LOW CRUDE OIL PRICES

Final Story

The Countries Suffering Most From Low Oil Prices

As Warren Buffet says, “Only when the tide goes out do you discover who’s been swimming naked.”

And in 2014, when oil prices crashed and burned, the tide was gone – and it was shown that too many countries were relying on frothy oil revenues to balance out their trade deficits.

A Lingering Crisis

Fast forward to today, and low oil prices are still causing big problems for many countries. The above visualization shows how the world economies most reliant on oil exports have fared since the 2014 crash.

The end results are not pretty – and even in 2016, there were 18 economies that had breakeven prices (based on spending on imports) that were above the average oil price for the year:

Country 2016 Breakeven Price (Based on Imports) Difference from Avg. Oil Price
Libya $134.10 -$91.29
Turkmenistan $132.00 -$89.19
Colombia $102.30 -$59.49
Algeria $101.10 -$58.29
Bahrain $92.30 -$49.49
Oman $86.80 -$43.99
Chad $86.20 -$43.39
Qatar $67.00 -$24.19
Kazakhstan $64.10 -$21.29
Gabon $60.50 -$17.69
Trinidad & Tobago $60.20 -$17.39
Brunei $58.50 -$15.69
Venezuela $54.40 -$11.59
Iraq $51.90 -$9.09
Saudi Arabia $51.80 -$8.99
Azerbaijan $50.90 -$8.09
Angola $50.30 -$7.49
Nigeria $43.50 -$0.69

The oil price crash made many oil-reliant economies more fragile, and this fragility can be triggered in different ways. One interesting case study is Venezuela, which is currently embroiled in an ongoing economic, currency, and humanitarian crisis.

Bad Timing for Maduro

During the Hugo Chávez era, sky-high oil prices enabled fiscal and trade policies that subsidized Venezuelan life in many ways. That all changed in 2014, which was only one year after Nicolás Maduro took office.

Despite having largely the same policies as his predecessor, low oil prices have hammered the Venezuelan economy. Even with today’s prices, oil generates an estimated 95% of export revenues for the country. This has resulted in a disaster for the socialist nation, and Venezuela is now stuck with shortages in essential goods, crushing unemployment, a contracting economy, skyrocketing crime and murder rates, and even widespread malnutrition.

At the root of much of this, arguably, is an uncontrollable cycle of hyperinflation:

Venezuelan hyperinflation of the bolivar

With an economy that is a runaway train, the government prints more and more cash to try to maintain the status quo. It takes 8,470 bolívars to buy US$1 today. Right before the oil crash this was closer to 65 bolívars.

A Lost Cause

While many oil dependent nations are working to diversify or ride out low oil prices in other ways, it seems unlikely that the crisis in Venezuela will be reversed anytime soon.

Here’s the full fiscal breakeven needed by OPEC producers, including Venezuela, to help normalize things:

Fiscal Breakeven

For the past half century, large players have dominated energy markets. Today, technology is spawning many smaller operators at the same time as new sources of capital emerge. Public markets and governments were once the only investors in the energy sector. But with many governments now cash-strapped, pension funds and private-equity firms are taking up the slack. In the past five years, private-equity firms invested more than $200 billion in the sector, matching new ideas and business models with capital hungry for returns. This fragmentation is diminishing the power of scale to shape markets.

A large number of shale gas and oil producers in North America, for example, make uncoordinated decisions about supply, challenging the ability of the Organization of Petroleum Exporting Countries to influence prices. Large utilities have to factor into their strategies the growing number of cities, businesses, and households that generate their own energy from renewables, often selling surplus back to the grid. And governments could find it harder to implement effective regulation. Rules around drilling, water disposal, and public health and safety are already being tested in North America because of the speed at which the number of oil and gas producers has grown. And distributed power generation has sparked regulatory questions about how to charge grid users equitably. Assuming it is wealthier consumers who can afford to install solar panels, the cost of maintaining the grid falls to a smaller number of less affluent households.

As scale in some areas diminishes in importance, agility takes precedence. With so many players interacting in so many different ways in so many different locations, it is harder than ever to predict the future. Billion-dollar investments in assets that must be productive for three decades or more become far too risky. Instead, companies will need to make smaller initial investments and be able to adjust their strategies rapidly as circumstances change or local conditions dictate. Local differentiation carries increasing competitive weight. In oil and gas, service providers increasingly tailor their offerings not at the country or even regional level, but basin by basin; power companies may need to consider different strategies for different cities depending on the choice of feedstock and the numbers of residents and businesses producing their own energy.

Ironically, fragmentation is likely to encourage more partnerships. While these are already commonplace in oil and gas, where companies split the cost and risk of large capital projects, one might assume that smaller assets with lower costs and risk would have less need of them. Yet with a rising number of participants in an energy system where local differentiation counts, the reverse could be true.

The speed and scale of change in the energy system will depend on the pace of technological advancement—in establishing cheaper, more efficient power storage, for example—and on government policies and regulation. Unless system participants start to plan now, they could find themselves left adrift.

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