Oil prices hit their lowest level since summer 2004 this week, continuing the rapid slump that began in June 2014. The global benchmark, Brent crude oil, closed trading Monday at $31.56 a barrel, closing out the lowest week of prices in 12 years.
Oil is the most geopolitically important commodity, and the ongoing structural shift in oil markets has produced clear-cut winners and losers. Between 2011 and 2014, major oil producers consistently managed to keep prices above $100 per barrel and set their budgets accordingly. For many of them, the past 18 months have been a period of slow attrition. And with no end in sight for low oil prices, their problems are going to only multiply. Each nation, though, has its own particular level of tolerance, and the following guidance highlights the key break points to monitor--
Former Soviet bloc
Russia, Kazakhstan and Azerbaijan stand to lose the most among the countries of the former Soviet Union. On Tuesday, Russia, under pressure from the falling global oil price, asked government departments to cut spending by 10%, reported Reuters, repeating a policy the country also imposed in 2015. The cutbacks will exclude several areas of government spending, including public obligations such as pensions, and pay for government employees.
Analysis projects these measure was taken to keep the economy afloat, but such cuts will come with major political tradeoffs. Moscow is embroiled in a standoff with the West, so slashing defence or security spending will be challenging. Russia will also hold crucial parliamentary elections in September, so cutting social programmes is not a good option either.
Both Kazakhstan and Azerbaijan face dilemmas similar to that of Russia and both countries are concerned with rising social tension over their weakening economies.
Asia-Pacific
Regional major oil producer Malaysia will feel the greatest pressure from oil price fall. Last year, roughly 20% of the Malaysian budget came from the earnings of state-owned oil company Petronas. As the firm’s earnings declined, Kuala Lumpur was forced to impose an unpopular goods and services tax to make up for the shortfall. The government’s 2016 budget has Petronas contributing less than 12% of federal income. If oil prices continue to plunge, however, analysts predict Malaysia will have to find new ways to raise money, either new taxes or pared-down services and subsidies. This will make the government unpopular at a time when Malaysian Prime Minister Najib Razak is mired in a corruption scandal involving the country’s sovereign wealth fund, 1Malaysia Development Berhad (1MDB). Since the political opposition in Malaysia is still incoherent, those who stand to gain from Razak’s declining public support are probably his rivals in the ruling United Malays National Organisation.
To the south, Indonesia will find low oil prices to be a mixed blessing because the country is a net consumer of oil but a net producer of natural gas. Natural gas revenue will certainly drop, which will hit state and export revenue. But low oil prices will give current President Jokowi Widodo a chance to continue delaying unpopular gasoline and diesel subsidy cuts. When Jokowi came to office in 2014 he cut fuel subsidies, bringing domestic prices to international levels. But as prices rose during the course of the middle of 2015, he declined to raise consumer prices and instead had state-owned Pertamina sell imported products at a loss. Now, with prices still dropping, Jokowi may be able to avoid the issue of raising prices and instead may cut them.
Europe
Much like the Asia-Pacific region, low oil prices will be largely a boon for Europe because most countries are net oil consumers. Norway, the Continent’s main oil and natural gas producer, will not be so lucky. The country is in the middle of an economic slump due in no small part to a drop in oil-related investment and activities in Norway. According to the International Monetary Fund, Norway’s GDP growth fell to 0.8% in 2015, down from 2.2% the year prior. Over the same period, unemployment grew from 3.5% in 2014 to 4.2% in 2015; this figure is expected to rise even further in 2016. Though the Organisation for Economic Co-operation and Development (OECD) projects a gradual economic recovery for Norway in the next two years, the trajectory of oil prices could impede this.
In the long run, low oil prices could also cause problems across the Continent as a whole. Presently, they are improving Europe’s economic climate; this could lead Europeans to believe that they are witnessing a “real” recovery when in fact a sizable share of the progress is caused by external factors. This misperception could play a particularly significant role in Southern Europe, where governments are beginning to slow reform efforts. Additionally, reduced oil prices could work against the European Central Bank’s attempts to create inflation in the eurozone in the hope of boosting economic growth in the bloc.
