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The following provides information on OPEC oil revenues, and particularly the impact to date of the sharp decline in oil prices experienced since late 1997. OPEC countries include: Algeria, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, United Arab Emirates, and Venezuela. Sources for this report include: Economist Intelligence Unit, International Energy Agency, Middle East Economic Digest, Middle East Economic Survey, New York Times, OPEC Annual Statistical Bulletin, and WEFA.

EXECUTIVE SUMMARY
The main conclusions of this study are the following:
* OPEC oil export revenues for 1998 are projected to be $80.5 billion (in constant $1990), the lowest level since 1972, and less than one-fifth compared to the peak revenue year (also in constant $1990) of 1980.
* OPEC oil export revenues are expected to be one-third less in 1998 compared to 1997.
* The sharp decline in OPEC oil revenues is having serious implications for both net oil exporting and net oil importing countries worldwide. Changes in oil prices (and OPEC revenues) have wide-ranging ramifications for the world economy.
* Declining OPEC oil revenues poses difficult social/economic/political challenges and tradeoffs for many OPEC countries.
* Most OPEC countries are overwhelmingly dependent on oil export revenues, and declining oil prices have forced governments to respond through a variety of fiscal (i.e., cutting subsidies) and monetary (i.e., devaluating currencies) policy measures.
* Saudi Arabia maintains the highest share of OPEC oil export revenues (at around 30% of the OPEC total). Other top OPEC oil exporters include Venezuela, Iran, the United Arab Emirates, Nigeria, and Kuwait, with Iraq increasing fast.
* Declining oil export revenues are affecting non-OPEC countries, such as Russia and Mexico, severely as well. Russia's current economic difficulties are in part due to a sharp decline in the country's oil and gas export revenues. * If oil prices had not collapsed beginning in late 1997, OPEC oil export revenues for 1998 would likely be running more than 30% higher than they actually are.

OVERVIEW
The sharp decline in world oil prices, beginning in late 1997, has had serious implications for OPEC oil export revenues, balance of payments, budgets, and overall economic conditions. Since late 1997, the OPEC "basket" price (a weighted average of Algeria's Saharan Blend, Indonesia's Minas, Nigeria's Bonny Light, Saudi Arabia's Arabian Light, Dubai, Venezuela's Tia Juana, and Mexico's Isthmus) has fallen more than $7 per barrel (around one-third), from nearly $19 per barrel in October 1997 to $11.91 per barrel in August 1998. In real (constant $1990) terms, world oil prices during 1998 have been running at the lowest levels since 1973, prior to the Arab Oil Embargo late that year, and since 1986, following the oil price collapse of late 1985/early 1986. In a sense, this represents a reverse oil price "shock" (downward in this case), in contrast to the sharp oil price increases of 1973/4, 1979, and 1990. In the current situation, low oil prices are causing a "shock" to oil exporting countries, while the economies of oil consuming countries are being positively impacted. In fact, the current situation is similar to, but not as extreme as, the oil price collapse of 1985/6, when oil prices were cut in half.

Low oil prices since late 1997 have been caused by several main factors, including: 1) OPEC's December 1, 1997 agreement to raise the group's production quota by 10%; 2) a warmer-than-normal winter (1997/1998) in the northern hemisphere; 3) increasing Iraqi oil exports; and 4) reduced oil demand due to the severe economic crisis in East Asia). If low oil prices continue for a prolonged period of time (and at present, no obvious end appears in sight, at least in the short-term), this could result in long-term reductions in OPEC oil export revenues, and would most likely force OPEC countries to make difficult economic/social/political tradeoffs. The International Monetary Fund stated in May 1998 that "if sustained," the decline in oil export revenues "would pose a serious risk to the growth outlook" for the Persian Gulf region, "and particularly for the region's largest oil exporters such as Saudi Arabia and Kuwait."

Collapsing oil prices have thrown 1998 budgets for OPEC countries into chaos, as members scramble to cut expenditures, raise revenues, and minimize budget deficits. During the first 6 months of 1998, OPEC countries earned $53 billion in revenues from the export of crude oil. This represents a direct reduction in OPEC crude oil export revenues of $22 billion (30%) from the first six months of 1997. For 1998 as a whole, OPEC is expected to earn $101 billion in oil export revenues, down 32% from $149 billion in 1997 (see Table 1). The OPEC Basket Price averaged around $12.37 per barrel during the first 6 months of 1998, compared to $19.30 during the first six months of 1997.

