Oil-producing countries vulnerable as world energy prices fall

FALLING oil prices from a peak of more than US$125 per barrel in early 2012 to US$80 in October 2014 appear to reflect a weakening global economy in Europe, the US and China. Coal and gas prices have dropped significantly too, while spot LNG prices on the Asia-Pacific market have halved since February 2014 from US$20 million British thermal units (mBtu) to US$10 by summer, writes World Review expert Dr Frank Umbach. The 30 per cent drop in oil prices between June and October 2014 appears temporary and confirmation of previous assumptions of more volatile global oil and gas markets, dependent on a return to a growing world economy. But this overlooks other fundamental factors and new strategic developments determining the world’s oil and gas markets which could be more important and may have a longer-lasting impact. They highlight the shifting geopolitics caused by technological innovation linked with horizontal drilling and hydraulic fracturing known as ‘fracking’, and seismic surveying technology leading to America’s shale oil and gas revolution. This revolution makes the US increasingly self-sufficient and is turning it from the world’s largest energy importer into a projected net exporter by 2025. US crude oil output has increased by 80 per cent since 2008 and the US will overtake Saudi Arabia to become the world’s largest producer of liquefied petroleum. The decline in global oil and gas prices is even more impressive when taking into account the spreading instability following the Arab Spring revolts which have led to production cuts and supply disruptions. The significant reduction from about 22 per cent to 10 per cent in America’s oil import dependence on the Gulf region and the Middle East has not led to a major US military disengagement from the Middle East. This may be partly because China has replaced the US as the world’s largest net oil importer and strengthened its military relationships with Middle East countries. Environmental and climate protection appeared to have dominated all public discussions and political strategies of EU energy policies in the last decade. This was often at the expense of energy supply security and economic competitiveness. But geopolitics has returned to Europe’s energy agenda through widespread instability and political unrest in North Africa, the Russian-Ukraine conflict and the rising terrorist threat of the Islamic State of Iraq and Syria (ISIS). It is a driving force of global energy developments together with the technological revolution of advances in fracking which are fuelling shale gas and oil production in America and having a wider impact on global oil and gas markets. Remarkable technological progress and efficiency during the last decade with deeper drilling is still dependent on geopolitical risk factors. The International Energy Agency (IEA) has reduced its global crude oil demand growth forecast for 2015 because of weakening global economies and OPEC’s unwillingness to counter a supply surge. OPEC often played as swing producer in the past, and the oil cartel may no longer be willing or able to adjust production to market demand. Other oil producers, with their higher production costs, such as those extracting from deep water, offshore oil fields, Canadian oil sands and Arctic regions, may be forced to cut production. Rapidly falling oil prices will affect state budgets which are heavily dependent on high oil and gas revenues. This includes several OPEC-members such as Venezuela, and non-members, particularly Russia. The sustained drop in oil prices will directly impact their export revenues. Eighty per cent of Russia’s energy export revenues come from oil exports and 40 per cent of its state budget come from oil exports. Russia’s original state budget for 2014 was based on oil prices averaging US$117 per barrel. The 2015 budget has already been revised on an oil price of US$100, which is again increasingly unrealistic. Russia’s finance ministry has estimated that lower oil prices will cost it at least two per cent of GDP. Russia's oil sector is expected to lose about US$4 billion a year for each US$10 fall in oil prices. Falling oil prices also put more pressure on Iran by lowering profit margins. Its state budget needs US$130 per barrel to balance it. But Venezuela seems to be the most vulnerable as it needs oil prices up to US$110 to meet government spending aims and to repay its debts of US$18.5 billion between 2015 and 2017. This will reduce its ability to fund expensive social programmes, its already dire food and consumer goods shortages and to subsidise imports. This is exacerbated by China’s increasing reluctance to support Venezuela financially and could fuel further discontent among the population. The European Union may benefit as it could save up to US$80 billion in energy imports if average oil prices remain below US$90 a barrel in 2015.

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