KUWAIT: OPEC’s decision to reduce production by 100,000 barrels daily and to remove a similar increase announced at the Jeddah meeting on Sept 5, reflected a high degree of uncertainty. This state of sharp fluctuation in oil prices, with a downtrend is the result of variables over which neither OPEC nor others seem to have any control. While the Russian-Ukrainian war and its economic repercussions occurred while the world economy had not yet recovered from a previous turmoil, it also tightened the Chinese economy in the second quarter of the year leading to a decline in its demand for oil. More importantly, the pessimistic expectations of the performance prospects for major economies still exist.
During that period, the highest price of Brent crude oil per barrel reached US$ 133.18 on March 8 and its lowest was at US$ 95.06 on August 22 . The difference is US$ 38.12 in a span of only several months, which is represented by the risk premium that has dropped over time. This premium, whether for geopolitical or economic reasons, may rise or fall substantially when its justifications are either exacerbated or eliminated.
Dealing with it should take into account that it is an exceptional case. Today’s world is different from the one that had to go through high oil prices due to its export ban to the West during the October 1973 War; likewise, it differs from its increase in 1979 after the Iranian Revolution. Technological progress in the transport sector is advanced. Even after these two cases, oil prices and production fell sharply in less than a decade.
The purpose of the above introduction is to recall what happened in Kuwait in the summer of 2020, when the Ministers of Finance and Oil disagreed on social media platforms over KD 7 billion profits, withheld by the Kuwait National Petroleum Corporation (KNPC). The Minister of Finance wanted them immediately, to avoid being in a position where he would be unable to pay salaries and wages. The government then entered into a feud with the National Assembly, when it submitted its proposals to request that it be allowed to withdraw, from future generations’ reserves or resort to borrowing from the global market, to counter the liquidity drain.
Today, due to the stated exceptional circumstances of the world, it was estimated in Al Shall, the possibility of the public budget achieving a surplus of slightly more than KD 10 billion for the fiscal year 2022/2023. But with the recent fall in oil prices, the estimated surplus may begin to decrease, though it remains on a significant scale. Associated with this, the signs of a return to the loose fiscal policy begins to emerge and so does promises from high government levels of bonuses and allowances unrelated to productivity, but in place to attract loyalties.
This is not just another clever government signal to start a similar auction, in the era of parliamentary elections and their subsequent results. What is assumed to happen is, the transfer of most of the revenues of the exceptional and temporary risk premium on oil prices, to an emergency reserve that saves the country from a liquidity bottleneck crisis, similar to the summer of 2020, in addition to the need to hedge against the inevitably negative possibilities of oil market conditions for a short – term period.