From Venezuela to Iraq to Russia, Oil Price Drops Raise Fears of Unrest
By CLIFFORD KRAUSS and RICK GLADSTONE
AUGUST 24, 2015
Oil, the lifeblood of many
countries that produce and sell it, appears to be rapidly turning into
an ever-cheaper economic curse.
A year ago, the international price per barrel of oil was about $103.
By Monday, the price was about $42, roughly 6 percent lower than on
Friday.
In oil-endowed Iraq, where an Islamic State insurgency and fractious
sectarian politics are growing threats, a new source of instability
erupted this month with violent protests over the government’s failure
to provide reliable electricity and explain what has been done with all
the promised petroleum money.
In
Russia, a leading oil producer, consumers are now paying far more for
imports, largely because of their currency’s plummeting value. In
Nigeria and Venezuela, which rely almost completely on oil exports,
fears of unrest and economic instability are building. In Ecuador, where
oil revenue has fallen by nearly half since last year, tens of
thousands of demonstrators pour into the streets every week, angered by
the government’s economic policies.
Even in wealthy Saudi
Arabia, where the ruling family spends oil money lavishly to preserve
its legitimacy, the government has been burning through roughly $10
billion a month in foreign exchange holdings to help pay expenses,
and it is borrowing in the financial markets for the first time since
2007. Other Arab countries in the Persian Gulf that are dependent on oil
exports, including Kuwait, Oman and Bahrain, are facing fiscal deficits
for the first time in two decades.
While the price has been declining for months, forecasts have always
been hedged with the assumption that oil would eventually stabilize or
at least not stay low for long.
But
new anxieties about frailties in China, the world’s most voracious
consumer of energy, have raised fears that the price of oil, now 30
percent lower than it was just a few months ago, could remain depressed
far longer than even the most pessimistic projections, and do even
deeper damage to oil exporters.
“The pain is very hard for these countries,” said René G. Ortiz,
former secretary general of the Organization of Petroleum Exporting
Countries and former energy minister of Ecuador. “These countries
dreamed that these low prices would be very temporary.”
Mr. Ortiz estimated that all major oil exporting countries had lost a
total of $1 trillion in oil sales because of the price decline over the
last year.
“
The apparent weakness in the Chinese economy is radiating out into the world,”
said Daniel Yergin, the vice chairman of IHS, a leading provider of
market information, and the author of two seminal books on the history
of the oil industry, “The Prize” and “The Quest.”
“An awful lot of producers who enjoyed good times were more dependent
on Chinese economic growth than they recognized,” Mr. Yergin said.
“This is an oil shock.”
Although the price drop has most directly hurt oil exporters, it also may signal a
new period of global economic fragility that could hurt all countries — an anxiety that already has been evident in the gyrating stock markets.
The price drop also has become an indirect element in the course of
Syria’s civil war and other points of global tension. Countries that
once could use their oil wealth as leverage, like Russia, Iran and Saudi
Arabia, may no longer have as much influence, some political analysts
said. Iran, which once asserted it could withstand the antinuclear
embargo of its oil by the West, appeared to have rethought that
calculation in reaching an agreement on its nuclear activities last
month.
Of course, lower oil prices confer economic benefits, too. The
average American household, for instance, buys 1,200 gallons of gasoline
every year. And gasoline, on average, has sold for most of this year by
roughly a dollar a gallon less than in 2014.
But even while lower oil prices stimulate economies of consuming countries,
a
protracted decline carries many unanticipated consequences — starting
with the economic weakness in developing countries that buy increasing
amounts of goods from the United States and others in the industrialized
world.
A supply glut has been evident for some time, driven partly by a vast
increase in Saudi production and a growing energy self-sufficiency in
the United States, which was once heavily reliant on Middle East oil.
Saudi Arabia not only is
producing a record amount, but also is increasing the number of rigs
drilling for future production. And its Gulf allies, the United Arab
Emirates and Kuwait, are following suit. Even with the turmoil wrought
by the Islamic State, Iraq’s production has jumped nearly 20 percent
since the beginning of the year.
The surge in production may seem counterintuitive, since lower prices
can cause self-inflicted economic wounds and potentially incite more
political and social trouble. But all the exporters in the Middle East
are struggling with each other to protect Asian markets, now that the
United States is using much less of their oil.
The Gulf states, said Sadad I. Al-Husseini, former executive vice
president of the Saudi Aramco oil company, “don’t want to take on the
role of oil price regulators because the market is far too big and too
political for them to manage it.”
Had these producers curtailed their production late last year, he
said, “a flood of new oil supplies from the U.S., Canada, the deep
offshore and other basins would have continued to undermine the oil
markets, and prices would have collapsed to where they are now in any
case.”
The global glut is likely
to worsen if the nuclear deal with Iran is approved, potentially
releasing as much as one million more barrels onto the
94-million-barrel-a-day global market in a year or so.
Iran’s oil minister, Bijan Namdar Zanganeh, has made no secret about
his country’s intentions. “We will be raising our oil production at any
cost, and we have no other alternative,” he was quoted Sunday in Iran’s
state-run news media as saying.
The big change in recent years has been the surge of United States oil production, adding
more than four million barrels a day to global supplies. But in recent
months the oversupply has been driven primarily by the Saudis, who have
flooded the market in what economists regard as a deliberate attempt to
drive down the price so that other high-cost producers can no longer
compete — most notably the Americans.
Still, production in the United States has not declined as much as
foreseen by the Saudis, who thought the price of oil would stabilize at
about $50 a barrel.
Now it may be headed to $30, the lowest level since the 2008 global economic recession.
The Saudis, the most important member of OPEC, have resisted calls by
other members to reduce output. The result is that nearly all OPEC
members, who together control much less of the global market than they
once did, are pumping more oil.
“We are witnessing competition between member states over market
share, and most of these countries are dependent on oil as a primary
source of income,” said Luay Al-Khatteeb, a nonresident fellow in
foreign policy at the Brookings Doha Center. If prices do not recover to
the $60 a barrel level, he said, “and countries in the Arab region
continue to rely on oil revenue heavily, we could see decades of
decline.”
David L. Goldwyn, who was the State Department special envoy and
coordinator for international energy affairs in the first Obama
administration, said that if the Brent global oil benchmark price stays
below $45 a barrel, that is “a red flag for stability issues across the
oil producing world.”
“The hemorrhaging of government budgets reliant on oil will force
dramatic cuts in spending or dangerous increases in borrowing, if not
both,” Mr. Goldwyn said. “The countries without significant foreign
exchange reserves are most at risk, and they include Nigeria, Angola,
Algeria, Venezuela and Iraq. The countries which need to sustain
investment to maintain political legitimacy need to be worried, and
that’s Brazil, Russia and even Iran.”
Meghan L. O’Sullivan, director of the Geopolitics of Energy program
at Harvard’s Kennedy School, said she was most immediately concerned
about the impact of extended low oil prices on Iraq.
“Not only is fighting ISIS an expensive endeavor, but many of the
political deals that need to be done to keep different groups supportive
of the Iraqi government require money to sustain,” she said.
But Ms. O’Sullivan expressed a longer-term worry about possible
miscalculations by Saudi Arabia, on both the duration and magnitude of
the oil price drop.
“With a burgeoning population looking for jobs, education and health
care every day,” she said, “the expensive social contract between the
royal family and Saudi citizens will get more difficult, and eventually
impossible, to sustain if oil prices do not recover.”