In real terms (constant $1990), OPEC revenue peaked in 1980, at $439 billion (see graph). OPEC's worst revenue year in constant dollar terms since the early 1970s was in 1986, following the oil price collapse of late 1985/early 1986. In 1986, OPEC earned $83 billion (in constant $1990), compared to $77 billion in 1972. OPEC revenues for all of 1998 will most likely be around $81 billion (in constant $1990). Under this scenario, OPEC revenues in real terms in 1998 will be less than one-fifth 1980 revenues. If agreed-upon OPEC output cuts (see EIA analysis of OPEC 1998 cutbacks) fail to boost oil prices, it is possible that 1998 will be the worst year for OPEC revenues (in real terms) since 1972 including 1986, following the oil price collapse of late 1985/early 1986.

Individual OPEC members' shares of total oil export revenues have fluctuated over the past 3 decades, but several trends are apparent (see graph). First, Saudi Arabia consistently has earned the most oil export revenues in OPEC, with its share ranging from below 20% in 1972 to over 40% in the early 1980s. Today, Saudi Arabia's oil export revenues account for about 30% of total OPEC revenues. Second, Iran's revenue share fell after the 1978/79 Iranian Revolution (followed soon thereafter by the Iran-Iraq War for much of the 1980s), and has never recovered since. Today, Iran accounts for about 10% of total OPEC oil export revenues. Third, Iraq's oil export revenue share has fluctuated greatly, from a high of around 15% in the late 1980s, to near 0% for several years following its August 1990 invasion of Kuwait (and the subsequent United Nations oil embargo, which continues to this day). Iraqi oil export revenues have increased over the past two years or so under the U.N. "food-for-oil" deal, which permits limited Iraqi oil exports to buy food and medicine, for war reparations, and for other U.N.-authorized purposes. Iraq's share of total OPEC oil revenues is now increasing towards 10%. Fourth, Venezuela has maintained a fairly consistent share -- around 10% -- of OPEC oil revenues. Finally, the rest of OPEC has earned between 40% and 50% of total OPEC oil export revenues between 1972 and 1998. Around half of this was earned by "other Persian Gulf" countries, including Kuwait and the United Arab Emirates.

Oil Prices and Revenues: a Brief Economic Analysis
The price of oil is of critical importance to today's world economy, given that oil is the largest internationally traded good, both in volume and value terms (creating what some analysts have called a "hydrocarbon economy"). In addition, the prices of energy-intensive goods and services are linked to energy prices, of which oil makes up the single most important share. Finally, the price of oil is linked to some extent to the price of other fuels (even though oil is not fully substitutable for natural gas, coal, and electricity, particularly in the transportation sector). For these reasons, abrupt changes in the price of oil have wide-ranging ramifications for both oil producing and consuming countries. The sharp decline in world oil prices since late 1997 certainly qualifies as an abrupt and significant change.

Generally speaking, a sharp decline in oil prices benefits oil importing nations and hurts oil exporters. For importers, lower oil prices act similarly to a tax cut, increasing consumer disposable income (click here for a chart showing the relationship between U.S. GDP and world oil prices). This allows for looser monetary policy, and hence lower interest rates with lower inflation and stronger economic growth (the situation the United States currently finds itself in) than would otherwise be the case. Sharply higher oil prices, on the other hand, have been identified as a major cause in 7 out of the 8 post-World War II recessions in the United States. Although this may sound like a straightforward relationship, the economics of oil prices changes actually are actually somewhat more complicated.

For one thing, oil revenues earned by producers are to a large extent "recycled" back to consumers in imports of all types of goods and services. For instance, Saudi Arabia may use its oil export revenues to buy construction goods and services, military hardware, food, or any other goods or services from companies located in its oil customer countries, like the United States, Japan, France, Italy, and Germany. In this way, net oil importing nations earn back some (or much) of the "petrodollars" they originally spend on oil purchases. A drop in oil revenues for net oil exporters, as in the present situation, leaves oil producers with fewer "petrodollars" to "recycle"; in other words, they can't buy as much from countries like the United States, thus hurting U.S. exports.

Another complicating factor in considering the impact of oil price fluctuations on oil importing countries is that certain states, or regions, within a country may be affected totally differently than other states or regions, while the effect on the overall economy may be positive or negative overall. In the United States, for instance, Alaska and Texas are major oil exporting states, and are therefore hurt on balance by lower oil prices. Northeastern states, on the other hand, are major net oil and gas importers, and are therefore generally helped by the same price drop.

The magnitude of any economic impact of an oil price change depends on several mediating factors, including the level, duration (both actual and perceived) of the oil price change, as well as the prevailing demand and supply elasticities for oil. The implications are quite different, for instance, between an oil price "shock" which ends quickly or which lasts a long time. Shifts in energy intensity, for instance, come about through shifts in economic structure (i.e., towards or away from energy intensive industries) or adoption of new technologies (i.e., more or less fuel efficient automobiles) which can take years, and which may only occur if people believe that the oil price change will last a long time.

