Russia, Iraq and others hit by oil price fall

The major question is whether OPEC, led by Saudi Arabia, will cut production and stabilise prices .

A steep decline in oil prices is straining the budgets of major petroleum-exporting countries around the globe, raising a spectre of spending cuts in Russia, where the economy is under pressure from Western sanctions, and posing a potentially grave security challenge for Iraq, which is already struggling to finance its fight against the Islamic State. 

From Moscow to Caracas, Riyadh to Baghdad, in Tehran, Algiers, Kuwait City and Lagos, political leaders, finance ministers and central bankers have been scrambling to confront the plunge in prices - roughly 25 per cent since a peak in June - driven by increased production in the United States and by projections of sustained cuts in demand in many developed countries, as well as decelerating growth in China. 

The price drop is mostly welcome news in the developed world, and particularly in Washington. Countries like Russia, Iran and Venezuela that in recent years have sought to thwart US influence could begin to moderate their behaviour, as they come under growing financial pressure. 

While Russia maintains reserves of hundreds of billions of dollars as a cushion for precisely this sort of price drop, there are already signs of tensions here. At a meeting in Moscow this week with a government human rights council, President Vladimir Putin pointedly rebuffed a request for increased financing, citing the pinch from declining oil revenues. 

It was a notable departure from the bravado Putin has shown in responding to Western economic sanctions over Ukraine, dismissing them as little more than an annoyance. In another sign of mounting pressure, a spokesman for the Russian state-controlled oil company, Rosneft, accused Saudi Arabia of secretly manipulating prices - an echo of conspiracy theories about US and Saudi collusion against the Soviet Union during the Cold War. 

Last week, Venezuela, which depends on oil for 95 per cent of its export revenues, called for an emergency meeting of the Organisation of Petroleum Exporting Countries to address the steep slide in prices, a move that other members rebuffed in favour of a regular meeting next month. 

The price of a barrel of Brent crude, a global benchmark, was $83.78 Wednesday, down from about $115 per barrel since its high in June. Experts on energy policy say prices are nearly certain to rebound in response to normal market forces and continued strong demand, particularly in the developing world. And some of the surplus that is dragging down oil markets is a result of production increases in Iraq and Libya, both struggling with instability that could shut down their oil fields at any time and send prices soaring. 

But in the near term, the big producers will likely face budget crunches in varying degrees of severity, with an array of economic, strategic and political ramifications. “It depends how long and how sharp the decline, but if oil prices stay around 20 per cent lower, that is going to be very challenging for countries that depend heavily on oil to meet their budget requirements,” said Jason Bordoff, the director of the Centre on Global Energy Policy at Columbia University in New York. “Many of these countries have implicitly high break-even numbers.” 

Bordoff said Russia and Iraq faced particularly difficult circumstances, partly because of broader geopolitical tensions in each region. Russia, already squeezed by inflation and a drastic decline in the ruble, has found its ability to borrow money severely constrained by the sanctions. Iraq is facing a costly, and potentially open-ended, military conflict against the Islamic State. 

“If oil prices were to stay in the range they are in now, we’ll see the Russian budget fall into deficit next year; that’s on top of the economic challenges they are already facing from sanctions and the decline in the value of their currency,” Bordoff said. “Iraq has its own set of challenges with skyrocketing public expenditure requirements, large public payroll, food and energy subsidies. They need to rebuild a dilapidated armed forces.” 

Some major oil producers are already experiencing substantially more budgetary pain from the decline in prices, particularly Venezuela, because of underlying economic problems, and Iran, which has faced years of Western economic sanctions over its nuclear energy programme. Nigeria faces particular political uncertainly because it has a presidential election coming up early next year. 

The major question now looming is whether OPEC, led by Saudi Arabia, will cut production and stabilise prices at a meeting next month. Some analysts say that is a logical step, while others suggest Saudi Arabia may allow lower prices to persist, in part to squeeze its main rivals – Iran and Russia – and in part to put pressure on shale oil producers in the US, whose higher production costs make it harder for them to compete when prices are lower abroad. 

Saudi Arabia’s relatively low-production costs and its domestic spending programme allow for a balanced budget at a price of roughly $95 a barrel, compared with $100 or more for Russia and even more for Iran. Saudi also has huge cash reserves to prop up its budget while prices remain low. 

Cash reserves

“The question is how much are you willing to eat into your cash reserves and for how long until you adjust your production down,” said Gal Luft, co-director of the Institute for the Analysis of Global Security, a Washington research organisation focused on energy issues. 

“Then you will have others, mainly Saudi Arabia, who might say, ‘Well, we don’t want to overreact.’ In the short run, I think most of the players can survive,” Luft said. “In the long run, beyond a year, I don’t think they have the means.” For the US and most of the developed world, a decline in oil prices is generally regarded as a macroeconomic plus, reducing costs for consumers and businesses and often lifting stock markets. 

That classical view has begun to change, however, as the United States has increased its own oil production, particularly in states like Texas and North Dakota. 

In Russia, the Kremlin and the Central Bank have insisted that there is no cause for panic. Official projections show oil prices rebounding to about $100 a barrel over the next three years, and government officials are adamant that the country’s cash reserves are sufficient to weather temporarily low prices. 

In testimony before the lower house of Parliament on Monday, the head of Russia’s Central Bank, Elvira Nabiullina, said despite the government’s confidence, the bank was nonetheless assessing the risks of a severe and prolonged decline in oil prices, to $60 per barrel. “The central bank is currently working on a so-called stress scenario, emergency scenario so to say, which includes an abrupt, more noticeable oil price fall in a forecasted time span,” Nabiullina said. “Nevertheless, I think there are low chances of this.” 

Luft said it was difficult to say whether the Saudis would eventually tighten the spigots in an effort to prop up prices, as they have in the past, or pursue a strategy of preserving market share, which means keeping prices relatively low. 

“From them, what matters is how much money goes through the door,” he said. “They don’t care how many barrels they sold or pumped, but how much money in billions goes through the door. In the end, that’s what it is all about. It’s about staying alive, staying in power, making sure you don’t end up like Mubarak.”