When oil is priced high, like it was in June at $107 a barrel, countries that are big exporters – Saudi Arabia, Russia, Iraq, Nigeria, Iran… have a tremendous stream of cash coming in. However, as history tells, countries that are heavily dependent on exporting commodities will suffer from market swings. Today, the price of oil is under $50 a barrel, a drop of more than 50%, and some economies are hurting.
As The Economist explained, there are four factors causing this huge depreciation.
1. Weak demand: Sluggish global economic growth, increased efficiency, and the growth of other energy sources.
2. Oversupply: USA has become the world’s largest oil producer. Though it does not export crude oil, it now imports much less.
3. Turmoil in Iraq and Libya—two big oil producers with nearly 4m barrels a day combined—has not affected their output.
4. The Saudis and their Gulf allies could curb production sharply, but they have decided not to sacrifice their own market share to restore the price.
Thus far, the biggest loser seems to be Russia. On top of being highly dependent on the high price of oil, the country is also facing economic sanctions by Western nations (due to the conflict in Ukraine). The depreciation of the ruble, which closely follows the oil price, means that purchasing power has fallen. A weaker ruble also makes it harder to pay foreign debt. Russian firms have a high foreign corporate debt that needs to be paid by the end of 2015, about $130 billion.
On the other side of the political spectrum, the American economy is currently doing very well. However, when it comes to oil, it seems that it’s facing a double-edged sword. Cheaper oil means that Americans have extra income to spend, boosting consumer spending. Though, a lot of the recent increase on American oil production is from shale formations. These shale oil companies borrowed a lot of capital, expecting that price of oil would be at around $100. The current technology makes shale oil an expensive procedure, which is unsustainable long-term with the current price. The International Energy Agency estimates that oil from shale formations costs $50 to $100 a barrel to produce, compared with $10 to $25 a barrel for conventional supplies from the Middle East and North Africa.
For Saudi Arabia, the largest oil exporter in the world, a 50% drop on its main source of income is terrifying. However, the country is on a better position than the USA and Russia. Firstly, Saudi Arabia has $900 billion in reserves. Secondly, their oil can be extracted very cheaply, at around $5 or $6 a barrel. That gives Saudi Arabia a cost advantage over USA and Russia. If the price stays at current level, shale oil companies might run out of business, which would reduce the supply of oil and lead to higher prices.
The price of oil will eventually rise, but no one knows when this will happen and if it will reach the $100 mark again. In the meantime, many countries and corporations will have to walk a thin line.
Thanks for reading!
Best,
Pedro
Sources
Image of public domain: http://en.wikipedia.org/wiki/Oil_well
The Economist
http://www.economist.com/blogs/economist-explains/2014/12/economist-explains-4
http://www.economist.com/news/leaders/21635472-economics-oil-have-changed-some-businesses-will-go-bust-market-will-be
Bloomber, The International Energy Agency estimates...http://www.bloomberg.com/news/2014-10-07/shale-boom-tested-as-sub-90-oil-threatens-u-s-drillers.html
No comments:
Post a Comment