Yes, crude oil is still in headlong retreat from its summertime peak. But that doesn't mean that all petrostates are trembling.

BY Keith Johnson 

Oil prices continued falling Thursday, dipping to levels last seen almost two years ago, despite a steady drumbeat of perilous developments from Ukraine to Iraq to Hong Kong.

But for all the turmoil in oil markets, not all petrostates are panicking. Although big producers, from Saudi Arabia to Russia, rely on high crude prices to balance their budgets, the price hasn't dropped low enough, or long enough, to fiscally squeeze them just yet.

Crude oil traded in New York slipped below $90 a barrel in midday trading Thursday before settling slightly higher; Brent crude traded in London fell to about $93 a barrel, continuing a plunge that began in June. Oil prices had reached $115 a barrel over the summer, at the height of the Islamic State's territorial gains in Iraq.

In other words, the benchmark oil price has fallen by one-fifth in little more than three months, despite a potent and bottomless cocktail of the kind of scary news that used to send oil prices soaring, from rampaging terrorists to renewed Cold War tensions.

The explanation, however, is easy enough to find: Producers, especially those in OPEC, just keep pumping, even as a tottering world economy needs less Black Gold. That supply-demand imbalance is made even worse by production gains in the United States, a surprising and unlikely rebound in Libyan output, and near-record production levels from Russia.

Oil prices have definitely fallen -- but not collapsed. By historical standards, prices are still very high; in real-dollar terms, $90-odd barrels are rare, equating to volatile periods such as the late 19th century, the late 1970s, or the current spike that began in the mid-2000s.

More importantly, cheaper oil doesn't hit producers equally: Some, such as Saudi Arabia and the Gulf states, are well prepared to weather softer oil prices in the short term, whereas Iraq, Russia, and the like have more to fear, and not just from falling oil. But it would take either a sustained drop or a much sharper price plunge to require big petrostates to start making painful choices.

Some observers are sounding the warning bell nonetheless. The International Monetary Fund recently warned that Saudi Arabia could slip into deficit much sooner than expected because its domestic spending has jumped since the start of the Arab Spring and it needs higher oil prices than just a few years ago to balance its budget. Gulf countries overall relied on oil fetching about $62 a barrel in 2009 to stay in the black; last year that baseline rose to $82 and climbing.

"The government's ambitious spending program could significantly erode the buffers that have been built up and increase vulnerability to a drop in oil prices," the IMF warned last month.

But Saudi Arabia and its neighbors have plenty of cushion. Riyadh ran budget surpluses for years, has huge currency reserves, and has almost no debt. Ninety-dollar barrels are obviously not as profitable as $115 ones, but it won't force any drastic changes in Saudi policy.

"In the short term, the Saudis are the last ones who need to worry. They can sit it out for a couple of years, even with oil below $90," said Laura El-Katiri, a research fellow at the Oxford Institute for Energy Studies. Other Gulf states, such as Kuwait and the United Arab Emirates, can also resort to deficits or spending tweaks to weather a price storm, she said.

That may partly explain the deaf ears turned by Saudi Arabia and other big OPEC members to Iran's pleas. Of the big producers, Iran by far requires the highest prices to remain fiscally sound, by some estimates as much as $130 a barrel. Further, Iran has been hammered by Western sanctions that have cut its oil exports -- and earnings -- almost in half.

Yet Saudi Arabia, still the world's swing oil producer and a visceral opponent of Shiite Iran, has little interest in slashing output. Quite the contrary: Saudi Arabia on Wednesday suddenly started offering discounts to maintain its market share, even if it undermines overall crude prices.

Cheaper oil is a threat to Iraq, too. Given its huge internal spending commitments, Baghdad's green eyeshades pencil in ever-higher prices -- by some estimates, at least $93 a barrel -- to square the books. And unlike other OPEC members, Iraq doesn't have deep reserves to fall back on, making it much more sensitive to short-term price swings. It also has a much more immediate problem in the form of rampaging Islamic State terrorists, who on Thursday made further inroads in western Iraq.

"Iraq is different because it's a corrupt welfare state facing a bloody insurgency. It's living hand to mouth, whereas the Gulf states have saved up huge surpluses in recent years," said Matthew Reed, vice president at energy consultancy Foreign Reports.

Russia could feel the pain next. Oil far outweighs gas in Russia's energy-export mix, but Moscow's budget is predicated on Brent crude prices north of $100 a barrel. What's more, Russia's economy has also been battered by Western sanctions in the wake of the Ukrainian crisis, leading to ruble flight, slumping markets, higher interest rates, and slashed growth forecasts.

Now, falling oil prices have Russian policymakers worried: One former finance minister said cheaper oil could punch a $30 billion to $40 billion hole in Russian revenues. The Russian Central Bank, meanwhile, is scrambling to prepare for oil prices as low as $60 a barrel, Reuters reported. Russia's current finance minister said Thursday that cheaper oil is a huge risk to its wobbly economy.

Kirill Kudryavtsev - AFP - Getty

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