Another issue is consumer expectations. If consumers are "surprised" (for instance, they believe an oil price change will be short-lived when in fact it is long-lived), this can result in a sub-optimal (either too-quick or too-slow) adaptation to the price signal. Demand elasticities (the degree of consumer response to price changes) are further complicated by their asymmetrical nature -- in other words, elasticities are different for an oil price increase than for a comparable decrease. In fact, most economic evidence points to the conclusion that a sudden, sharp oil price increase (or shock) has a negative impact on the economies of net oil importing nations. The impact of a similar oil price decrease (downward shock), on the contrary, has been found not to be as large. Such asymmetries can occur for a variety of reasons, such as consumer expectations and psychology, the "irreversibility" of technological improvement, and other factors, such as the high share of taxes (in Europe as high as 80%) in the price of oil products in many countries.

For oil producing countries, impacts of oil price fluctuations can vary greatly depending on many factors. Within OPEC, countries like Algeria, Nigeria, and Indonesia, for instance, contain relatively large populations and relatively small oil reserves. These countries, therefore, generally have tended (with numerous exceptions) to favor a strategy of short-term revenue maximization, and tend to have had relatively low political/social tolerance for the pain caused by low oil revenues. Countries with small populations and large oil reserves, like Kuwait, the United Arab Emirates, and Saudi Arabia, on the other hand, have tended (also with exceptions) to favor a strategy of long-term revenue maxmization, and generally have been in stronger positions to weather price declines.

The effect of oil price fluctuations on oil producing countries also varies greatly depending on whether the country is a relatively low-cost or high-cost oil producer. For low-cost producers (like Saudi Arabia, Kuwait, the United Arab Emirates, and Iraq), the marginal cost of producing each additional barrel of oil is relatively low, and therefore it often remains economical to produce oil from these countries when oil prices fall. For relatively high-cost oil producers like the United States, Norway, the United Kingdom, or Canada, on the other hand, low oil prices can turn many oil fields from economical to uneconomical in a short period of time. High oil prices, meanwhile, generally have tended to encourage oil exploration and production in previously marginal fields (like the North Sea in the late 1970s and early 1980s). [For further details on finding costs by region, see the U.S. Energy Information Administration report, Performance Profiles of Major Energy Producers 1996, Table 19.]

Finally, the impact of oil price fluctuations on oil producers (and consumers, for that matter) is greatly affected by government reactions (or lack thereof). An oil producing country can, for instance, react to an oil price collapse by devaluing its currency, cutting subsidies, raising taxes, privatizing energy industries, etc. Oil consumers, meanwhile, can mitigate or worsen the impact of oil price changes by various policies. To defend themselves against oil price increases, in particular, consuming nations have created strategic oil reserves, coordinated with other oil importing nations, and attempted to reduce dependence on oil imports, among other policies.

Algeria
Algeria is heavily reliant on oil and natural gas export revenues. In 1997, Algeria hydrocarbon export revenues accounted for 97% of Algeria's total export revenues, and 58% of total fiscal revenues. A rule of thumb for Algeria is that every $1 per barrel drop in the price of Algerian Saharan Blend results in a $560 million annual revenue loss (around 4.3% of normal export levels, 2.6% of the country's budget, and 0.8% of Gross Domestic Product -- GDP). For Algeria's light crude (Saharan Blend), prices decreased 40%, from over $20 per barrel in October 1997, to around $12 per barrel in July 1998. In addition to lower prices for its oil, Algeria also has pledged to cut a total of 80,000 barrels per day (bbl/d) in oil production from February 1998 levels as part of overall OPEC production cutbacks. As a result both of lower oil prices and lower production, Algeria has experienced a 35% decline in oil revenues, to an estimated $4.9 billion in 1998, compared to $7.5 billion in 1997. This is putting pressure on government finances as well as on the country's overall economic growth. In recent years, Algeria's real GDP had grown strongly (5.5% in 1997, for instance). For 1998, a 6% growth rate had been projected prior to the oil price collapse, but this growth rate now has been revised downwards to 2%. The decline in Algeria's oil export revenues already has put pressure on the country's finances, with the government reducing its assumed oil price for 1998 budgetary purposes by $3 per barrel. Finally, declining oil revenues are a complicating factor for a country which is already experiencing severe economic and social tensions and has suffered an estimated 75,000 deaths resulting from a six-year conflict with the Islamic Salvation Front and the Armed Islamic Group. On the positive side, Algeria is a major natural gas exporter, and continued expansion in this area could help to mitigate the negative effect of declining oil revenues.

