The changing winners, losers from oil’s historic plunge

The changing winners and losers from crude oil’s historic plunge

Representative image. (AFP Photo)

By Marc Champion

Oil price shocks always divide the world’s economies into winners and losers, sometimes producing lasting geopolitical change —and this time is unlikely to be different. But to misquote Tolstoy, every oil crisis distributes happiness and unhappiness in its own way.

Crude’s biggest drop in three decades on Monday coincided with the spreading coronavirus, slow growth in China, a wave of de-globalization affecting trade, and the emergence of the US as the world’s largest oil producer. Even for some consumer nations, gains from lower oil prices may this time be overwhelmed by the collapse in demand caused by COVID-19.

Perhaps the biggest worldwide change, though, is that inflation and interest rates are already at rock bottom. That means central banks may have very little capacity 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’s hard to predict the impact of sub-$30 oil on governments around the world. Importing nations in Asia and central Europe would normally be expected to win, and major producers in the Middle East, northern Europe and the Americas to lose. But it’s not that simple.

The Americas: Winners

The US has historically won big from 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 a lot less clear. The US was the world’s largest oil producer in 2019, beating Saudi Arabia thanks to an explosion of shale fracking. With shale producers highly leveraged, a sustained price drop could drive some companies under and savage investment plans across the industry, creating a drag on job creation and growth.

The upshot is that “a US that in the past had a lot to gain from lower oil prices, now has something to lose,” said Tom Orlik, chief economist for Bloomberg Economics.

Indeed, wiping out that competition was one reason cited for Russia’s action that helped precipitate the oil-price crash. And any major setback for shale could offset the feelgood factor voters get from low gasoline prices, which could impact Trump’s chances at re-election in November. In fact, says Sterne of Oxford Economics, a shale meltdown would tip the US firmly into the losers camp from $30 oil.

Low crude prices should also benefit Peru, a net importer which bought $5.6 billion of oil products last year, although it may also delay the exploration investment needed to boost local output.

The picture is more nuanced again for Brazil, where President Jair Bolsonaro could get some relief in his dealings with truck drivers, whose strike against rising diesel prices two years ago brought the country to a standstill. At the same time, plans by state-controlled oil company Petroleo Brasileiro SA to sell assets and cut debt will likely hit a wall.

The Americas: Losers

If the U.S. is a borderline case, Venezuela is not. Oil is already sold at a deep discount, due to US sanctions that reduce the country’s ability to export crude. The collapse in international prices will mean even less cash for Petroleos de Venezuela SA, one of the few remaining lifelines for Nicolas Maduro’s embattled regime.

An analysis from Allianz Research on Monday put Ecuador and Colombia at the top of their list of countries most exposed if oil stays below $45, losing well over a percentage point of growth each. Ecuador looks increasingly likely to default on its debt, amid doubts over disbursements of an International Monetary Fund loan.

Mexico, meanwhile, stands to lose about 0.15% of GDP, according to Oxford Economics, and more according to Allianz. The government could struggle with plans to expand the role of its oil company Petroleos Mexicanos in the energy sector, while the peso’s recent plunge could hamstring the central bank’s ability to follow the Fed’s emergency rate cut. Argentina’s plans to develop its Vaca Muerta shale gas reserve, already suffering under the administration of leftist Alberto Fernandez, will have to wait even longer. The market volatility will also complicate government plans to refinance debt.

Canada’s economy was already on a soft footing at the end of last year, and some economists say the oil shock could tip it into recession. Canada exported just over $59 billion of crude and bitumen in 2018, when benchmark oil prices averaged $57 a barrel.

Asia: Winners

China benefits from lower oil prices as a major importer, but this time it may take a while for the effects to materialize: It already has high stockpiles of oil and liquid natural gas, while the coronavirus is hindering travel and manufacturing and creating uncertainty.

Under those circumstances, excessive volatility in the markets may hinder China’s economic recovery, as it needs stability across the globe to prevent further shocks to supply chains. Those concerns were on full display Monday, when the foreign ministry took the unusual step of commenting on commodity market developments.

The dramatic fall in oil prices also could have political consequences for friendly countries ranging from Iran to Venezuela —a headache Beijing doesn’t need.

India, the world’s third-largest crude consumer, should be among the big beneficiaries since its import bill will fall significantly. Cheaper oil could also help Prime Minister Narendra Modi’s government by allowing it to increase taxes on fuels, rather than pass the entire benefit of the price decline to consumers. This couldn’t come at a better time for Modi, whose government is under pressure over 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 hit by a crisis of confidence over the coronavirus and a damaging sales-tax hike. It means lower costs for businesses as well, potentially supporting profits through a looming downturn.

But the volatility is a double-edged sword. The dramatic fall on Monday helped propel a flood of haven-seeking funds into the yen, pushing it to heights not seen in more than three years. And cheaper fuel will make it even harder for Prime Minister Shinzo Abe to reach his inflation targets, which he’s already struggled to hit despite unprecedented monetary easing.

