Crude oil price: In the oil price war between Saudi Arabia and Russia, India is a big winner | International Business News
The biggest drop in oil in three decades on Monday coincided with the spread of the coronavirus, slow growth in China, a wave of deglobalization affecting trade, and the United States’ emergence as the world’s largest oil producer. Even for some consuming nations, the gains from lower oil prices may this time be overwhelmed by the collapse in demand caused by Covid-19.
However, perhaps the biggest global change is that inflation and interest rates are already at the bottom. That means central banks may have little ability to cushion the deflationary effects of falling oil costs, according to Gabriel Sterne, head of global strategy services at Oxford Economics, a UK consultancy.
It is difficult to predict the impact of oil below $ 30 on governments around the world. Importing nations in Asia and Central Europe would normally be expected to win, with major producers in the Middle East, Northern Europe and the Americas losing. But it’s not that simple.
The Americas: winners
Historically, the US UU. It has won big over falling oil prices, and President Donald Trump was quick to celebrate with a tweet on Monday.
But a lot has changed since the 1980s, and this time it’s much less clear. The United States was the world’s largest oil producer in 2019, outpacing Saudi Arabia thanks to an oil shale fracture explosion. With shale producers highly leveraged, a sustained drop in prices could lead some companies to destroy investment plans across the industry, creating an obstacle to job creation and growth.
The result is that “a United States that in the past had a lot to gain from lower oil prices now has something to lose,” said Tom Orlik, chief economist at Bloomberg Economics.
Bloomberg’s economy on what falling oil means for global growth
Indeed, eliminating that competition was one of the reasons cited for Russia’s action that helped precipitate the drop in the price of oil. And any major shale setback could offset the positive factor voters get from low gasoline prices, potentially affecting Trump’s chances of being reelected in November. In fact, Sterne of Oxford Economics says, a shale collapse could lead the United States firmly to the $ 30 oil loser camp.
Low crude prices should also benefit PERU, a net importer that bought $ 5.6 billion of oil products last year, although it may also delay the investment in exploration necessary to boost local production.
The image is again more nuanced for Brazil, where President Jair Bolsonaro could get some relief from his dealings with truckers, whose strike against rising diesel prices two years ago stopped the country. At the same time, plans by state oil company Petroleo Brasileiro SA to sell assets and reduce debt are likely to hit a wall.
The Americas: losers
If the United States is a borderline case, Venezuela is not. Oil is already being sold at a huge discount, due to United States sanctions that reduce the country’s ability to export crude. The collapse of international prices will mean even less cash for Petróleos de Venezuela SA, one of the few remaining lifelines for the embattled Nicolás Maduro regime.
An analysis by Allianz Research on Monday put Ecuador and Colombia at the top of their list of most exposed countries if oil stays below $ 45, losing more than one percentage point of growth each. Ecuador seems increasingly likely to default on its debt amid doubts about the disbursements of a loan from the International Monetary Fund (IMF).
Meanwhile, Mexico will lose around 0.15% of GDP (gross domestic product), according to Oxford Economics and more according to Allianz. The government could struggle with plans to expand the role of its oil company Petróleos Mexicanos in the energy sector, while the recent peso decline could hinder the central bank’s ability to continue cutting the Federal Reserve’s emergency rates.
Argentina’s plans to develop its Vaca Muerta shale gas reserve, which is already suffering under the administration of leftist Alberto Fernández, will have to wait even longer. Market volatility will also complicate government plans to refinance debt.
Canada’s economy was already in a soft state late last year, and some economists say the oil shock could lead to a recession. Canada exported just over $ 59 billion of crude and bitumen in 2018, when benchmark oil prices averaged $ 57 per barrel.
China benefits from declining oil prices as a major importer, but this time it may take a while for the effects to materialize: it already has large reserves of oil and liquid natural gas, while the coronavirus is hampering travel and manufacturing and creating uncertainty.
In these circumstances, excessive volatility in the markets can hinder China’s economic recovery, as it needs stability worldwide to avoid further disruptions in supply chains. Those concerns were on display Monday, when the Foreign Ministry took the unusual step of commenting on developments in the commodity market.
The dramatic drop in oil prices could also have political consequences for friendly countries ranging from Iran to Venezuela, a headache that Beijing does not need.
India, the world’s third largest consumer of crude oil, should be among the big beneficiaries as its import bill will drop significantly. Cheaper oil could also help Prime Minister Narendra Modi’s government by allowing it to raise fuel taxes, rather than passing the full benefit of lower prices to consumers. This could not come at a better time for Modi, whose government is under pressure from slowing growth and the biggest bank failure in India’s history.
Lower oil prices are also generally good for resource-poor Japan, with cheaper gas helping consumers afflicted by a crisis of confidence in the coronavirus and a damaging increase in sales tax. It also means lower costs for businesses, possibly supporting profits through an impending recession.
But volatility is a double-edged sword. Monday’s dramatic drop helped fuel an avalanche of funds seeking refuge in the yen, taking it to heights that have not been seen in more than three years. And the cheaper fuel will make it even more difficult for Prime Minister Shinzo Abe to reach his inflation targets, which he has already struggled to achieve despite unprecedented monetary easing.
Australia’s currency suffered a so-called sudden collapse on Monday, before recovering much of the loss. A major commodity producer dependent on Asian markets, Australia’s growth outlook for 2020 is 1.5 percentage points lower since the coronavirus occurred, according to a forecast by James MacIntyre of Bloomberg Economics.