Indonesia
Indonesia's oil revenues are expected to fall 32%, to $3.5 billion, in 1998, compared to $5.1 billion in 1997. This comes in addition to the already dire economic straits Indonesia finds itself in as part of the Asian economic crisis. Indonesia exports around 750,000 bbl/d of oil (on a net basis), with oil and gas exports accounting for about 23% of Indonesia' total export revenues. For 1998, Indonesia's economy is now expected to fall 13.5%-20% in real terms. To cope with its economic crisis (which is being aggravated by low oil prices), Indonesia has taken a number of measures, including lowering its oil price projection for the country's 1998/99 budget from $17 per barrel to $13 per barrel currently. In addition, Indonesia also has taken a number of measures affecting its oil and gas sectors. On July 29, 1998, for instance, the Indonesian government announced that it would postpone exploration at the giant (42 trillion cubic feet) Natuna natural gas field operated by Exxon (Mobil holds a 26% stake as well, with Indonesia's Pertamina holding 24%). Indonesia also has cut back on production of polyethylene, polypropylene, and other petrochemicals. Meanwhile, Indonesia has pledged to cut 100,000 bbl/d from its February 1998 oil output levels as part of OPEC's efforts at reversing the world oil price decline.

Iran
Oil exports account for about 36% of Iran's state revenues, and 80%-85% of total export earnings. Iran is suffering serious economic problems, exacerbated by low oil prices (Iran also has pledged to cut 305,000 bbl/d from February 1998 levels). Iran originally had budgeted for the fiscal year beginning March 21, 1998 based on an oil price of $17.50 per barrel. This was revised downwards in January 1998 to $16 per barrel, and then again to $12 per barrel effective on March 21, 1998 (the beginning of country's the new fiscal year). For 1998 as a whole, Iran's oil revenues now are expected to be $10.2 billion, down 35% from $15.7 billion in 1997. In March 1998, President Khatami said that "the structure of our economy is sick" and that "we have to get used to spending less hard currency." In addition, Khatami and his ministers have emphasized the importance of fiscal discipline and of balancing the budget. In March 1998, however, Iran's Central Bank Governor, Dr. Mohsen Nourbakhsh, estimated that Iran had $26.4 billion in foreign debt obligations, including $14.1 billion in confirmed debt. Repayment of this debt will be made much more difficult due the sharp decline in Iran's oil revenues. Iran also will most likely experience a larger budget deficit, a depreciation of the Iranian riyal, and a shortage of foreign exchange. Other problems facing Iran's economy include inflation and unemployment. At current oil export levels, Iran loses about $1 billion per year in oil export revenues for every $1 drop in oil prices.

One result of the decline in Iran's oil export revenues has been a lack of available cash for much-needed investment in the country's oil sector. As a result, Iran is looking increasingly towards western capital markets as a source of investment capital. In addition, President Khatami and oil minister Namdar Zangeneh apparently have decided to open previously forbidden onshore oil fields to foreign oil companies, which have been barred by the constitution from the strategic oil sector since the 1979 Iranian revolution.

Iraq
The effect of declining world oil prices on Iraq is more complicated than other OPEC countries for one main reason: Iraqi oil exports continue to be constrained by United Nations oil export sanctions, imposed following Iraq's invasion of Kuwait in August 1990. With U.N. permission, Iraqi crude oil production (including lease condensates) has increased by around 1.5 million bbl/d since late 1997 -- from 781,000 bbl/d in December 1997 to around 2.2-2.3 million bbl/d in August 1998. Iraqi oil exports also have been increasing steadily, reaching an estimated 1.7 million bbl/d in July 1998 and perhaps as much as 1.8 million bbl/d in August (up nearly 500,000 bbl/d since April 1, 1998). This increase in Iraqi oil exports has been playing a significant role in the world oil glut which is responsible for the sharp decline in world oil prices since late 1997. So, Iraq is in the strange (and unique) position wherein its ability to meet the increased dollar value of oil exports ($5.26 billion every 6 months) permitted by the United Nations is being made more difficult by the sharp decline in oil prices caused partly by its own increased oil exports. To meet the $5.26 billion, 6-month target, Iraq would have to increase its oil exports from 1.7 million bbl/d to over 2.4 million bbl/d (assuming $12 per barrel). For the full year of 1998, Iraq is forecast to earn $6.1 billion in oil export revenues, up 45% from $4.2 billion in 1997.

