We hear a lot about lower oil prices putting extra money in the pockets of consumers, and how oil importers, like India and China, will benefit from the crude price collapse. These are clear positives for much of the world as we wait for oil markets to “stabilize” in this new, more Darwinian world order, in which market forces will, over time, drive out the higher marginal cost oil producers.

But as market forces are left to stabilize crude oil markets, following Saudi Arabia’s decision to cast off its historical role as OPEC’s swing producer, there’s no shortage of forces working to destabilize many countries whose economies are largely dependent on oil.

First, while OPEC’s decision to keep unchanged recent production levels has been largely portrayed as the breakout of a “war on U.S. shale,” the pain of lower oil prices is being shared globally.

As noted by Wells Fargo senior analyst Roger Reid, “based on a combination of fiscal budgeting issues and reservoir economics, we believe that a number of OPEC countries (Iran, Iraq, Nigeria and Venezuela) and several non-OPEC countries (Russia, Canada and Norway) are in an even worse economic return position than the U.S. shale plays and will end up being the real ‘victims’ of lower oil prices in 2015 and beyond.”

Nigeria is such an example. Already, it has had to devalue its currency, raise interest rates and slash its domestic budget. In addition, the country is in February holding elections, which in the past have been accompanied by production outages caused by violence and oil theft resulting in losses of several hundred thousand barrels per day (bbl/d).

“Given that the military is already over-stretched fighting a virulent Islamist insurgency in the north, it will be hard-pressed to contain any rise in unrest around the February elections,” according to Helima Croft, head of commodity strategy at RBC Capital Markets.

In Russia, the ruble has fallen by more than 30% against the dollar since early September, hurt by its linkage to the price of crude and the impact of U.S. and European sanctions. Russian policy represents perhaps the biggest wild card, reflecting concerns President Putin is at risk of further escalating tensions in the Ukraine and Crimea to distract attention from domestic economic concerns.

Elsewhere, risks of a possible sovereign debt default by Venezuela are well-publicized, while Libya has suffered continued deterioration of security conditions. Since August, Libya has had two governments, after an Islamist group seized Tripoli and set up a rival government to the internationally recognized government, forced to move east to Tobruk.

Even Saudi Arabia is not free from financial duress. In the wake of the Arab Spring, it introduced $130 billion in social programs, as well as “massive” post-2011 defense spending, Croft said. Based on International Monetary Fund (IMF) figures, if oil trades $25/bbl below the IMF’s $100 to $105/bbl reference case, Saudi government reserves would be depleted by 2018 in the absence of changes in spending, she noted.

Speaking ahead of the OPEC meeting, Macquarie Group’s global oil and gas strategist, Vikas Dwivedi, said that even though Saudi Arabia and other wealthy OPEC members can handle lower prices for significant periods, “many countries in the Middle East and Africa could de-stabilize as a result of insufficient oil revenue. We believe this would be a particularly undesirable scenario for Saudi policy planners given the potential for the next Arab Spring-type event to overflow into Saudi Arabia.”

With both Brent and West Texas Intermediate trading below $70/bbl at press time, clearly little concern is directed towards OPEC spare capacity, standing at around 3.25 million bbl/d, or 3.5% of projected 2015 oil demand. Saudi Arabia accounts for 84% of spare capacity.

The November International Energy Agency report noted that supply risks remain “extraordinarily elevated” and, if anything, “will be exacerbated by falling prices.” ISIS militants in portions of northern Iraq continue to pose a threat, although to date they have not affected southern Iraqi supplies, and Baghdad and the Kurdish Regional Government have reached an oil export agreement.

Hard fact: Lower oil prices will only further strain these economies.

Comments