$49 Per Barrel - The Winners and Losers


Global oil prices have plummeted, halving in only seven months. Given that Brent Crude was $49 per barrel on the 23rd January, it is hard to believe that in June of last year it was around $115 per barrel.


Quite simply, the forces of supply and demand are to blame. Demand for oil has been tapering globally due to weakened economies and new efficiency measures. At the same time, US and Canadian fracking output has flooded the market. In reaction to this, OPEC’s strategy is to maintain its output of oil, ensuring it maintains market share. Consequently, supply is outstripping demand, thus lowering the price of oil. Predictions as to when prices will rise vary drastically, from several years according to the boss of BP, to within months as predicted by some OPEC members.


Below I very briefly outline a few of the winners and losers over the past few months of this oil price crash.


Winners


India is now set to hit its fiscal targets thanks to low oil prices. Commodity imports, largely oil, account for 50% of India’s imports, therefore it has suffered years of fiscal deficits due to being heavily dependent on costly oil. Thus the government has recently been able to abandon fuel related subsidies, and increase taxes on petrol and diesel, drastically shrinking its budget deficit as percent of GDP.


China being the world’s largest importer of oil is classified as a winner for obvious reasons. However, China’s banks may be vulnerable, as net oil exporting nations’ ability to repay debt has been dented by falling oil prices.


The United States’ booming shale industry may be slowed down by the fall in oil prices, but it leaves hundreds of millions of consumers with extra cash. According to the Financial Times, the US public will have an extra $75bn to spend this year, that’s 0.7% of total consumption.


The Eurozone imports 88% of its oil, so low oil prices have boosted business confidence and increased people’s purchasing power. However there is a caveat, low oil prices may become embedded in low wages, thus amplifying the fear that alarmingly low inflation may lead to deflation. Therefore there is a limit on the oil price’s impact on purchasing power, as many members are looking to inflationary pressures to alleviate their debt burdens.


Britain’s Retail Consortium has reported that food prices in January are down by 0.5% from last year partially thanks to low oil prices reducing supply chain prices, which have been passed onto consumers. More obviously, the average motorist is set to save £146 this year, provided the price stays low. These both exemplify why the oil price has pulled inflation down to 1%, thus boosting confidence and improving prospects for 2015. However, it does impact adversely upon North Sea oil extractors, but the impact is relatively minimal as the oil industry is declining as a percent of the UK’s GDP. Interestingly, if this trend of falling oil revenues continues, Scottish Nationalists argument that Scotland will be better off as an independent country will be weakened.


Losers


Russia, a nation heavily dependent on the export of oil, needs the price of oil to be around $105 per barrel to balance its budgets, as estimated by Deutsche Bank and the IMF. Therefore, the low prices are eating into state budgets at an alarming rate, with rumours of pension pots being used. This, combined with Western sanctions against Russia due to its actions in Ukraine, leaves the nation at ‘crisis’ point, particularly if the oil price remains low.


Venezuela’s economic performance is tied to the price of oil, with the commodity constituting 96% of its export revenues. Moreover, the nation is notoriously inefficient at oil extraction, meaning that Venezuela needs oil to be $151 per barrel in 2015 to balance its budget according to Citi Research.


Nigeria’s economy is not set to fare well with falling oil prices, with oil forming around 15% of its GDP. In the IMF’s latest predictions, Nigeria’s expected GDP has been cut from 7% to 5%.


Saudi Arabia is the largest member of OPEC, the cartel which controls the supply of its members in order to set the world price of oil. Moreover, it is also the world’s largest exporter of oil. In the short term, it can withstand low prices with its $700bn reserve fund, but in the longer run it needs the price of oil to average around $85 per barrel.


Image from https://en.wikipedia.org/wiki/Oil_well#/media/File:West_Texas_Pumpjack.JPG