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Bahrain on the edge of collapse

Image: Rory

The Gulf Kingdom of Bahrain may be the first to succumb to the economic consequences of low oil prices according to Bloomberg:

“Bahrain, one of the most vulnerable economies in the Gulf Cooperation Council to political instability and oil-price swings, sought financial support from Saudi Arabia and the United Arab Emirates to replenish its foreign reserves and avert a currency devaluation, according to two people with knowledge of the issue. A third person said Kuwait was also approached.”

The result is a Greek-style bailout in which the Kingdom is being forced to rein in its public spending in return for an injection of foreign currency.

According to the Bloomberg article, Bahrain may just be the first domino to fall:

“Analysts and investors say the cost of a bailout is cheaper than cleaning up the mess of a devaluation, given that six out of the five nations in the Gulf Cooperation Council have pegged their currencies to the U.S. dollar for decades. Doing away with the peg in Bahrain would raise doubts that other Gulf nations can sustain their currency policies with low oil prices languishing below $65 a barrel.”

With oil inventories tightening, and world oil prices beginning to creep upward, it is likely that OPEC/Russia will continue to hold production down in order to drive prices into profitable territory for the first time since June 2014.  The IMF estimates that Saudi Arabia will need prices to top $73 per barrel, while Bahrain will need a price in excess of $99.

This spells trouble ahead for a UK that now depends upon oil imports to fuel our economy.  The last time oil prices were that high, Britain was plunged into a deep recession.  This time around, with Brexit looming, we are even less equipped to cope.

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