The fall is set to give a $1 trillion stimulus to oil consumer countries this year, as the head of International Energy Agency (IEA), Nobuo Tanaka, expected. The producer countries will of course suffer the reverse, namely contracting economies and increasing budget deficits because the oil revenues of the exporting countries in 2009 are expected to be less than half of last year's levels.Most of the loss due to the fall in prices will of course be borne by the Organization of the Petroleum Exporting Countries (OPEC), which supplies about half of the world's oil. The US Department of Energy has forecast that this year OPEC's members will earn about $400 billion exporting oil -- the lowest since 2004 and less than half the record high of $970 billion they achieved last year.
Among the OPEC members who will suffer considerably from the fall in prices is of course Iraq, which needs oil revenues more than the others because of its special situation. Having achieved a lot last year in terms of security and stability, Iraq needs more money to sustain its growing security forces, whose number has soared close to 609,000 from 250,000 only two years ago. In addition to sustaining the security forces, Iraq has to continue with reconstruction projects and also modernize the oil industry's infrastructure.
Therefore, Iraq is not in a position to cut down on public expenditure, and that is why the Iraqi Parliament this week adopted only a small cut in the 2009 state budget despite the looming deficit.
According to the legislation approved by the parliament last Thursday, the government will absorb cuts of around 7 percent, about $4.2 billion. This cut will bring the 2009 budget down to $58.6 billion, which was around $80 billion originally. In this context, members of parliament will have to cut their salaries by 10 percent, thereby bringing each member's salary to about $7,600 per month. However, at the same time each member will continue to have a budget of about $12,800 per month for bodyguards.
The 2009 budget is based on an optimistic projection that oil will be selling at $50 a barrel and that Iraq will be exporting 2 million barrels a day, about 100,000 barrels, which is more than Iraq exported per day in January.
Some critics of the budget maintain that the projections are unrealistically rosy and that the deficit will be even larger than planned. However, Iraq has the short-term cushion of reserve money to offset some of the probable deficit.
That money, which Iraq's central bank and senior Obama administration officials say comes to roughly $35 billion, is sitting in various bank accounts, including one at the Federal Reserve Bank in New York.
To help compensate for the budget cut, the Iraqi government is planning to withdraw about $20 billion from these reserves in a single year. However, that will not be enough, government officials say, to save reconstruction projects crucial to improving important services that are now inadequate.
As we said above, this reserve money provides only short-term relief. In the long run, what will happen is anybody's guess, of course. In this respect, some claim that even a $50 a barrel price will make a substantial deficit all but inevitable later this year. Some estimates of the size of the deficit are nearly half of the amount of the budget. If that turns out to be true, Iraq's progress towards stability and welfare will be affected for sure. On the other hand, if prices rise above $50 a barrel, Iraq will continue its progress uninterrupted.
Iraq and the departing US will watch oil prices more closely than others because so much is at stake…
