Will April Showers Bring May Flowers For Oil Importers?
Following years of rapid fluctuations, crude oil prices finally peaked at a staggering $136.55 per barrel in 2008. However, the recession hit the oil industry hard, so that prices began to steadily fall once more and by 2009, they had lost three quarters of their value. Though oil prices eventually begin to climb to their usual market prices in (quarter of year x) once the global economy had stabilised, the trend did not last long. In 2014, oil prices began to plummet further, culminating to a 12 year low of below 30$ per barrel. These striking market shocks have made it seem like plunging oil prices have dominated the news over the past year (examples of newspaper headlines and their time of publication). Needless to say the fall of the market prices impact is felt everywhere – no nation can remain indifferent to these developments as oil is integral to their economic progress.
It is not difficult to understand the factors which led to these price shocks in the oil industry. One explanation, is attributed to the dwindling demand for oil. Another explanation is due to the increasing influx of supply which itself is explained by a number of contributory factors. Firstly, the United States doubled its domestic production of oil after the “shale revolution,” consequently provoking oil importers to look elsewhere. Secondly, the OPEC cartel has lifted its price floor, leading to a further fall in oil prices. A third reason partly lies with the fact that the global demand for oil has been rocked by the recession leading to a glut in the production of oil. The increasing demand for energy-efficiency is another factor, as it consequently leads to less gas-guzzling vehicles being consumed.
When prices started to fall there seemed to be a general attitude that there would be an overall positive effect around the globe. Now, however, there are reasons to believe that it might have a net negative effect on the global economy. Although it is still to be ascertained, the boundary between the winners and losers of these developments is anything but blurry. While the fall in oil prices was celebrated with enthusiasm by oil importing countries, whose inhabitants reaped the benefits every time they filled up their car or home heating oil tanks, on the losers’ side are oil exporting countries, such as Russia, Venezuela, and Saudi Arabia. The oil dependent economies which lack export diversity are not able to withstand a substantial decrease in oil revenues. As a result, most of these countries have been plunged into a recession.
It is no secret that the wealth derived from natural resources has a major impact on the economics and politics of producing countries. However, unlike human resources, these are limited and the volatile nature of their price cannot guarantee stability and constant economic growth. Joseph Stiglitz and other economists go so far as to claim that countries with large endowments of natural resources suffer from a resource curse. This is because countries that have no such resources are forced to develop human resources whose limits are yet to be discovered. Take Switzerland, for example, despite possessing no substantial natural resources it is one of the richest countries in the world, while resource-rich countries like Nigeria experience high corruption, low (if any) growth rates, great volatility, and, in extreme cases, civil wars.
Venezuela is one of the countries that has been damaged most by the fluctuations of the global price of oil. Being the world’s fifth largest oil exporting country, it has dipped into a recession after oil revenues have slumped and there do not seem to be any signs of recovery. Revenue from petroleum exports account for more than 50% of the country's GDP and roughly 95% of total exports so it is of no surprise that with a plummeting oil price, the country dips into a recession. The IMF forecasts a 10% and 6% contraction this and next year respectively, while inflation skyrockets to 159%. Could this be substantial enough evidence to Venezuelans that they cannot base their economy on only natural resources and expect stability as well as growth? Although the answer is unclear there seems to be a bright light. In the most recent Venezuelan parliamentary election which was held in December 2015, the United Socialist Party of Venezuela (PSUV) lost control of the Assembly for the first time since 1999. During their reign, as can be expected, there were no reforms implemented that could have diversified Venezuela’s economy. The new majority at the very least seems to be promising essential reforms and a will to escape the dependence on oil.
Saudi Arabia is another oil exporting country that experienced a similar fate. Having the second largest oil reserves in the world, it is largely dependent on the price of oil, as the petroleum sector accounts for roughly 92.5% of Saudi budget revenues, 97% of export earnings, and 55% of its GDP. The Saudi Kingdom seems to have realized that it must quicken the pace of reform to avoid rapid economic deterioration. A few months ago Saudi Arabia issued a manifesto for change in the face of a number of pressing issues. The government has sought to allocate its petroleum income to transform its relatively undeveloped, oil-based economy into that of a modern industrial state while maintaining the kingdom's traditional Islamic values and customs. The new plan envisages cutting waste and increasing spending on infrastructure to diversify sources of income.
There is hope that in a few decades Venezuelans and Saudis will look back on 2016 as a year when reforms leading to economic prosperity were starting to be implemented. After all, we should not forget that April showers bring May flowers.