When Oil Prices Drop, Some Lose & Some Win

By Alexandra Zevallos-Ortiz Reprint | | Print |

UNITED NATIONS, Jan 26 2015 (IPS) - The question of how the oil market is going to rebalance itself in 2015 is going to be one of the most challenging ones for the oil industry.

Since June 2014 oil prices have slumped by more than 60 percent due to global oversupply, the strong dollar and less demand. By then the most volatile commodity known to civilisation was almost $115 a barrel. For the first time since 2009, it now stands close to $50 a barrel.

As the sharp decline in oil prices is expected to persist in 2015, there will be significant income shifts from oil-exporting to oil-importing countries.

Cheaper oil is going to act like a shot of adrenalin for the economies of rich oil-importing countries and could mean a $1.5 to $2 trillion transfer from oil-exporting countries to oil-importing countries.

In its bi-annual Global Economic Prospects report, released on January 13, the World Bank said lower oil price will help to lower inflation worldwide.

“The lower oil price, which is expected to persist through 2015, is lowering inflation worldwide and is likely to delay interest rate hikes in rich countries. This creates a window of opportunity for oil-importing countries, such as China and India,” Kaushik Basu, World Bank Chief Economist and Senior Vice President said, noting the World Bank’s expectations for India’s growth to rise to 7 per cent by 2016.

But the global oil price fall is also going to have negative impacts: around the world, oil companies are cutting budgets and cancelling projects. Since last June, the global outplacement firm Challenger, Gray & Christmas, Inc. has tracked 21,917 US job cuts by oil and oil-related industries.

The most vulnerable ones are low-income oil-producing countries whose budgets are dependent on a high oil price, such as Venezuela, Iran and Nigeria. Iraq and Libya are also going to be affected as their oil output is increasing with nearly 4 million barrels per day combined.

With oil production scaling up rapidly in the Middle East, oil prices risk to fall even more, especially if Tehran and Washington reach an agreement on Iran’s nuclear programme.

According to the European Bank for Reconstruction and Development (EBRD) latest economic outlook, published on January 19, Russia’s economy, already hit by Ukraine-related sanctions, will shrink by 4.8 percent this year. Russia, a non-OPEC member, is the world’s largest oil supplier with production in excess of 10 million barrels per day or 13 percent of global crude production.

The most vulnerable African countries include Nigeria, Angola, Equatorial Guinea, Gabon and Sudan, as well as developing nations such as Algeria, Libya and Egypt.

Nigeria, Africa’s top crude exporter is trying to adjust to crashing prices. The oil sector represents 95 percent of export earnings and 75 percent of government revenues. The Nigerian finance minister, Ngozi Okonjo-Iweala, announced on January 20 that Nigeria plans to double its value-added tax and cancel government projects if oil prices continue to slide.

Last week Venezuela’s President Nicolás Maduro was touring across Asia and Russia searching for supportive measures to bolster oil prices. On January 15 Maduro announced that he is planning to create a “formula that impacts the oil market and restores the normalisation of prices” with OPEC and non-OPEC members.

Venezuela’s oil revenues account for about 95 percent of export earnings, the most among the OPEC members.

According to the report on the world oil outlook released by the Organization of the Petroleum Exporting Countries (OPEC) in 2014, oil demand of non-member states of the Organisation for Economic Co-operation and Development (OECD) will be greater than the demand of member states in 2015.

“Demand is going to increase clearly in developing countries, with an annual rise of 1.1 mb/d,” the report says. Of the demand increase, developing Asia accounts for 71 percent of the growth in developing countries.

Although OPEC’s official mission states that their goal is to “unify the petroleum policies of its Member Countries and ensure the stabilisation of oil markets” the organisation, which controls about 40 percent of the world market, has failed to do so.

According to Thomas E. Donilon, former National Security Advisor and a member of the Center on Global Energy Policy’s Advisory Board, there is a simple reason for that.

“OPEC is Saudi Arabia, this is a central point,” Donilon said, speaking about the recent oil price collapse, at a seminar at Columbia University on January 21.

“Saudi Arabia made it very clear that it is not going on unilateral basis to reduce production. It is about sending a signal that others would have to participate,” he added.

Over the past weeks, Saudi Arabia, the United Arab Emirates and Kuwait have said repeatedly that the organisation would not cut output to halt the biggest rout since 2008. Though Saudi Arabia has enough resources to do so, the King Abdullah bin Abdulaziz decided in November 2014 not to sacrifice their own market share to restore the price.

The passing of King Abdullah is going to increase uncertainty and increase volatility in oil prices in the near term according to Neil Beveridge, a Hong Kong-based analyst at Sanford C. Bernstein & Co., Bloomberg reported on January 23. “I would not expect a change in policy in the near term to be known, but the passing comes at a challenging time for Saudi Arabia.”

If Saudi Arabia, a country that produces about a third of the OPEC total production (10 million barrels per day) would curb production, the main benefits would go to their main adversaries: Russia and Iran.

So far, the market has recognised the core dynamics of Saudi Arabia’s decision and the global reduction in demand. But there is another factor that must be taken into consideration: the dramatic increase in supply of the United States.

Due to the discovery of shale oil, which is a substitute for conventional crude oil, the American oil production has been boosted by a third to nearly 9 million barrels a day.

Goldman Sachs even speaks about a “new oil order”. “We use this term to describe the transition that the market is going through,” Jeff Currie, global head of commodities research at Goldman Sachs said in a video posted on their website which explains how the U.S. shale revolution has changed the global energy landscape.

Because of the very flat supply curve that is generated out of these shale technologies OPEC has lost much of its pricing power, according to Currie. “If OPEC adds oil on the market or takes oil off the market it does not have a significant impact like it did previously.”