Friday, 12 December 2014

Oil Prices - Who Loses Out?

Yesterdays post looked at why oil prices are falling, and who benefits from cheaper oil. 

Who is disadvantaged by falling oil prices?
Oil exporters:  Exporters will face declines in revenue, and this will affect their ability to fulfil spending commitments. 

In October, Venezuela’s president Nicol├ís Maduro,  declared “However low the oil price falls we will always guarantee...the social rights of our people.” Every dollar off the price of a barrel however cuts roughly $450m-500m off export earnings. By Deutsche Bank’s calculation, the government needs oil at $120 a barrel to finance its spending plans—higher than before the recent price drop.

Iran is even more vulnerable than Venezuela. It needs oil at $136 a barrel to finance its spending plans. Last year it spent $100 billion on consumer subsidies, about 25% of GDP. Sanctions mean it cannot borrow the shortfall. 

Russia's draft budget for 2015 assumes oil at $100 a barrel. But Russia now has reserves of $454 billion to cushion against oil-price fluctuations. 

America is simultaneously the world’s largest consumer, importer and producer of oil. On balance cheaper oil will help, but not as much as it used to. The fracking process is expensive, so when the oil price drops, America is one of the places most likely to pull back. According to Michael Cohen of Barclays, a bank, a $20 drop in the world oil price reduces American producers’ earnings before interest by 20%.

Opec v America
the Organisation of Petroleum Exporting Countries (Opec),  aims to "coordinate and unify the petroleum policies of its Member Countries and ensure the stabilization of oil markets in order to secure an efficient, economic and regular supply of petroleum to consumers, a steady income to producers and a fair return on capital for those investing in the petroleum industry." There are currently 12 member countries: Algeria, Angola, Ecuador, Iran, iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, United Arab Emirates and Venezuela.

Opec met last month to discuss falling oil prices, and decided "in the interest of restoring market equilibrium," not to cut production (cue a Brent oil nosedive). There are many theories as to why Opec reached this decision; One holds that the Sunnis of Saudi Arabia want to hurt the Shiites of Iran, who need high-priced oil to finance their government. Another, expressed by Russian President Vladimir Putin, is that the whole thing is a conspiracy to undermine Russia, the world’s biggest oil producer. Yet another is that the Saudis hope to drive oil prices below where it makes sense for American shale producers to invest in new production (Business week). 

Opec's inaction has led to claims that it has 'lost its purpose' and 'no longer exists in any meaningful sense'. According to energy economist Philip Verleger, "The rate of increase in production is going to slow down...even at $50 oil, though, US production probably plateaus, but it doesn’t start going down." Marketwatch may therefore be correct in it's call for Opec to surrender.

On the other hand, some believe that US producers will shut down first, because the US shale producers are motivated by economics... and the OPEC countries are motivated by social imperatives

This post is essentially a mixture of this article from The Economist, this one from the Financial Times, and the other publications named above. 

Read more:
The Telegraph - Opec refuses to cut oil production, prices slump to five-year low
Oilprice - Oil Wars: Why OPEC will win
Marketwatch - It's time for Opec to surrender
Financial Times - US shale industry faces endurance test after Opec rejects cuts


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