Most European nations are major net importers of crude oil, mainly from Russia, so they tend to win when oil prices fall. Lower oil prices increase household incomes in Germany and France by reducing expenses on fuel and food. Still, this time, policymakers won’t necessarily accept the fall. In Germany, where the public has become increasingly frustrated with the European Central Bank’s record interest rates for penalizing the nation’s savers, there may be additional concern about the effect on inflation.
Politically, German Chancellor Angela Merkel and French President Emmanuel Macron have appreciated the attempt to stabilize a frayed international order, and with Saudi Arabia leading the Group of 20 nations this year, a dispute with Russia over oil risks dwarfing the talks. of the G-20.
Meanwhile, for Italy, the fiscal boost that comes with falling oil costs may pale alongside the existing risks of being locked up as the European epicenter for the coronavirus.
The collapse of crude oil is a stark reminder to NORWAY of how reliable it is as the largest oil and gas producer in Western Europe. The krona plummeted to record lows against the euro on Monday, while the Oslo stock exchange fell as much as 12%. Oil and gas account for more than a third of Norway’s exports and a fifth of the state’s revenue, but the country’s massive $ 1.1 trillion sovereign wealth fund gives the government the means to cushion the blow.
Russia, whose production of oil and gas condensates hit a post-Soviet record last year, gets about half of its budget revenue from the energy industry. A free floating ruble and a flexible tax system have helped protect the budget from previous oil price crises. At the same time, the Finance Ministry said on Monday it was ready to start selling foreign exchange if oil prices remain below the so-called budget rule level of $ 42.40 per barrel. Russia’s $ 150 billion National Welfare Fund can cover lost oil revenues at $ 25- $ 30 a barrel for up to 10 years, he said.
Many analysts believe Moscow is better positioned to absorb a sustained period of low oil prices than its rival, Saudi Arabia, although the cost may be higher.
Middle East and North Africa: losers
Saudi Arabia, the world’s largest oil exporter, secured a price war with Russia last week when it slashed the official cost of crude for most of the kingdom’s buyers in more than 30 years. However, the measure comes at a delicate moment for a country that is in the midst of a major economic, political and social transformation, and could be costly.
Crown Prince Mohammed bin Salman has tried to drive the oil economy away by opening himself up to tourism and using the assets of his large oil company, Saudi Aramco, to build a sovereign wealth fund to invest in the new economy. Much of that effort will now have to be reversed, with uncertain consequences.
Along with the coronavirus, the collapse of oil could undermine Saudi Arabia’s nascent economic recovery and lead to a larger budget deficit, which could lead authorities to cut spending in a country where state generosity has long been a guarantor. of social and political stability. Even before crude fell, the government expected a deficit of 6.8% of GDP this year.
Alegria offers a textbook case of the political impact of an oil price collapse. In the mid-1980s, falling prices contributed to a recession, riots, Islamist electoral victories, a military coup, and a civil war. Even before the latest drop in the price of crude oil, protesters had been on the streets for a year to demand political change.
Oil and gas account for more than 85% of exports, and authorities are still struggling to recover from the economic impact of falling prices in 2014. High oil revenues previously allowed generous subsidies that helped isolate the government from called uprisings of the 2011 Arab Spring, but that buffer has now disappeared.
Iran relies on oil revenues to balance its budget and was already in trouble, with crude exports decimated since the US. UU. It again imposed sanctions in 2018. The economy was hit hard, and the government now has to deal with the consequences of one of the worst coronavirus outbreaks outside of China as well. However, the impact of the United States sanctions also means that Iran has absorbed much of the pain of oil-related losses and as a result may have less to lose from the current price war than any other member of the OPEC.
Middle East and North Africa: winners
Egypt, preparing for the economic impact of the coronavirus on its key tourism industry, should get relief from lower oil prices. Although it is an oil producer, the most populous nation in the Arab world is usually a net importer of crude oil, which means that lower prices should benefit government finances.
Saving on your energy import bills could give the government a break. It is trying to move forward with an economic reform program that previously involved radical cuts in public spending and subsidies, sensitive issues in a country where about a third of people live below the poverty line of about $ 1.5 a day.
Sub-Saharan Africa: losers
They include much of the rest of the African continent. Cutting oil prices in half for a year would reduce the value of sub-Saharan Africa’s net exports by $ 30 billion, according to Dirk Willem te Velde of the London-based Overseas Development Institute. They could also reduce foreign direct investment and make it difficult to service public debt.
OPEC member Angola depends on oil to represent more than 90% of its exports. He hoped that this year would finally emerge from an economic crisis caused by the last oil collapse, in 2014-2017, but the chances of President Joao Lourenco succeeding became much slimmer.
The 2014 price shock also led to an economic contraction in NIGERIA, Africa’s largest crude oil producer. “The main risk is that the Nigerian government runs out of money and then prints more naira to cover that fact,” said Cheta Nwanze, senior partner at Lagos-based risk consultancy SBM Intelligence. “This could lead to even worse inflation than the country is currently experiencing.”
Sub-Saharan Africa: winner
South Africa, the most industrialized nation on the African continent, has virtually no oil production. It imports fuel and refines crude oil in the country to satisfy most of the demand. The cost of gasoline and diesel is often a key factor in consumer prices, so the decline in oil provides a rare measure of relief for an economy that fell into a recession in the fourth quarter.