econintersect.com
       
  

FREE NEWSLETTER: Econintersect sends a nightly newsletter highlighting news events of the day, and providing a summary of new articles posted on the website. Econintersect will not sell or pass your email address to others per our privacy policy. You can cancel this subscription at any time by selecting the unsubscribing link in the footer of each email.



posted on 22 December 2015

How Plummeting Prices Are Spurring Reform In Oil Producing Countries

from The Conversation

-- this post authored by Nafis Alam, University of Nottingham

It has been a turbulent year for oil. Prices were strong in summer 2014, before plummeting in the second half of that year. After a modest stabilisation in early 2015, they dropped even further and are now more than two thirds lower than in summer 2014 - as the graph below shows. It's bad news for oil producers but is forcing some, at least, to reform their economies as a result.

Russia is losing an estimated US$2 billion in revenues for every dollar fall in the oil price. Its economy is heavily dependent on energy revenues, which account for 50% of its federal budget revenues. Even a dramatic interest rate hike to 17% has not helped the steep devaluation of the ruble, the stock-market drop or the amount of money leaving the country.

The situation is even worse for the world's largest exporter of oil, Saudi Arabia, which is expected to end the year with a deficit of $150 billion - about 20% of its GDP and the largest in its history. It has already started cutting project budgets and military acquisitions as a result. It is even introducing VAT for the first time.

The severity of falling oil prices on Saudi Arabia's economy can also be seen in its decision to open its stock market to foreigners in June 2015. It has also relaxed rules to allow qualified investors direct access to stocks to reduce the economy's dependence on crude.

In Venezuela, the economy was already in a shambles when oil was at $120 a barrel. And in Malaysia the government is realigning its budget by removing gasoline and diesel subsidies. Similar steps were taken by governments across the world to remove oil subsidies - Indonesia abandoned a four-decade-old policy of subsidising gasoline while India also stopped subsidising diesel and raised fuel taxes.

Of course, falling oil prices are not bad for all. They increase households' scope for consumption and at the same time decrease companies' production and transportation costs, which normally leads to higher profits and increased investments. Rapidly developing economies such as China and India, which are net importers of oil, are experiencing the most obvious immediate benefits. They are able to use savings on oil imports to reduce their trade deficit, improve government budgets, reduce inflation and redistribute money to infrastructure projects.

Out of pocket: drivers in India will no longer benefit from government diesel subsidies Steve/flickr, CC BY-NC-ND.

Blessing in disguise

This is not the end of the rout. OPEC's commitment to glutting the market, along with the prospect of US and Iranian supplies joining it, has sparked predictions that prices could drop to $20 a barrel. OPEC recently raised its production ceiling to 31.5m from 30m barrels a day. Iran, meanwhile, is gearing up to pump an extra 500,000 barrels per day onto the market as soon as sanctions are eased, which could be within months. And the US Congress has just lifted the country's 40-year export ban.

Nations that are dependent on oil revenues will therefore require immediate economic and financial reforms in 2016 to balance their budgets. One method being adopted by many Islamic states is the issuing of sharia law-approved bonds, known as sukuk. These bonds can be used to finance big projects such as the building of important infrastructure, including airports, and developing other natural resources.

Malaysia has been leading the way on this, banking on its burgeoning Islamic finance industry to reduce its oil earnings shortfall. It is planning to sell $1 billion to $1.5 billion of sovereign credit in 2016 on top of global Islamic bonds this year.

The Saudi Arabian government is similarly depending on both conventional sovereign bonds and sukuk to finance its budget deficit. In 2015, the kingdom issued sovereign bonds worth around 100 billion riyals ($26.5 billion) to ease the shortfall. It's all part of a $130 billion spending plan to diversify its economy away from oil. But to increase its share of the Islamic finance market, it will need to follow Malaysia's lead in making the regulations clear for trading sukuk.

Many more oil exporters are turning to sukuk bonds to cover their deficits, including Bahrain, Oman, Qatar and Nigeria, Africa's largest oil producer. The sukuk bond market is forecast to grow by 15% in 2016 as a result.