Kuwait
With oil revenues accounting for about 90% of Kuwait's government income (and nearly half the country's GDP), the sharp drop in oil prices obviously has had serious implications for Kuwait's finances. For 1998, Kuwait oil export revenues are expected to reach $7.9 billion, down 33% from $11.8 billion in 1997. At the beginning of March 1998, in response to plummeting oil prices, Kuwait's Finance Ministry asked state bodies to cut spending by 25% for the remainder of the fiscal year ending June 30, 1998. In April, Kuwaiti oil minister Saud al-Sabah warned that Kuwait could face an "economic catastrophe" if Kuwaiti crude remained at $10.50 per barrel. In early May, Kuwait's Supreme Petroleum Council decided to increase domestic fuel prices by 40%-50%. Kuwait has pledged to cut 225,000 bbl/d from its February 1998 oil production.

Libya
Libya is expected to earn $5.8 billion from oil exports in 1998. This represents a 36% decline from Libya's 1997 earnings of $9.0 billion. Oil export revenues account for about 95% of Libya's hard currency earnings. In addition to lower oil prices, Libyan oil export production and export earnings have been affected by U.N. sanctions imposed following the 1988 bombing of Pan Am flight 103 over Lockerbie, Scotland, in which 270 people were killed. On April 15, 1992, the United Nations imposed economic sanctions on Libya for refusing to extradite two Libyan nationals accused of carrying out the attack. U.N. sanctions were extended in November 1993 to include a freeze on Libyan funds overseas, a ban on the sale of oil equipment for oil and gas export terminals and refineries, and tougher restrictions on civil aviation and the supply of arms. On August 5, 1996, the United States imposed additional sanctions on Libya. This action -- the Iran-Libya Sanctions Act (ILSA) of 1996 -- extends U.S. sanctions on Libya to cover foreign companies that make new investments of $40 million or more over a 12-month period in Libya's oil or gas sectors. In late August 1998, the United States and the United Kingdom proposed that the two Libyan suspects in the Lockerbie bombing be tried in the Netherlands under Scottish law. Libya had previously demanded such an arrangement. The outcome of this situtation could have serious repercussions one way or the other for sanctions.

As a result of both sanctions and lower oil prices, Libya's economy has barely grown in several years (0.7% growth in 1996, 0.6% in 1997, and a forecast decline of 0.5% in 1998). The country has been forced to adopt a more conservative fiscal policy and to limit public infrastructure spending to a few main projects, such as the Great Man Made River (GMR), a $25 billion project to bring water from underground aquifers beneath the Sahara to the Mediterranean coast. Libya has pledged to cut 130,000 bbl/d from February 1998, compared to its 1997 crude oil production of 1.4 million bbl/d, in an attempt to boost oil prices.

Nigeria
Crude oil exports generate over 90% of Nigeria's foreign exchange earnings. Due to lower oil prices and production cuts (pledged), Nigeria's crude oil export revenues are expected to fall by 36% in 1998, to $9.2 billion, compared to $14.5 billion in 1997. The sharp decline in world oil prices and export revenues comes amidst a period of political and social turmoil for Nigeria, especially following the deaths of President Sani Abacha on June 8, 1998 and of Mashood Abiola -- presumed winner of 1993 presidential elections -- on July 7. All this is having a serious effect on Nigeria's short-term economic and fiscal outlook. Real GDP, for instance, is expected to grow only 2.2% in 1998, compared to 3.8% in 1997. Nigeria's budget for 1998 was made with an assumption of $17 per barrel oil, compared to the actual $13 per barrel which the country has seen so far in 1998. Nigeria's government already has cut back on funding for oil sector joint ventures, delayed the release of capital budget funds, and capped foreign debt repayments. Nigeria has pledged to cut 225,000 bbl/d from February 1998.

Qatar
Oil continues as the dominant feature of Qatar's economy, although natural gas is becoming increasingly important. Oil accounts for around 70% of Qatar's government revenues, and also has an impact on production of condensate and associated natural gas. The collapse in oil prices hurts Qatar in several ways, not the least of which is the loss of revenues which were to be used for balancing the country's budget and paying for a huge liquefied natural gas (LNG) development program (Qatar has the third largest gas reserves in the world, after Russia and Iran). Qatar's oil export earnings for 1998 are currently forecast at $3.0 billion, down 26% from $4.0 billion in 1997. Qatar's sovereign debt stands at around 30% of GDP. Much of this debt has been accumulated as the country has invested in LNG, petrochemicals, refining, and electric power capacity. This capacity should start coming online largely beginning in 2000, but meanwhile, Qatar is facing a period of tight budgets and lower economic growth (4.5% forecast for 1998, compared to 10.5% growth in 1997). Qatar has pledged to cut 60,000 bbl/d from February 1998. Despite the fall in oil prices, Qatar is still planning to increase oil production capacity by 20%, from 714,000 bbl/d at present to 854,000 bbl/d, by the end of 1999.

