Oil prices fell by over half from June 2014 to January 2015, then another one-third since. Natural gas and coal prices have also plunged, partially due to the same forces but also from substitution.
These are the results from a modest slowing of demand growth and — more importantly — the decision of the Saudi Princes to wage the first financial war against next-gen oil producers, those that tap oil sands, shale fields, and deep ocean deposits. Eventually, analysts say, the supply will fall below demand and prices will rise. But layoffs across the oil industry are already mounting, and oil company bankruptcies are expected to soar. BP announced layoffs of 4,000 workers on Tuesday.
Latin America
Oil-dependent and ailing Venezuela will suffer a great deal because of sustained low oil prices. Annual inflation is already at nearly 300% according to leaked central bank estimates. Inflation will mount and shortages will become even more extreme. Lower oil export revenues will reduce the country’s expenditures not accounted for in the budget, which in 2015 supplied much of the additional foreign currency needed to finance imports and foreign debt payments. Venezuela will likely need to decrease imports, and the country could even default on its foreign debt later in 2016. In the near term, the government, now with an opposition supermajority, will take what steps it can to address the economic situation. Currency devaluation and consumer price hikes would be the most effective remedy, but these would come with unacceptable political costs. Further unrest is inevitable, and the government will need to work to contain this from spreading too widely.
Brazil’s economy has already sustained a great deal of damage from the corruption scandal in state-owned energy firm Petrobras. Unless the government decides to curb the major criminal investigation into the company and associated officials, the scandal will continue to disrupt supply chains and contractor financing, further delaying existing projects. In response to the disruptions, Petrobras will need to further cut its investment plans, which will slow future foreign investment and energy production.
Ecuador’s oil exports plummeted by 30% in 2015 and will continue to be low through the next year. Quito has the option of imposing trade barriers to reduce imports and to compensate for lower export revenue, but this would compound the economic slowdown. The nation will hold a presidential election in February 2017, which could highlight eroding public approval for the ruling Alianza Pais coalition because of the declining economy.
North America
North America has, of course, been under the same low oil price pressure as the rest of the world. Nevertheless, production has been resilient in recent months, staying at around 9.2m barrels per day since October. Production has the potential to fall again, however, as the oil hedges taken out against low oil prices in 2015 expire. The remaining 2016 hedges are mostly at a lower volume or price, a fact that will increase the burden on oil-producing companies. Across the continent, companies have drilled numerous new wells, but companies are holding off for higher prices before they complete the projects. This means that there is spare capacity that can react if prices make a sudden leap. As Iranian oil comes back on the market, if North American production remains high, it could exert more downward pressure on prices. Producers of heavy oil in Canada in particular are going to remain under more pressure as Western Canadian Select, the Canadian heavy oil benchmark, is already well below $20 per barrel.
Sub-Saharan Africa
The portion of Africa below the Sahara Desert is home to numerous small oil-producing countries that will feel the pinch of low oil prices to different degrees. The continent’s largest economy and oil producer, Nigeria, will be affected the most. Unlike producers in the former Soviet bloc and in the Middle East, Nigeria has calibrated its budget using the rather realistic price of $38 per barrel. The problem is that even at this price point, the budget will run a deficit of $11bn, 2.2% of GDP. Abuja will find it difficult to maintain its fuel subsidy programs and its currency peg to the US dollar, put in place in June 2014 when the naira fell 25%. Since that time, the gap between the official and unofficial currency exchange rates has widened. Low oil prices will only make it wider. The new president, Muhammadu Buhari, has been clear that he does not support devaluation but will face pressure from various political interests and will likely need to cut spending. Despite all these, Nigerian authorities on Wednesday confirmed that the country will not cut oil production even as nosediving crude prices caused by a global supply glut ravage revenue.
Angola, Africa’s second-largest producer of crude oil, is under the same financial pressure as other world oil producers. The government, however, is quite stable. The ruling Popular Movement for the Liberation of Angola (MPLA) has tight control of the state security apparatus. Any threat would have to come from within the party itself. The government has based its 2016 budget on $48 per barrel oil prices and is continuing the large-scale austerity programs it began in 2015 in response to the initial drop at the end of the previous year. Angolan President Jose Eduardo dos Santos is now contemplating whether to step down in 2017. Power brokers within the ruling party are competing to become his successor, and low oil prices will make this competition more heated simply because there will be less money to pour into patronage networks.