Consumers or producers: who wins oil game?
By Gulgiz Dadashova
Dangerous global oil game could split the world into two camps, putting oil producing countries losing from decline in oil prices and consumers taking advantage of it. Are the consumers really on the winning side of lower oil prices?
Oil prices have fallen sharply in the crude market over the past six months, leading to significant revenue cuts in many energy exporting nations, while consumers in oil-addicted countries pay less to keep lights on, homes warm and cars on.
The reason behind the cheap oil is weak demand in many countries on one hand, the U.S. shale revolution, the very thing that caused the global oil glut and triggered the rout in oil prices, and OPEC’s firm stand on position - not to back prices by cutting production.
The winning side: Each person using transportation is a winner, as lower oil prices turn into lower prices for gasoline and jet fuel and eventually lower transportation costs.
The world, as a whole, certainly will benefit from this situation as many financial institutions assure that the lower prices will boost economy.
The International Monetary Fund, U.S. Federal Reserve and the European Central Bank say cheaper oil will be a shot in the arm for the world economy overall. J.P. Morgan estimates the price decline to probably have a 7 percent positive impact on global growth.
The 25 percent drop in the price of oil since July is likely to lift economic growth prospects, improve terms of trade, and have a potentially positive credit impact for a number of Asia-Pacific sovereigns if the lower prices are sustained below $90/bbl through 2015, in line with our latest forecast, says Fitch Ratings.
Most major Asian economies - including China, Japan, Korea and Thailand - would see an effective overall income boost from sustained lower oil prices.
Surely, China will be on the side of the winners in this battle of the supply and price as the country does not make money on energy but buys it. The lower oil prices fall, the more China develops its economy.
Japan imports nearly all of the oil it uses, however the declining figures is not a good trend at all. A 17 percent drop in the yen-denominated price of crude oil could pose further challenges for “Abenomics”. High energy prices pushed inflation higher.
India imports 75 percent of its oil, and analysts say falling oil prices will ease its current account deficit. The cost of India's fuel subsidies could fall by $2.5bn this year - but only if oil prices stay low.
The losers: The Middle East, CIS and Africa will be hit by the fall in oil prices the most.
When OPEC decided not to reduce production saying that the market will itself define the future trends, the main losers were producers such as the United States, whose boom in shale oil requires expensive extraction methods. Oil producing countries like Venezuela, Russia and Iran falls in this category, when prices were above $100, they were the winning side. But not now the declining prices replenish their reserves.
The American economy has struggled to recover in the last few years. But now experts await financial crisis that the United States hasn’t since 2008.
Instead the Obama administration said recently that falling oil prices are helping the U.S. economy and are unlikely to lead to a reduction in production at the country's shale oil fields.
Russia is one of the world's largest oil producers, and its economy heavily depends on energy revenues, with oil and gas accounting for 70 percent of export incomes.
Moscow, which is also hit by the Western sanctions over its policy towards Ukraine, loses about $2bn in revenues for every dollar fall in the oil price, and the World Bank has warned that Russia's economy would shrink by at least 0.7 percent in 2015 if oil prices do not recover.
Despite this, Russian President Vladimir Putin on Thursday promised that his nation’s troubled economy would recover in two years despite a looming recession, a severely weakened ruble and growing fears about economic instability.
Meanwhile, the government has cut its growth forecast for 2015, predicting that the economy will sink into recession.
Venezuela is one of the world's largest oil exporters, but its inflation is running at about 60 percent and the economy is teetering on the brink of recession. The need for spending cuts is clear, but the government faces difficult choices.
Even OPEC members will see losses of revenue, especially those outside the oil-rich Persian Gulf, which have built up reserves and can probably withstand it.
Saudi Arabia, the world's largest oil exporter, was able to back the crude oil prices by cutting back its own production within the Cartel, but no hope it will.
The country has deep pockets with a reserve fund of some $700bn that is why it can probably hold off for a while in this scenario.
Alongside Saudi Arabia, the United Arab Emirates and Kuwait also enjoy considerable reserves, which mean that they could run deficits for several years if necessary.
But not all OPEC member-countries are equal -- Iran, Iraq and Nigeria, with huge domestic budgetary demands because are less lucky.
Some can stand the pain longer than others, and 2015 will show who will make the first step to compromise.
Where stands Azerbaijan?
The oil factor still accounts for a large share in the Azerbaijani economy. The South Caucasus’s biggest economy and most populous nation of over 9.5 million people relies on oil for bulk of the state revenue and 92 percent of export earnings.
Although economists don’t expect a sharp effect from the lower oil prices on Azerbaijan’s economy, there is no doubt that there would be a reduction in the earnings. According to calculations, the figure $10 below the target price may result in $260 million cut in the state revenues from oil.
President Ilham Aliyev assured that in Azerbaijan, social-political situation is very positive, economic and political situation is stable.
Azerbaijani citizens will not feel the oil price decrease on the world market, President Aliyev said this week.
“The oil prices have sharply decreased,” the president said. “Has anyone felt this in Azerbaijan? No, and no one will feel this because we have a powerful economic basis.”
President Aliyev went on to add that manat rate is stable. “This testifies to the fact that Azerbaijan also has economic power, a well thought-out policy and a social policy,” the president said.
Azerbaijan extracted 43.1 million tons of oil and gas condensate in 2013 compared to 42.98 million tons in 2012. Crude oil and condensate production in Azerbaijan decreased to 32.1 million tonnes in January-September 2014 from 32.8 million tonnes in the same period of last year.
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