Saudi Arabia
Saudi Arabia is the largest OPEC oil producer and as a leader in the organization's production quota decisions, including the decision of December 1, 1997, to raise the OPEC oil production ceiling by 10% (although actual OPEC production increased by less than 2% between November 1997 and February 1998). Saudi Arabia is a critically important player behind the recent oil price collapse, and also in actions taken to reverse this situation. Currently, Saudi Arabia produces a little more than 8 million bbl/d of crude oil (30% of total OPEC crude production). This represents a significant cut from Saudi Arabia's February 1998 production of 8.7 million bbl/d. Saudi Arabia also supplies 16% of U.S. crude imports (Venezuela and Mexico are Saudi Arabia's main competitors for U.S. market share). The current sharp decline in oil revenues which the country is experiencing represents a major challenge for the Saudi government (since oil export revenues account for nearly 90% of total Saudi export earnings). Aside from the overall oil price decline which is affecting all world oil producers, Saudi Arabia's difficulties are being compounded by the economic crisis in Asia, since Asia accounts for around 60% of Saudi oil sales.

Saudi Arabia earned about $45.5 billion in 1997 from crude oil exports. In 1998, this is expected to fall by 35%, to around $29.4 billion (Saudi Arabia loses an estimated $2.7 billion for every $1/bbl fall in the price of oil). Since January 1998, the price of Saudi Arab Light has averaged between $10 and $13 per barrel, down around $7 per barrel vs. the last few months of 1997. These prices also are well below Saudi Arabia's original $16 per barrel oil price expectations originally assumed for use in 1998 budgetary calculations. In inflation adjusted terms, these represent the lowest Arab Light prices for a sustained period of time since 1973.

Saudi Arabia is being affected significantly -- both positively and negatively -- by the decline in oil prices as well as by its supply cutbacks (pledged, and being implemented) of 725,000 bbl/d. On the positive side, lower oil prices -- to some undefined point -- can be helpful to Saudi Arabia for several reasons. For one, Saudi Arabia has at least 250 billion barrels (and as much as 1 trillion barrels) of oil in the ground, and is among the world's lowest-cost oil producers. Given the country's high reserve to production ratio (i.e., the time its oil reserves are expected to last at current production rates) of 100 years or more, low oil prices can help to accomplish several main economic objectives for Saudi Arabia. These include: deterring development of alternative energy sources, including increasingly economical "unconventional" oil sources such as Canadian tar sands and Venezuelan orimulsion; maintaining Saudi market share against its main competitors both in and out of OPEC, especially in the key U.S. market; and deterring marginal non-OPEC oil production investment.

On the negative side, Saudi Arabia -- despite attempts to diversify -- remains heavily dependent on oil revenues, for 88% of total export earnings, about 75% of state revenues, and 40% of GDP). This year's oil price decline comes just as the Saudi economy appeared to be recovering from the adverse impacts of the 1990/91Gulf War. The dramatic reduction in these revenues will likely result in a significantly lower GDP growth rate (possibly even negative, compared to an average 4.4% annual growth rate over the past two years), as well as a higher budget deficit (possibly 4.8% of GDP) than expected for 1998. Meanwhile, the oil price decline has forced state oil and gas company Saudi Aramco (whose expenditures account for around 6% of Saudi GDP) to reassess its capital expenditure program, to delay a series of upstream and refining projects (at an estimated savings of $2 billion this in 1998), and to defer bidding on the $150-$200 million Haradh (phase 2) crude oil production increment project, its only upstream oil project in the tendering process. This decision apparently leaves Saudi Arabia with only two major energy projects under bidding -- the $2 billion Hawiya natural gas processing plant, and an $800 million upgrade of the Rabigh oil refinery. The Hawiyah gas project is part of an ambitious expansion plan for the Saudi Master Gas System, through which Saudi Arabia hopes to increase domestic gas consumption and free up oil for export. Aramco also is pushing ahead with delineation of the deep Khuff natural gas reservoir.

