In a paper presented at Chatham House, Matthew Hulbert of the European Energy Review argues that there is an inherent instability in world oil markets because the OPEC producing countries have failed to diversify their economies but are still dependent on high oil prices to keep their populations in check.
In order to illustrate this, he presents a graph showing the break-even oil price for each OPEC nation. This is the price that each country needs in order to maintain the welfare programs their people have come to expect.
The horizontal axis aligns the OPEC nations in the order that they redistribute wealth to the general population. This is generally done through subsidizing prices and maintaining welfare programs. Iran has the largest commitments (and the biggest population) while Qatar has the least. The vertical axis represents the price of oil in US dollars from zero to $140 per barrel. Saudi Arabia is highlighted in green because it represent the median.
The price of oil is currently around $85 per barrel, which means that all the countries to the right of Saudi Arabia are losing ground. This is where Hulbert sees the a pending instability. He writes:
"A key outcome of the Arab uprisings has been a significant increase in the prices needed by the producers to manage their fiscal position. This is a serious indictment of the producers' failure to diversify their economies away from a dependence on oil revenues over the past 20 years.
“If the oil price goes much lower, three scenarios could ensue sequentially: a price war forcing prices even lower, a period of internal repression as revenues fail to buy compliance among populations, and internal unrest among producers, which could lead to supply disruptions followed by prices bouncing back."
So what else is new? Prices are always going up or down. The interesting thing is the revelation of which countries are the most vulnerable to price collapses and which are not.