.26 million barrels a day from 10.4 million barrels a day in August. Despite dramatically lower prices, there is perhaps one simple reason not to expect any reasonable amount of production cuts from major Gulf states.
This time it's different
During previous oil crises, the finances of major oil producers were in much better condition. For that reason, those countries could internally afford to shoulder lower government revenues stemming from lower production (given that nearly all of this output is state-owned).
Today, the situation is very different.
A perfect example is Saudi Arabia. Given the impact from the Arab Spring, the kingdom was forced to continue lavishing its citizens with high government spending. As you can see from the chart below, even when Brent fell below $50 in 2009, the country was able to avoid government deficits. After continued spending increases, however, the recent collapse has pushed government revenues below spending, a rare occurence. Because of rising political and social pressures, cutting spending is a low probability.
Across OPEC and most Gulf states, the budget situation has been similair. Even Kuwait and Qatar, long believed to avoid deficit spending even with bearish oil predictions, are expected to spend more than they take in this year. The charts below show the breakeven price points for budget deficits across Gulf countries. Everyone is below that point.
The simple reality is that the imperative to spend more on government services for many OPEC and Gulf countries has never been higher due to social and political instability. For example, Saudi Arabia said that it projects total expenditures in 2015 to reach $229.3 billion, an increase of nearly 1% from the last record-setting budget. The kingdom expects to run a wider deficit to continue with its spending plans.
Without the ability to cut spending, revenues must be raised one way or the other. The easiest way: Continue pumping low cost oil, even at depressed profit margins. The fact is, few major oil producing countries can afford to lower supply. In the past, Saudi Arabia has acted as the market hero, cutting supply to save the market. This time around, it's doubtful that any major producer will step up given the issues at home.