Saudi Arabia theoretically can cope with lower oil revenues in a number of ways, although in practice each option has its drawbacks and difficulties. First, Saudi Arabia theoretically could reduce its generous domestic subsidies (on gasoline, electricity, and water, for instance). Reduction in popular entitlement programs, particularly in areas like health care, housing, jobs, and education, however, could risk political or social unrest. Another hypothetical possibility would be to draw down the country's large foreign exchange reserves (around $8 billion). Saudi Arabia also could increase borrowing and/or sell off state-owned (including foreign) assets, although this risks exhausting the country's once huge financial reserves. Saudi Arabia also could cut back on defense spending, which accounts for an estimated one-third of the Saudi budget. Cuts in defense, however, are constrained by perceived and actual threats from neighboring countries like Iraq, as well as the need for domestic security. Other possibilities for budget cuts include investments in the oil and gas sectors, such as the Saudi Aramco examples mentioned above. Saudi Arabia's Ministry of Finance and National Economy is pressuring ministries to cut expenditures, especially in their capital budgets. Reductions in wages and salaries for state workers are possible, but less likely, since they would undoubtedly be politically unpopular. Finally, Saudi Arabia could theoretically raise taxes, although this could also prove politically unpopular.

UAE
The UAE economy appears to be slowing significantly, at least in part due to the decline in oil prices. The UAE is expected to earn $9.3 billion in oil export revenues in 1998, down 32% from $13.7 billion, in 1997. Real GDP is expected to fall by 4.1% in 1998, compared to growth of 1% in 1997 and 9.9% in 1996. International reserves will likely fall to $5.6 billion, from $6.9 billion in 1997, while the current account balance will fall to a $2 billion surplus (form a $4.5 billion surplus in 1997). In response to falling oil export revenues, the UAE has called for restraint in government expenditures. The UAE has pledged 225,000 bbl/d in production cuts for 1998, from a base of almost 2.4 million bbl/d.

Venezuela
Venezuela is expected to earn $11.1 billion in oil export revenues for 1998, down 37% from $17.7 billion in 1997. This is seriously hurting Venezuela's economy, which could see a contraction of -1% or -2% in 1998, compared to 5.1% growth in 1997, and also is adding political uncertainty in the Presidential elections scheduled for December 6, 1998. Specifically, the populist candidacy of former army commander Hugo Chavez, who attempted a coup on February 4, 1992, and who has called for a partial moratorium on debt repayments among other measures, is causing concern among many foreign investors in Venezuela. In response to its economic crisis (including a 40% drop in the country's stock market in the first 9 months of 1998), Venezuela is attempting to curb expenditures by the government and by state-owned corporations, as well as to increase revenues wherever possible. So far this year, state oil company PdVSA, for instance, has cut its budget repeatedly, slashing as much as $2.4 billion. Cash flow problems have forced the company to look to international capital markets for alternative funding possibilities. The Venezuelan government is looking to float a $1.4 billion global bond offering in September to help bridge the gap between revenues and expenditures. On the positive side, reforms undertaken by Venezuela over the past several years (i.e., encouraging privatization measures and increased foreign investment, strengthening the banking sector, and increasing foreign exchange reserves), could help make Venezuela's economy more resilient and better able to withstand the current sharp decline in oil prices.

PdVSA's profits are expected to drop sharply in 1998, from $4.4 billion in 1997. Cuts in PdVSA's budget have already affected, and likely will continue to affect, the company's plans to expand oil production capacity by 300,000 bbl/d in 1998, as well as its ambitious long-term expansion plans. PdVSA's production capacity target for 2007 already has been lowered from 6.4 million bbl/d, to 5.8 million bbl/d (up from 3.3 million bbl/d in 1997). Development of the Orinoco heavy oil field, a $2.6 billion project owned 51% by Conoco and 49% by PdVSA, has been threatened by Venezuela's economic crisis, which has caused Standard and Poor's to downgrade its credit rating of the project from stable to negative. Also potentially affected are PdVSA's downstream operations, including 730,000 bbl/d in U.S. refining capacity which the company owns outright, not counting its 42% share of the 320,000 bbl/d Lyondell-Citgo refinery in Houston and a one-half share in Amarada Hess's 500,000 bbl/d refinery in St. Croix, Virgin Islands. As of late August 1998, Venezuela had pledged production cuts during 1998 of 525,000 bbl/d (to 2.845 million bbl/d), down from its agreed Feburary 1998 baseline production of 3.37 million bbl/d, in an attempt to raise oil prices. In late June 1998, the price of Venezuelan oil hit a 12-year low of $8.43 per barrel.

Non-OPEC Countries Oil Revenues: A Brief Summary
The decline in world oil prices is affecting non-OPEC countries as well, particularly Mexico and Russia. Mexico, for instance, has been forced to slash its budget three times this year (as of July 9, 1998) to make up for lost oil export income (as much as $4 billion) as a consequence both of falling prices and production. In addition, and partly as a result of low oil prices, Mexico's stock market fell 40% between mid-July and early September, while the Peso was down 13% during the same period against the U.S. dollar. As a result, the Mexican government has recalculated its budget based on a price of $11.50 per barrel, down from $15.50 per barrel contained in the orginal 1998 budget. Mexican state oil company Pemex is estimated to provide around 40% of Mexican government revenues.

