Interesting article. Does anyone know what to make of the oil price crater and what it means for the future?
https://foreignpolicy.com/2020/04/23/th ... tpcc=21060
"We are now facing a fourth counter-shock. Faced with the unprecedented collapse in demand due to COVID-19, talks between Russia and Saudi Arabia broke down in early March. Russia refused to limit production, and Saudi Arabia doubled down by dumping oil on global markets at steep discounts. Despite the effort to patch together an agreement on production restriction in recent weeks, the overhang of supply is massive. A fleet of up to 20 supertankers loaded with Saudi oil is bearing down on American oil ports. Even if the negative prices for oil in May were the result of technical factors in the futures market, the prices for June are also historic lows.
In inflation-adjusted terms, oil prices are similar to those last seen in the 1950s, when the Persian Gulf states were little more than clients of the oil majors, the United States and the British Empire. All of this raises the question of what the impact will be on today’s global producers.
We tend to think of oil states as rich oligarchies serviced by armies of foreign workers, and the image applies to the Gulf states. Lower prices will certainly require them to tighten their belts.
In February, even before the coronavirus hit, the International Monetary Fund was warning Saudi Arabia and the United Arab Emirates that by 2034 they would be net debtors to the rest of the world. That prediction was based on a 2020 price of $55 per barrel. At a price of $30, that timeline will shorten. And even in the Gulf there are weak links. Bahrain avoids financial crisis only through the financial patronage of Saudi Arabia. Oman is in even worse shape. Its government debt is so heavily discounted that it may soon slip into the distressed debt category. At that point it will most likely be forced to turn either to Riyadh or to the IMF for help.
The economic profile of the Gulf states is not, however, typical of most oil-producing states. Most have a much lower ratio of oil reserves to population. Many large oil exporters have large and rapidly growing populations that are hungry for consumption, social spending, subsidies, and investment. Whereas such countries as Saudi Arabia and Kuwait routinely earn more in revenue than they can sensibly invest at home, even at the height of OPEC’s power in the 1970s, the shah’s regime in Iran not only consumed all its oil revenue but used its oil assets as collateral for borrowing.
It is therefore not surprising that counter-shocks to oil prices often trigger political upheaval. The sudden shift in the terms of trade undercuts export revenues, budget stability, and growth prospects. Fiscal crises caused by falling prices limit governments’ room for domestic maneuver and force painful political choices. The dilemma of defaulting on debt owed to foreign creditors and imposing austerity on populations has been the cause of grave political crises, some with serious geopolitical consequences.
In the late 1980s, falling oil revenues undercut Mikhail Gorbachev’s efforts to reform Soviet communism, accelerating the end of the Soviet Union. Both Hugo Chávez in Venezuela and Vladimir Putin in Russia were able to rise because their predecessors failed to stabilize domestic politics in the wake of the price plunge of the late 1990s. Since 2014 the fall in oil prices has once again applied huge pressure to the regime of Chávez’s successor, Nicolás Maduro, in Caracas. While U.S. economic sanctions against Russia and Venezuela have been prominent in the news, aggressive competition from U.S. shale producers has been as important in shaping their economic fortunes.
So who is vulnerable now?
Under Putin, Russia overhauled its economic policy after the 2014 price collapse. Its budget was pared by a sustained austerity drive. When it launched the current oil price war in March by refusing to cooperate with OPEC in supply reductions, Moscow probably did not anticipate the collapse that would ensue. But Russia started with an exchange reserve of just shy of $570 billion, and due to its budgetary consolidation, it only began running up deficits once oil prices fell below $42.
Other emerging-market oil producers, by contrast, have to deal with large debt loads. Petrobras in Brazil has $78.9 billion of net debt as of the end of 2019 and one of the highest debt burdens of all oil firms. Its bonds trade at junk levels. But there have so far been few signs of panic. In Malaysia, Petronas has accounted for more than 15 percent of the government’s total revenue over the last five years. It was put on a negative outlook by Fitch. But like its government, it maintains a solid A- bond rating. These are resilient businesses with deep pockets in diversified economies.
After Venezuela, Ecuador is the Latin American oil producer facing the most urgent problems. In February 2019, it obtained a $10.2 billion loan package from a group of multilateral lenders led by the IMF. But to unlock this funding it had to push through painful reforms. By last October, the government’s plans to abolish fuel subsidies had to be halted because of enormous popular protests. Ecuador was already in this unstable condition when the oil price shock hit. This weekend, the government announced it had agreed with investors to delay $800 million in interest payments on its $65 billion foreign debt. This means that Ecuador is the second Latin American country after Argentina to enter technical default this year.
Populous middle-income countries that depend critically on oil are uniquely vulnerable. Iran is a special case because of the punitive sanctions regime imposed by the United States. But its neighbor Iraq, with a population of 38 million and a government budget that is 90 percent dependent on oil, will struggle to keep civil servants paid. Not paying the state administration is a recipe for instability at a time when the country is the theater of a shadow war between Washington and Tehran.
Populous middle-income countries that depend critically on oil are uniquely vulnerable.
In North Africa, Algeria—with a population of 44 million and an official unemployment rate of 15 percent—depends on oil and gas imports for 85 percent of its foreign exchange revenue. In the late 1980s, the oil shock triggered by Saudi Arabia wreaked havoc in Algeria, destabilizing its state-dominated economy. As harsh austerity measures were implemented, the Islamic Salvation Front grew as the main organization opposition to the National Liberation Front regime. When the Algerian military denied the Islamists their electoral victory in 1991 it unleashed a civil war that raged until 2002 and cost an estimated 150,000 lives.
The oil and gas boom of the early 2000s provided the financial foundation for the subsequent pacification of Algerian society under National Liberation Front President Abdelaziz Bouteflika. Algeria’s giant military, the basic pillar of the regime, was the chief beneficiaries of this largesse, along with its Russian arms suppliers. The country’s foreign currency reserves peaked at $200 billion in 2012. Spending this windfall on assistance programs and subsidies allowed Bouteflika’s government to survive the initial wave of protests during the Arab Spring. But with oil prices trending down, this was not a sustainable long-run course. By 2018 the government’s oil stabilization fund, which once held reserves worth more than one-third of GDP, had been depleted. Given Algeria’s yawning trade deficit, the IMF expects reserves to fall below $13 billion in 2021. A strict COVID-19 lockdown is containing popular protest for now, but given that the fragile government in Algiers is now bracing for budget cuts of 30 percent, do not expect that calm to last."