Global oil prices have fallen sharply since mid-2014 and are expected to stay low during the course of 2015. For oil exporters, this leads to significant shortfalls in government revenues, rising unemployment, falling income and expenditure, potential economic recession as well as increased risk of social instability. However, it can also present an opportunity for oil exporters to enhance efforts to diversify their economies.
Crude Oil Average Spot Prices: Q1 2014 – Q4 2015
Source: Euromonitor International from national statistics
Note: Data for Q1 2015 onwards are forecast
- Global oil prices have been sliding dramatically since mid-2014 on the back of weak demand (due to sluggish global economic growth and increasing energy efficiency) and ample and increasing oil supply;
- Gains in global oil supply have been driven by surging light oil production from shale deposits in the USA, rising output from the Organization of Petroleum Exporting Countries (OPEC) and the organisation’s intention to protect its market share. The OPEC, which comprises of six Persian Gulf countries (Iran, Iraq, Kuwait, Qatar, Saudi Arabia and the United Arab Emirates) plus Algeria, Angola, Ecuador, Libya, Nigeria and Venezuela accounted for 40.0% of global oil production in 2013.
Implications
Tumbling oil prices can hurt governments, businesses and consumers in oil exporting countries:
- Oil exporters – such as Russia, Iran, Nigeria, Venezuela and Ecuador – that rely exclusively on a high oil price to generate revenues, fund big-ticket infrastructure projects and expensive social programmes, or finance costly foreign adventures will be impacted the hardest;
- Falling oil prices will make it difficult for these countries to balance their government budgets, pay off foreign debts and stabilise their currencies. Venezuela, for example, is expected to see its general government budget deficit reach 14.1% of total GDP in 2014, compared to 3.5% of total GDP in 2008. According to estimates from Citi Research, for every US$10 drop in oil prices Venezuela loses about US$7.5 billion in revenues;
- As oil producers and relating businesses in the energy sector suffer from declining profits and even losses, massive job cuts will ensue. The International Labour Organization (ILO) predicted in January 2015 that if the steep decline in oil prices is sustained, labour markets in oil exporting countries across Latin America, Africa and the Middle East will be particularly hard hit. In Nigeria, unemployment is already a major concern, with an estimated 23.1% of the economically active population already out of work in 2014, up from 14.9% in 2008. In Russia, the unemployment rate is expected to rise to 6.7% in 2015, from 5.2% in 2014;
- Rising unemployment will depress household income growth and constrain discretionary spending, with negative knock-on effects on the consumer markets in oil exporting countries. It can also undermine social stability and negatively impact the business environment. The risk of social instability is particularly high in poorer oil exporting countries such as Nigeria and Venezuela where social spending will fall significantly in 2015 as a result of declining oil revenues;
- The impacts of tumbling oil prices will be less severe in countries that are better prepared for medium-term price volatility. Saudi Arabia, for example, is expected to be able to absorb several years of low oil prices. The country has accumulated over US$700 billion in foreign exchange reserves from past higher prices, its oil production cost is low, and its economy has diversified enough for non-oil sectors to become main drivers of growth.
Foreign Exchange Reserves in Major Oil Exporters: 2009-2014
Source: Euromonitor International from national statistics/International Monetary Fund (IMF), International Financial Statistics (IFS)
Note: Data for 2014 are forecast
Prospects
- Euromonitor International predicts that global world oil prices will fall below US$60 per barrel in 2015, with the average spot price of Europe Brent reaching US$58.59 (down from US$99 in 2014) and WTI Cushing price averaging US$56.37 (compared to the average of US$93.24 in 2014);
- Economic growth prospects will be weak for major oil exporters. Russia’s real GDP is forecast to shrink by 3.8% year-on-year in 2015, compared to a modest 0.5% year-on-year growth in 2014. This will be the first year of negative growth for the Russian economy since 2009. Meanwhile, annual real GDP growth rate in the Gulf Cooperation Council (GCC) collectively will fall to -0.2% in 2015, from 3.8% in 2014;
- The sharp decline in oil prices can serve as a reminder of the vulnerability inherent in a high reliance on oil exports and thus it can offer an opportunity for oil exporters to enhance efforts to reform and diversify their economies.
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