Russia, which depends upon energy (mainly oil and gas) exports for as critical shares of its total export earnings and government revenues, has been seriously hurt in recent months by the sharp decline in oil prices. Russian oil export revenues are estimated to have fallen by 25%, despite higher export volumes, during the first half of 1998 compared to the first half of 1997. This has contributed to a severe deterioration in Russia's trade balance. On August 17, 1998, Russia announced that it would allow the ruble to fall by as much as 34%, suspended trading of Treasury bonds, and announced a 90-day moratorium on repayment of corporate and bank debt.

Other oil exporting nations also have been affected by the decline in oil prices and revenues. Ecuador's oil export revenues, for instance, fell 36% (from $674 million to $430 million) in the first half of 1998 compared to the same period in 1997, according to Ecuador's Central Bank. As of late August 1998, the price for Ecuadoran crude was running around $7.60 per barrel, a 47% drop from $14.82 per barrel a year earlier. Egypt's oil export revenues (one of the country's top four main foreign exchange earners, along with tourism, Suez Canal fees, and worker remittances from abroad) fell 52% (from $640 million to $310 million) in the first five months of 1998 from the same period in 1997. Lower oil prices have affected Canada as well, causing oil companies to lay off workers and to reduce heavy oil production in British Columbia. High-cost wells, such as the Hibernia offshore platform near Newfoundland, are also nearing the point where production costs exceed earnings. Norway, the world's second largest oil exporter, raised interest rates on August 24, 1998 in an effort to boost its sagging currency (the Krone), which has been hurt in part by low oil prices. If low oil prices continue in the long-term, it is possible that relatively expensive oilfields throughout the world could become uneconomical, while new exploration activities also could be reduced.

Oil Revenue Prospects/Conclusions
Probabilities of a rapid improvement in OPEC oil revenues in the short-term are not high. In fact, downside risks (i.e., the chances that prices could decrease even further) are strong. Factors that could help push oil prices even lower include: a worsening and/or broadening (i.e., to China and/or other countries) of the East Asia crisis, for instance, which could reduce marginal world oil demand still further; a failure by OPEC to cut as much production as it actually has pledged; a sharp downturn in Russia's economy, which could reduce Russian oil demand and put more Russian oil on world markets; and continued increases in Iraqi oil output in coming months. "Upside" risks (i.e., the chances that prices could rebound) include: a more rapid recovery in Asia than expected; a disruption in Iraqi oil exports; and a colder-than-normal winter in the northern hemisphere.

Taking all these considerations into account, the U.S. Energy Information Administration currently expects world oil prices at best to increase slightly (possibly $2 per barrel) by the end of 1998, from about $11 per barrel estimated for August. The main assumption behind this scenario is OPEC coming increasingly into compliance with its pledged production cuts. According to the International Energy Agency, as of July 1998, OPEC (excluding Iraq) was about 55% in compliance with the 2.6 million bbl/d in oil supply cutbacks it has pledged to make. This percentage is expected to increase gradually to around 75% by the end of 1998, even assuming continued increases in Iraqi output, which so far has been partly "cancelling out" other OPEC member production cuts.

For comparison purposes, two alternate cases are presented here. These two cases attempt to illustrate what could have happened if oil prices and/or OPEC production had not changed as they did. Case 1 (see Table 2) assumes that oil prices remained constant from December 1997, instead of falling sharply as they have done. OPEC oil production is not fixed in Case 1. Under this case, OPEC oil revenues (in nominal dollars) would be $135 billion (nominal dollars) for 1998, instead of $101 billion as current projections indicate. Case 2 (see Table 3) assumes that oil prices had remained constant from December 1997, while OPEC production had held constant from February 1998. Under this case, OPEC oil revenues would be $139 billion (nominal dollars) for 1998. The point of these cases is to pose hypothetical "what-if" scenarios. It is important to note that the two "what-if" cases presented here are only two of many possible alternative cases.

For additional information from the Energy Information Administration on OPEC Revenues, please see:
Energy Information Administration -- Country Analysis Briefs, OPEC Fact Sheet
Short-Term Energy Outlook - International Petroleum Supply and Demand Table

The following link is provided solely as a service to our customers, and therefore should not be construed as advocating or reflecting any position of the Energy Information Administration (EIA) or the United States Government. In addition, EIA does not guarantee the content or accuracy of any information presented in linked sites.
OPEC Online

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File last modified: September 4, 1998

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