OPEC+’s 'Reasonable Oil Price Level' Notion and the External Breakeven in Saudi Arabia, Russia and Canada: Accounting for Economic Cycles and Pipeline Politics

Abstract

OPEC+ has set a goal of establishing a stable oil market and achieving a reasonable oil price that benefits all industry stakeholders and the global citizenry. But what price is reasonable? Rather than analyzing the fiscal breakeven or full-cycle breakeven, we examine the effect of the oil price threshold on external balances with the aim of evaluating a country’s ability to finance its external deficits. Building on Gnimassoun et al. (2017), we adopt a macroeconomic approach, explore the impact of geopolitics and pipeline politics, account for cyclical movements using threshold regression analysis, and perform detailed case studies of Saudi Arabia, Russia and Canada. Our results show that a reasonable oil price is greater than USD 61–65/barrel for Saudi Arabia, USD 57–58/barrel for Russia and USD 74–76/barrel for Canada. The results suggest that Russia has been able to weather the effect of Western sanctions and pipeline politics, and that in Canada, an increase in oil prices provides benefits that overcome “Dutch disease” under a high oil price regime, but not under a low oil price regime.

Keywords: OPEC+, Saudi Arabia, Russia, Canada, oil price, external balance, breakeven, threshold, oil price differential, geopolitics, pipeline politics

JEL Classification: Q41, Q43, F32, F41