Oil prices are more than 70% lower than they were in the Summer of 2014. Right now, they’re around $26.40 per barrel.
But according to IHS Insight’s chief economist Dr. Nariman Behravesh, responsible for a team of over 400 economists, worse is yet to come.
“Is it feasible for oil to reach $20 per barrel in 2016? — Yes it is. Oil can reach $20 this year. But if it does, it will be temporary, because at those prices a lot of production will be unprofitable and will cease,” said Dr Behravesh in an interview with Business Insider on the sidelines of the World Economic Forum in Davos, Switzerland.
Saudi Arabia is arguably to blame for hurting its own economy because it is a “swing producer,”meaning it produces so much oil that it can shift prices depending on how much of the product it releases to the market.
The country reported that its budget deficit — the amount in which expenditures exceed revenue — for 2015 hit $98 billion (£65.7 billion). It’s spending more while less money is coming in — mainly thanks to low oil prices.
So Saudi Arabia has the power to boost its economy with a simple policy shift.
Dr. Behravesh pointed out that the pain it is feeling from keeping the oil prices low will not stop the country from cutting supply any time soon.
“The Saudis are willing to play the ‘long game.’ While their budget is under pressure, they still have ample forex reserves and will able to last at least another year and possibly two,” said Dr.Behravesh.
“The winners are consumers of oil in the developed world and also in the emerging world, for example India. The losers are high cost oil producers such as Russia and Venezuela.”
Some 2,500 people from over 100 countries for are in Davos for the WEF meeting. China’s slowdown is also being scrutinised by delegates as a key economic risk.
Dr. Behravesh said that since the slowdown has been “well known” for some time — a huge bubble isn’t about to pop and sink the Western economies.
“China’s economy has been slowing down for some time and its huge debt pile and vast amount of excess industrial capacity are well known problems,” he said.
“The real reason for China’s recent financial problems are the burst stock market bubble and the chaotic response of the government to the crash and the intense downward pressure on the exchange. This had spooked the markets and undermine confidence in Chinese policy makers.
“The exposure of the developed world to China is fairly small. The financial linkages are weak and the US and EU do not export that much to China. Assuming that China is able to stabilise its financial markets, then global markets will become calmer.”
So what are the other key risks for this year? Well, Dr. Behravesh says “it’s the rising tensions between Iran and Saudi Arabia.”
“In the unlikely event that this escalates into a bigger conflict then the impact on oil markets could be very problematic.”
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