Cheap Oil; Winners & Losers
Global oil prices have not been this cheap since the summer of 2004. In January 2016 closed the Brent crude oil below $30 per barrel and is today trading at about $40. There are some forces around the globe that shape the global oil prices.
- The Chinese economy is slowing down due to decreased consumption in Europe and North America. Additionally, other manufacturing centers are emerging in Mexico and South East Asia.
- A mild winter had its effect on oil and gas imports.
- Iran will soon be supplying their oil, likely, to the same customers as Saudi Arabia.
- Saudi Arabia is not slowing oil production to lose market shares.
- North American energy independence and fast technological breakthroughs in the fracking industry.
Energy production and consumption, of the black gold, is one of the largest forces that constrain and motivates governments and societies. Who are then the winners and losers in this new world with cheap oil prices? I have looked at some countries tolerance and highlights some problematic outcomes.
Russia is one of the biggest losers. Russia, one of the prime producers, is heavily dependent on oil and gas exports. Some reports estimate that it contributes about half of the government’s budget with the target of 100 dollars per barrel. Moscow is also under sanctions by the west due to the conflicts in eastern Ukraine, however, Putin has two funds with a valuation around $130 billion to draw from during this period of cheap oil. Moscow has also deployed budget cuts, around 10% across ministries, except for military defense who only cuts 5% in 2016. President Vladimir Putin is looking at all alternatives to provide the economy with relief without losing face internationally.
Two of the more important players in the Middle East is Iran and Saudi Arabia. Saudi Arabia has pegged their economy on approximately $100 per barrel, still, they have low debt and rich oil found savings to whether the low price. Nevertheless, Saudi Arabia is today's financing proxy wars in the region to limit Iran’s influence. Yemen and Syria are most noticeable examples. Wars are a drain on Riyadh’s budget together with large subsidies to keep the population happy. I am closely watching the Saudi Arabia’s moves when it comes to the privatization of kingdoms assets, especially the state-owned Saudi Arabian Oil Company (a.k.a. Saudi Aramco). Saudi Aramco is the source of the kingdom’s economic and geopolitical power. Additionally, Iran has now returned to the international economy with stockpiles of oil ready to be liberated. Iran has the highest pegg with 130–140 dollars per barrel. Tehran needs the revenue and increased market share to boost their production capabilities. I believe therefore that Iran will push for more production and this will force Saudi Arabia to counter.
Venezuela is one of the countries that suffer the most. The country has sky-high annual inflation. Food and other products will, therefore, be more scarce, and this will lead to potentially more unrest in Caracas that the government must contain. Brazil has also felt the pain of cheap oil, but not at the same levels as Venezuela. However, Brazil is now experiencing a scandal involving their semi-public energy corporation popularly known as Petrobras. In my opinion; this will limit investments in Petrobras and the company’s future investments until the scandal is overblown.
On the other side of the coin, we have the winners of cheap oil. The European peninsula, South- and East Asia, except for Norway, Malaysia, and Indonesia, are net oil importers and this will add greatly to their economies. The European Union, China, and Japan have had difficulties with economic growth the past couple of years and inexpensive energy could help their budgets to move towards the black. However, a short-term boost could give the mirage of economic recovery and lead to offsets in economic reform to counter the demographic shifts. Southern Europe should be closely watched for this issue.
North America is more of a mixed bag. One of the main reasons for lower oil prices is the North American energy independence due to the shale fracking movement. The United States have protected Saudi Arabia and their oil shipments during the last decades. Still, with America’s energy independence, the US is now backing away from the region by warming up to Iran and letting the Saudi kingdom, Turkey, and Israel to do more of the heavy lifting in the region. How does Saudi Arabia insist that the United States should continue to protect them? You get the US hooked on cheap oil. Some US shale companies are suffering, however, they are forced to push the technological development further. Some regions have now breakeven prices at $46 and still pushing downward. Additionally, companies have also drilled new wells and just waiting for the price to go up when competition pushes some old producers, like Venezuela, over the edge.
Summary: Saudi Arabia is forced by US shale companies and Iran to motivate the single global superpower to continue to protect them. The biggest losers are Russia and Venezuela. The winners are Europe and East Asia. American shale companies are the losers today, but the United States will be the biggest winner tomorrow, as oil independent.
