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Falling oil prices may disrupt budget calculations
Economic 2024/08/08
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Economic experts expressed their fear of the continued decline in oil prices in global markets, stressing that the decline in oil prices below the limits on which the current year’s budget was based, which amounted to $80 per barrel, could cause a financial gap that could lead to a reduction in government spending on vital projects or resorting to borrowing, stressing the need to find strict precautionary measures in light of the tensions that could contribute to further declines in the prices of “black gold.”
This year’s budget was based on an oil price of $80 per barrel, an indicator that many economists have called for hedging against as a result of the decline in oil prices in recent days to $75, stressing that this could exacerbate the budget deficit levels and confuse other economic calculations.
In the meantime, the Prime Minister’s financial advisor, Dr. Mazhar Mohammed Saleh, believes that economic circles around the world were surprised by the sharp fluctuations and declines in the US stock market amid a wave of panic over fears of a potential recession in the world’s largest economy, and that “these declines were based on a combination of local and global economic factors that led to a weakening of investor confidence in the performance of the US economy. If the situation continues for six consecutive months, the recession will turn into a major depression that will hit all economies around the world.”
Saleh pointed out that “the US Energy Information Administration had previously announced that it expected average prices to reach about $89 per barrel for the rest of 2024, but there is a gradual decline in global oil prices, which has begun to coincide with the decline in the value of financial assets in the US markets, especially the decline in the benchmark oil (Brent crude), which ranges at about $76 per barrel for futures contracts after reaching about $88 per barrel last June, which requires more caution and economic precaution.”
In support of the government advisor’s warnings, economic expert Dr. Nawar Al-Saadi, during his interview with “Al-Sabah”, believes that “adopting a price of $80 per barrel in the budget represents a great risk, especially in light of the recent developments witnessed by global markets, as the collapses that hit global stock exchanges caused the price of Brent crude to drop to $76 per barrel, which raises concerns about the realism of the estimates adopted in the Iraqi budget.”
“Global financial markets, especially the oil market, are subject to extreme fluctuations due to many factors, such as geopolitical tensions, decisions related to production policies by producing countries, as well as global economic shifts such as slowdowns in growth or financial crises. This situation makes it very difficult to accurately predict the price of oil in the long term, which means that setting a price of $80 in the budget may be overly optimistic,” explained Al-Saadi.
In light of these facts, Al-Saadi explains, “There are real concerns that the continued decline in the price of oil below the level specified in the budget will create a large financial gap, which could push the government to take exceptional measures to bridge the deficit, such as reducing spending on vital projects or resorting to borrowing, which could add financial burdens to the Iraqi economy and increase economic challenges in the future.”
The spokesman also indicated that “the continued decline in oil prices could directly affect the ability to finance basic services and infrastructure, which could lead to a decline in economic growth rates and an increase in unemployment rates. This situation could worsen if the government does not take rapid steps to enhance non-oil revenue sources and diversify the Iraqi economy to reduce dependence on oil.”
The economic expert, Dr. Nabil Al-Marsoumi, did not deviate far from the previous opinion, when he explained to “Al-Sabah” that “the economic indicators for the second half of this year and even next year show that oil prices are heading towards a decline, and that the global oil markets today are very weak due to the specter of the economic recession dominating the United States, resulting from the decline in industrial performance and the decrease in demand for diesel fuel.”
Al-Marsoumi pointed out that as a result of these global factors, the price of Brent crude is ranging between $74-$75-$76, which could lead to an exacerbation of the country’s budget deficit of about 64 trillion dinars, and thus the budget deficit will increase, and the deficit will be financed from internal and external borrowing of more than 46 trillion dinars, which has negative repercussions on the economy, expecting oil revenues to decline in the next 6 months.
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