Raad Mahmoud Al-Tal

The cost of producing oil is often presented as a measure of strength. A country that can produce a barrel of oil at a very low cost appears to have a clear advantage, especially when global oil prices decline. But production cost tells only part of the story. The real question is not simply how cheaply a country can produce oil, but how much it depends on oil to finance its economy and government.

A low production cost gives an oil producer an important competitive advantage. When prices fall, producers with low costs can continue operating while higher-cost producers may be forced to reduce production or delay investment. This makes countries with large, low-cost oil reserves more resilient in the global oil market. However, the financial position of the government can be very different from the profitability of oil production.

This is where the concept of the fiscal breakeven oil price becomes important. It refers to the oil price a government needs to finance its planned public spending while keeping its budget broadly balanced. This price can be much higher than the cost of producing a barrel. The difference exists because governments do not spend money only on producing oil. They finance public salaries, infrastructure, social programmes, investment, subsidies, and debt obligations.

This creates an important paradox. A country may be able to produce oil profitably at a very low price while its government still faces serious financial pressure when oil prices fall. The oil industry may remain profitable, but government revenues can decline sharply. If public spending does not adjust, the result can be a larger budget deficit, higher borrowing, or a reduction in financial reserves.

This distinction is particularly important for oil-exporting economies. High oil revenues can support rapid increases in public spending during periods of high prices. But once prices fall, governments may find it difficult to reduce spending at the same speed. Public expenditure often becomes politically and economically difficult to cut. What looks like financial strength during an oil boom can therefore become a vulnerability during an oil downturn.

Economic diversification can reduce this vulnerability. Countries with strong non-oil sectors have alternative sources of income, employment, and government revenue. Diversification does not eliminate the importance of oil, especially for major exporters, but it can reduce the impact of oil price shocks on the wider economy and public finances.

Another important factor is the level of public debt and financial reserves. Two countries with similar oil production costs can face very different risks if one has large financial reserves and low debt while the other has limited fiscal space. The ability to absorb a temporary fall in oil prices depends not only on production costs, but also on how much room the government has to borrow, spend from reserves, or adjust expenditure.

The same logic applies to external balances. Oil revenues provide foreign currency that helps finance imports and support the current account. A prolonged fall in oil prices can therefore affect not only the government budget but also the country’s external position. This means that assessing an oil economy requires looking beyond the oil sector itself.

The most important lesson is that cheap oil production and strong public finances are not the same thing. Low production costs determine how profitable the oil industry can remain when prices fall. Fiscal structure, public spending, debt, reserves, and economic diversification determine how well the country can absorb the shock.

For this reason, the strength of an oil-producing country should not be measured by one number. The cost of producing a barrel is important, but it should be considered alongside the fiscal breakeven price, the external position, public debt, financial reserves, and the size of the non-oil economy.

In the end, the real test of an oil economy is not how cheaply it can produce a barrel when prices are high. It is how well it can protect growth, public finances, and economic stability when the price of that barrel falls. Cheap oil production is an advantage. Low dependence on oil is an even greater one.