Asia: Losers

Australia’s currency suffered a so-called flash crash on Monday, before recovering much of the loss. A major commodity producer dependent on Asian markets, Australia’s 2020 growth outlook is 1.5 percentage points lower since the coronavirus struck, according to a forecast by James MacIntyre of Bloomberg Economics.

Europe: Winners

Most European nations are major net importers of crude – mainly from Russia – so they have tended to win when oil prices fall. Lower oil prices boost incomes for families in Germany and France by reducing outlays for fuel and food. Still, this time around, policy makers won’t necessarily welcome the plunge. In Germany, where the public has grown increasingly frustrated with the European Central Bank’s record-low interest rates for penalizing the nation’s savers, there may be an added concern about the effect on inflation.

Politically, German Chancellor Angela Merkel and French President Emmanuel Macron have put a premium on trying to stabilize a fraying international order, and with Saudi Arabia leading the Group of 20 nations this year, a dispute with Russia over oil risks overshadowing G-20 talks.

For Italy, meanwhile, the fiscal boost that comes with falling oil costs may pale next to existing risks of being in lockdown as the European epicentre of the coronavirus.

Europe: Losers

Crude’s collapse is a harsh reminder for Norway of just how reliant it is as Western Europe’s biggest oil and gas producer. The krone plunged to record lows against the euro on Monday, while the oil-heavy 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 income, but the country’s massive $1.1 trillion sovereign wealth fund gives the government the means to cushion the blow.

Russia, whose oil and gas condensate production reached a post-Soviet record last year, gets about half of its budget revenue from the energy industry. A free-floating ruble and flexible tax system have helped to shield the budget from past oil price shocks. At the same time, the Finance Ministry said Monday it was willing to start selling foreign currency if oil prices stay below the so-called budget rule level of $42.40 per barrel. Russia’s $150 billion National Wellbeing Fund can cover lost revenue from oil at $25-$30 a barrel for up to 10 years, it 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 heavier.

Middle East and North Africa: Losers

Saudi Arabia, the world’s largest oil exporter, ensured a price war with Russia last week when it slashed the official cost of crude to the kingdom’s buyers by the most in more than 30 years. Yet, the move comes at a sensitive time for a country that’s in the midst of a major economic, political and social transformation, and it could prove costly.

Crown Prince Mohammed bin Salman has sought to wean the economy off oil by opening up to tourism and using the assets of its mammoth oil major, Saudi Aramco, to build a sovereign wealth fund to invest in the new economy. Much of that effort will now have to be dialled back, with uncertain consequences.

Along with the coronavirus, the oil crash could undermine Saudi Arabia’s nascent economic recovery and result in a higher budget deficit, potentially prompting authorities to cut spending in a country where state largess has long been a guarantor of social and political stability. Even before crude slumped, the government was expecting a deficit at 6.8% of GDP this year.

Algeria offers a textbook case of the political impact of an oil price collapse. In the mid-1980s, plunging prices contributed to a recession, unrest, Islamist election victories, a military coup and a civil war. Even before the latest fall in the price of crude, protesters had been taking to the streets for a year to demand political change.

Oil and gas makes up more than 85% of exports, and authorities are still struggling to recover from the economic impact of 2014’s price plunge. Bumper oil revenues before then allowed for generous subsidies that helped insulate the government from the so-called Arab Spring uprisings of 2011, but that buffer has now disappeared.

Iran depends on oil revenues to balance its budget and was already in trouble, with crude exports decimated since the US reimposed sanctions in 2018. The economy was hit hard, and the government is now also having to deal with the fallout from one of the worst outbreaks of the coronavirus outside of China. Yet the impact of US sanctions also means that Iran has absorbed much of the pain from oil-related losses and it may, as a result, have less to lose from the current price war than any other OPEC member.

Middle East and North Africa: Winners

Egypt, which is bracing for the economic impact of the coronavirus on its key tourism industry, should gain some relief from lower oil prices. Although it is an oil producer, the Arab world’s most populous nation is usually a net importer of crude, meaning that lower prices should benefit government finances.

Saving on its energy import bills could give breathing space for the government. It’s trying to press on with an economic reform program that’s previously involved sweeping cuts to public spending and subsidies -- sensitive issues in a country where about a third of people are living below the poverty line of about $1.5 per day.

Sub-Saharan Africa: Losers

They include much of the rest of the African continent. Halving oil prices for a year would reduce the value of net exports from sub-Saharan Africa 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 more difficult to service public debt.

Angola, an OPEC member, depends on oil to make up more than 90% of its exports. It had hoped this year it would finally emerge from an economic crisis caused by crude’s last crash, in 2014-2017, but the chances of President Joao Lourenco succeeding just got a lot slimmer.

The 2014 price shock also led to an economic contraction in Nigeria, Africa’s biggest crude producer. “The main risk is the Nigerian government running out of money, and then printing more naira in order to cover that fact,” said Cheta Nwanze, lead partner with 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 domestically to meet the bulk of demand. The cost of gasoline and diesel is often a key driver of consumer prices, so oil’s decline provides a rare measure of relief for an economy that slumped into a recession in the fourth quarter.

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