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Falling Oil Prices Who Are The Winners And Losers?

Updated: November 8, 2014 1:51 pm

Falling oil prices mean that some oil exporters are bracing themselves for significant revenue shortfalls, while some importing countries could benefit economically as consumers pay less for energy and have more to spend elsewhere

Until this summer, the global oil price had been relatively stable for almost four years, at about $110 (£68) a barrel.

However, weaker demand coupled with surging US production has seen the price of the benchmark Brent crude oil price drop by 30 per cent since June to around $83 a barrel.

So just who are some of the winners and losers?

Venezuela: Inflation and shortages

Venezuela is one of the world’s largest oil exporters, but thanks to economic mismanagement even before the current oil price fall, it was already finding it difficult to pay its way.

Last week the country’s Foreign Minister, Rafael Ramirez, called for an emergency Opec meeting to allow members to keep prices above $100 a barrel—but some say it really needs prices of $120 a barrel to fund its extensive social programmes.

Venezuela is already suffering rampant inflation—currently around 50%—fuelled by government currency controls, which have created a booming black currency market and led to severe shortages in the shops.

However, President Nicolas Maduro has insisted that the current oil price falls will not harm Venezuela’s economy or its social spending plans.

“The price of oil will hit its floor and it will rise again. Venezuela will continue with its social plans,” he said. “Venezuela will move forward.”


Russia: ‘Strained but balanced’

Like Venezuela, Russia depends on its oil revenues for income, with oil and gas accounting for 70 per cent of its revenues.

Russia loses about $2bn in revenues for every dollar fall in the oil price, and falling prices are set to push the duty that the country earns on its oil exports to their lowest level since December 2010, according to a Foreign Ministry adviser cited by Bloomberg.

Budget cuts cannot be ruled out because of the impact of falling oil prices, says President Putin

This week President Putin highlighted the risk of spending cuts, saying Russia “cannot rule out a revision in the budget” because of falling energy prices.

“Our budget is not falling apart at the seams. It is strained but it is balanced and completely realistic,” he said. The International Monetary Fund earlier this month reduced its 2015 growth forecast for Russia to 0.5 per cent, down from 1 per cnet—and the country’s state-owned Sberbank says oil prices need to stay above $104 a barrel if the budget is to be balanced.

The rouble has fallen sharply after falls earlier this year. This was initially triggered by the conflict in Ukraine and sanctions, but the currency has been further undermined by falling oil prices.

“The future prospects for the rouble will be determined by oil prices,” says ING Bank economist Dmitry Polevoy.


Saudi Arabia: Price versus market share

Saudi Arabia, the world’s largest oil exporter and Opec’s most influential member, could support global oil prices by cutting back its own production, but so far there is no sign of this. Saudi Arabia is not expected to cut production to prop up oil prices in the short term.

“The market has perceived some signals from Saudi Arabia that they are not intending to cut production to support prices,” says Jason Bordoff, of the Center on Global Energy Policy at Columbia University.

“They are happy to let prices slide a little bit further.”

There could be two reasons for this: to try to instil some discipline among fellow Opec oil producers, and perhaps to put the US’s burgeoning shale oil and gas industry under pressure.

Although Saudi Arabia needs oil prices to be around $85 in the longer term, it has deep pockets with a reserve fund of some $700bn—so could withstand lower prices for some time.

“In terms of production and pricing of oil by Middle East producers, they are beginning to recognise the challenge of US production,” says Robin Mills, Manaar Energy’s head of consulting.

“They have had to price competitively, and they have had to price their oil, sometimes, at considerable discounts to get it into the US market.”

If a period of lower prices were to force some higher cost producers to shut down, then Riyadh might hope to pick up market share in the longer run.

Opec: Not all are equal

Alongside Saudi Arabia, Gulf producers such as the United Arab Emirates and Kuwait have also amassed considerable foreign currency reserves, which means that they could run deficits for several years if necessary.

Other Opec members such Iran, Iraq and Nigeria, with greater domestic budgetary demands because of their large population sizes in relation to their oil revenues, have less room for manoeuvre. They have combined foreign currency reserves of less than $200bn, and are already under pressure from increased US competition.

“Nigeria last month didn’t export any oil to the US—which is a remarkable development,” says Robin Mills.

The war in Syria and Iraq has also seen ISIS, or Islamic State, capturing wells in both countries and selling their products. However, the International Energy Agency says airstrikes have cut this down from 70,000 barrels a day in August to 20,000 barrels a day now.


United States: Fracking boom

“The growth of oil production in North America, particularly in the US, has been staggering,” says Jason Bordoff. Speaking to BBC World Service’s World Business Report, he says that US oil production levels are at their highest in almost 30 years.

It has been this growth in US energy production, where gas and oil is extracted from shale formations using hydraulic fracturing or fracking, that has been one of the main drivers of lower oil prices.

“Shale has essentially severed the linkage between geopolitical turmoil in the Middle East, and oil price and equities,” says Seth Kleinman, head of energy strategy at Citi.

What’s more, the majority of US shale oil is far cheaper to produce than a lot of conventional crude. So in any long term price war, US producers would be likely to win.

“Some 98 per cent of crude oil and condensates from the United States have a break-even price of below $80, and 82 per cent had a break-even price of $60 or lower,” Maria van der Hoeven, executive director of the International Energy Agency, told Reuters.

Europe and Asia: Mixed blessings

With Europe’s flagging economies characterised by low inflation and weak growth—and the possibility of Europe’s economy entering its third recession in six years—any benefits of lower prices would be welcomed by beleaguered governments.

A 10 per cent fall in oil prices should lead to a 0.1 per cent increase in economic output, say some. However, investors have been selling shares in energy firms recently, which has helped to drag stock markets lower. For now though, lower crude oil and fuel prices should be a boon for consumers.

China, which is set to become the largest net importer of oil, should gain from falling prices. However, lower oil prices won’t fully offset the far wider effects of a slowing economy.

Japan imports nearly all of the oil it uses. But lower prices are a mixed blessing because high energy prices had helped to push inflation higher, which has been a key part of Japanese Prime Minister Shinzo Abe’s growth strategy to combat deflation. India imports 75 per cent of its oil, and analysts say falling oil prices will ease its current account deficit. At the same time, the cost of India’s fuel subsidies could fall $2.5bn this year—but only if oil prices stay low.

(Courtesy: BBC)

By Tim Bowler

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