Impacts of falling oil prices
In a meeting earlier this month, Brookings scholars met to analyse the global impacts of the oil market crash. Panellists discussed market trends influencing oil prices as well as the impacts of lower demand on Iran, Venezuela and Russia. It was stated by Charles Ebinger, Senior Fellow. Energy Security and Climate Initiative that the drop in oil prices is not a temporary change but a structural one. He also pointed out that falling or static energy demand around the world, including China, India and Brazil, in combination with oil’s market share erosion over the last 10 years suggests that forecasts of a huge growth in oil demand may need to be looked at once more.
Looking to the future Ebinger said that he believes that several dynamics may transform the future of the global oil market, including the growing use of biofuels in the transportation sector, the influence of the environmental community on Wall Street evaluations of fossil fuel companies, and the possibility of downward demand because of aging populations in countries such as China and Japan. For the short term, he forecast an oil price floor of between US$36 and US$38/bbl.
Iran
Iran, Venezuela and Russia have been particularly hit by low oil prices and Suzanne Maloney, Senior Fellow at the Centre for Middle East Policy pointed out how sanctions targeting Iran’s financial sector, particularly those that have been in place since 2011, have already severely impacted its energy exports. Iran is a relatively high cost producer as its older fields require capital and technology that sanctions have effectively cut off. These lower levels in combination with rising production from countries such as Iraq have put Iran in what Maloney called at the meeting, a “very beleaguered battle for market share.”
Iran’s export revenues and economic problems have been further exacerbated by the collapse in oil prices. Maloney discussed the political fallout for Iran’s moderate president, crediting the government for efforts to mitigate the economic impact by revising the budgeted oil price from US$72 to US$40/bbl.
When it comes to negotiations on the nuclear front between the US and Iran, Maloney commented that the falling oil prices may not bring Iran to a deal but they can positively influence Tehran’s approach to the talks. She sited President Hassan Rouhani’s recent public advocacy at the meeting where he was in favour of international engagement and orienting Iran’s foreign and domestic policies to support economic growth. She also noted that the Supreme Leader explicitly disagreed and Maloney contrasted today’s situation to the sharp oil drop in the 1980s when “no one was willing to go to then Ayatollah Khomeini and say it’s time to end the war.”
When it comes to Venezuela, Harold Trinkunas, Senior Fellow and Director of the Latin American Initiative pointed out that unlike Iran, Venezuela’s leadership has shown a lack of realism in its response to the oil market crash. He echoed a recent article that he wrote on the subject and described how falling oil prices have been catastrophic for Venezuela’s economy. He pointed out that before the oil crash, the country already had the highest inflation rate in the world which was over 50% in 2013. Also, over 95% of Venezuela’s foreign exchange earnings derive from oil sales, and Venezuela’s heavy, sour crude nets approximately US$5 – 8 /bbl less than market price. Trinkunas pointed out that when prices were in the US$100 /bbl range, the country’s economy was still in trouble, adding that for every dollar the price of oil drops, Venezuela loses US$775 million of earnings per year.
President Maduro has sought to persuade oil producers to coordinate to raise prices in response to this crisis. He has also sought loans to help the country manage its economic turmoil. Trinkunas believes that Maduro has failed on both counts, and remains pessimistic about Venezuela’s ability to improve its economic situation in the near term.
Russia
Clifford Gaddy broached the topic of Russia at the meeting and discussed how, similar to Iran, Russia is facing a difficult combination of economic sanctions, including, importantly, those on its oil and gas sector, and the oil price drop. One of the most important impacts of sanctions, as pointed out by Gaddy, is the climate of uncertainty that has been created for investors. Gaddy said that the “Russia is radioactive” mentality can potentially have huge consequences for long term development, including in the energy sector. In the short term, Gaddy did note that Russia has not yet seen any major political effects of the oil crisis. The collapse of the Ruble has been largely due to oil prices, but the government has made a strategic choice to permit devaluation rather than use its financial reserves. Gaddy predicts that Russia may see a GDP drop of up to 8% this year should oil prices remain near US$50/bbl. However did point out that President Vladimir Putin’s regime will continue to do everything in its power to allocate shrinking rents in a way that supports Russia’s survival, sovereignty, security and social stability.
Also, according to Gaddy, it is unlikely that the fallout from the price decline will threaten government stability or noticeably affect its foreign policy posture. However, with that said, it is important to follow the domestic debate closely and watch for future developments.
Edited from report by Claira Lloyd
Read the article online at: https://www.hydrocarbonengineering.com/refining/27022015/impacts-falling-oil-prices-brookings/
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