The emergence of sukuk has been a significant development in Islamic capital markets for many oil rich nations in the Middle East and South East Asia. Funds raised through sukuk can be allocated in an efficient and transparent way. Sukuk issuance has proven its resilience during recent periods of turbulence in global capital markets and it is showing its potential to act as a cushion for falling oil prices for oil rich countries.

The ConversationNafis Alam, Associate Professor of Finance, Director- Centre for Islamic Business and Finance Research (CIBFR), University of Nottingham

This article was originally published on The Conversation. Read the original article.

>>>>> Scroll down to view and make comments <<<<<<

Click here for Historical News Post Listing










Make a Comment

Econintersect wants your comments, data and opinion on the articles posted.  As the internet is a "war zone" of trolls, hackers and spammers - Econintersect must balance its defences against ease of commenting.  We have joined with Livefyre to manage our comment streams.

To comment, using Livefyre just click the "Sign In" button at the top-left corner of the comment box below. You can create a commenting account using your favorite social network such as Twitter, Facebook, Google+, LinkedIn or Open ID - or open a Livefyre account using your email address.



You can also comment using Facebook directly using he comment block below.





Econintersect Contributors


search_box

Print this page or create a PDF file of this page
Print Friendly and PDF


The growing use of ad blocking software is creating a shortfall in covering our fixed expenses. Please consider a donation to Econintersect to allow continuing output of quality and balanced financial and economic news and analysis.


Take a look at what is going on inside of Econintersect.com
Main Home
Analysis Blog
The Expected Effects of Petitions to Improve the Monetary System
Energy and Falling Productivity
News Blog
90% Rally In Sugar Prices Since Late 2015
U.S. Real Wage Growth: Slowing Down With Age - Part 2 Of 2
Infographic Of The Day: Four Tips To Grow Wealth
Early Headlines: Asia Stocks Down, Yen Rises, Oil Soft, Wells CEO Gives Up Bonuses, Trump Didn't Want To Embarass Clinton, US Asset Bubbles, US Crime Rates Falling And More
What is Democracy, Anyway?
Transcript Of Elizabeth Warren Questioning Wells Fargo CEO John Stumpf
Documentary Of The Week: Elizabeth Warren Indictment Of Wells Fargo
Clinton Wins Round One
Why Alzheimer's Research Is Failing To Hit Treatment Targets
Voters Still Distrust Both Presidential Candidates
What We Read Today 27 September 2016
How To Get People To Exercise
September 2016 Conference Board Consumer Confidence Now At Highest Level Since the Great Recession
Investing Blog
Banks Of Absurdity
Investing.com Technical Summary 27 September 2016
Opinion Blog
Trump Stumped In First Debate With Clinton - Will It Cost Him?
Why All Banks Should Be Federally Owned
Precious Metals Blog
War On Cash Turns To $20, $50, And $100 Bills
Live Markets
27Sep2016 Market Close: US Major Indexes Closed Higher As Commodities Fell, WTI Crude Slipped Three Percent
Amazon Books & More






.... and keep up with economic news using our dynamic economic newspapers with the largest international coverage on the internet
Asia / Pacific
Europe
Middle East / Africa
Americas
USA Government



Crowdfunding ....






























 navigate econintersect.com

Blogs

Analysis Blog
News Blog
Investing Blog
Opinion Blog
Precious Metals Blog
Markets Blog
Video of the Day
Weather

Newspapers

Asia / Pacific
Europe
Middle East / Africa
Americas
USA Government
     

RSS Feeds / Social Media

Combined Econintersect Feed
Google+
Facebook
Twitter
Digg

Free Newsletter

Marketplace - Books & More

Economic Forecast

Content Contribution

Contact

About

  Top Economics Site

Investing.com Contributor TalkMarkets Contributor Finance Blogs Free PageRank Checker Active Search Results Google+

This Web Page by Steven Hansen ---- Copyright 2010 - 2016 Econintersect LLC - all rights reserved