Lotus Ruan, MAAPPS // Feb 5, 2015
International news headlines have been hooked by a volatile energy market for the past weeks. In fact, global economies have ben gripped by the unpredictable oil prices since last year. In the past two days alone, we saw crude oil prices going up and abruptly falling below $50—again. WTI oil prices, often used as a grade of crude oil used as a benchmark in oil pricing, dipped 9.6% to $47.95 a barrel whereas Brent crude prices tumbled 6.37% to $54.22.
While we, as common people, might cheer for the falling oil prices when we fill up our car with cheaper gas, most energy-abundant countries which rely their national economy on extractive industries just hate it. The reason is simple: oil deflation or failing prices are most frequently accompanied by economic stagnation or at the very least a loss of revenues. In our local Canada context, Suncor Energy Inc., Canada’s biggest crude-oil producer, reported an 81% drop in fourth-quarter profits yesterday as a result of plunging global crude prices. Kazakstan, my case study country in this year’s Asia Pacific Policy Project, might suffer worse.
To understand the possible impact of plugging oil prices on Kazakhstan, it is necessary to have an idea how important oil and gas industry is to this upper-middle income level country.
Kazakhstan is one of the world’s major oil producers. Its giant Tengiz, Karachaganak, and Kashagan oil fields produced petroleum and other liquids at 1.70 million barrels per day (bbl/d) in 2014. It is estimated that Kazakhstan had proved crude oil reserves of 30 billion barrels as of January 2014—the second largest endowment in Eurasia after Russia, and the 12th largest in the world, just behind the United States.
To Kazakhstan, the oil and gas industry is one of the main drivers of its GDP growth and it is a large tax source to its national budget revenue. The Ministry of Economy and Budget Planning of Kazakhstan announced in 2013 that its average annual growth from 2014 to 2018 will be 6.5%; of its GDP, the oil and gas industry shared 25.2% in 2012 and the figure is still on the rise. The state’s involvement and interests in the oil and gas industry are also reflected in its oil and gas industry structure. The vertically integrated national company KazMunayGas controls 20 percent of total oil and gas known reserves of the country.
The abundant natural resources now turn out to be both a blessing and a curse for Kazakhstan.
Due to its heavy reliance on the extractive industries—the oil and gas in particular, its national economy is more susceptible to external challenges. Analysts point out that the slumping oil prices might lead to the falling prices for other commodities such as gold, which is also one of the main extractive resources to Kazakhstan. Because of such, Kazakhstan’s government recently revised its budget for the period 2015-2017. The current budget is based on the price of oil average $80 per barrel. According to its Ministry of National Economy official, the new budget would be calculated on oil pricing on the level of $50 per barrel.
But challengers are still awaiting.
For Kazakhstan, as some has pointed out, the continuous fall of oil prices will result in serous negative macroeconomic consequences. Employment and the prospect for manufacturing industry might be the first to suffer. While Kazakstan has succeeded in creating job positions and keeping its unemployment rate roughly around 5%, 60% of the manufacturing contracts are for the oil industry. Exports will decrease as well, which leads to the slowdown of its GDP growth. According to the IMF, the oil price at which Kazakhstan can balance its budget is $65.5, but a price below $90.6 means the balance of payments dipping into the red. If the price of crude continues to plummet, Kazakhstan might face zero growth.
There is no doubt that EITI’s goals are important to the healthy and transparent development to a country’s extractive industries. But in face with the challenges brought by a volatile global energy market, Kazakhstan or any other resource-intensive countries might also want to consider how to effectively and reasonably structure their economy structure to make them less susceptible to external crisis.