Sources: British Petroleum; International Monetary Fund; Haver Analytics; Setser and Cole

Some commodity-exporting countries are more vulnerable than others to falling prices. One way to consistently compare how the world’s largest oil producers will fare with lower prices is through calculating each country’s external breakeven, the price at which selling oil can cover expenses on imports.

Brad Setser and Cole Frank write for the Council on Foreign Relations that the external breakeven oil price for Russia has recently fallen to become one of the lowest among oil-exporting countries. At the same time, Saudi Arabia has swapped places with Russia, joining the ranks of high breakeven countries.

How Russia reduced its vulnerability:

“Soon after the price of oil collapsed in late 2014, Russia allowed its currency, the ruble, to depreciate drastically—in part because U.S. and EU financial sanctions limited the ability of major Russian companies to borrow offshore and reduced Russia’s financial freedom to maneuver. Russia’s breakeven price fell from $100 in 2013 to $84 in 2014 and then to $35 in 2015, keeping Russia’s current account in surplus. Real GDP contracted by 3.7 percent between 2014 and 2015 and, with inflation far in excess of nominal wage growth, real living standards fell sharply. But by adjusting quickly, Russia has clearly reduced its vulnerability to a prolonged period of low oil prices. Russia’s adjustment shows that external adjustment is possible even in the absence of large swings in the fiscal deficit if the exchange rate adjusts. Russia’s headline fiscal deficit and cyclically adjusted fiscal balance both deteriorated by about 3 percentage points of GDP between 2014 and 2016.”

Saudi Arabia’s shift to a more precarious position:

“Ironically, the Saudi breakeven stopped following the low breakeven set of countries just before the Saudis changed their oil policy and shifted away from trying to manage the global oil price—largely because relatively high-cost sources of supply (including the oil the United States produced by “fracking”) were eating into Saudi and Organization of the Petroleum Exporting Countries (OPEC) market share. This alone shows that the breakeven price cannot mechanically be used to infer the oil policy preferences of important countries.”

Geopolitical Implications:

“Changes in external breakeven have consequences for the geopolitical positions of the major oil exporters. Rising oil prices can facilitate the pursuit of the strategic aims of major oil-exporting economies: financial assistance to allies is easier to provide, and internal stability can be maintained through generous budgets. Conversely, falling oil prices can make it more difficult to generate the resources needed to sustain an active foreign policy and can limit a government’s ability to deliver the services and jobs that help to assure political stability.

At the same time, knowing a country’s external breakeven is not sufficient to allow for confident political and strategic forecasting. Russia’s high breakeven price, $100 in 2013, did not prove to be a major constraint on its geopolitical ambitions in the former Soviet Union or the Middle East. Russia’s limited foreign currency debts, relatively flexible exchange rate, and willingness to adjust quickly proved more significant. Similarly, the Saudis’ breakeven price has not determined Saudi Arabia’s strategic behavior, or even its price preferences in the oil markets—though it does highlight how $50 a barrel oil will continue to pose a serious test to the kingdom’s economic management.”