Kazakhstan Will Face Economic Risks in Case of Falling Oil Prices

A significant drop in oil prices poses a substantial threat to Kazakhstan's economy, heavily reliant on the energy sector, senior analyst Yerasyl Serikbai from AERC's consulting services department told LS Aqparat.

Serikbai expressed skepticism about former U.S. President Donald Trump’s recent comments on potentially driving oil prices down to pressure an end to the Russia-Ukraine war. He warned, however, that any sharp decline in oil prices would have severe ramifications for Kazakhstan, where hydrocarbons form the backbone of the economy.

The analyst highlighted that Kazakhstan's state budget relies on guaranteed transfers from the National Fund amounting to 2 trillion tenge annually. For this to be sustainable, the breakeven price for oil is forecasted at $42.3 per barrel in 2025, declining to $39.4-$41 per barrel by 2026-2027.

"If oil prices drop below these levels, Kazakhstan will face a serious budget deficit, exacerbating existing fiscal challenges. This will necessitate radical spending cuts, including in social programs and infrastructure projects, while potentially increasing external debt and weakening the tenge," Serikbai said.

To mitigate these risks, he emphasized the need for economic diversification and fiscal reforms, recommending accelerated development of non-oil sectors, optimization of government expenditures, and bolstering foreign exchange reserves.

Trump’s threats have already rattled the oil markets, with Brent crude trading at $78.73 per barrel on January 24, reflecting the market's sensitivity to U.S. political signals. Analysts believe the U.S. could leverage increased domestic production and releases from strategic reserves to influence prices.

While Serikbai acknowledged the potential for short-term declines, he argued that a prolonged price collapse is unlikely due to the high costs of U.S. shale production, which averages $40-$50 per barrel. "Long-term sustainability of such low prices would be uneconomical for American producers," he added.

Saudi Arabia and OPEC’s willingness to heed U.S. calls to increase output is also in doubt, according to the analyst. "Saudi Arabia’s daily production of 9 million barrels at $80 per barrel generates $720 million in revenue. Increasing output to 12 million barrels at $60 would not only cut revenues but raise production costs, making it an unattractive option for the kingdom," Serikbai explained.

Adding to the complexity, global oil demand growth is slowing due to uncertainties over China's economic recovery, potentially exacerbating market imbalances. However, OPEC+ agreements and sanctions on Russia may counterbalance these risks.

Meanwhile, Kazakhstan's Tengizchevroil announced the long-awaited launch of its Future Growth Project (FGP), which will boost oil production by 12 million tonnes annually to 40 million tonnes. However, this expansion raises questions about Kazakhstan's ability to meet its OPEC+ production cut commitments.

Energy expert Olzhas Baidildinov pointed to the alignment of U.S. corporate actions with political directives, citing the swift execution of the FGP after Trump's remarks advocating increased drilling.

If Brent crude prices were to fall to $60, Baidildinov suggested that Russia, which already sells oil at discounted rates, would be less affected. However, further declines to $40 could force Moscow into additional currency devaluations, putting pressure on Kazakhstan’s tenge.

"For Kazakhstan, the outlook is bleak if oil prices drop significantly. The government must prepare for a prolonged crisis that appears increasingly likely," Baidildinov concluded.