Dependence on Oil Revenue
Many countries around the world are dependent on revenue from oil production. For Ecuador, the oil sector accounts for over half of all the country’s exports and nearly 25 percent of all public sector revenue (EIA, 2017). For the South African nation of Angola, a 2017 report published by the African Development Bank conveyed that 52 percent of the country’s fiscal revenue can be attributed directly to oil production (EIA, 2019). About 1,500 miles northwest of Angola, the Central African nation of South Sudan relies on the oil industry for 98 percent of the country’s total budget (Campbell, 2019). However, Venezuela is perhaps the most oil-dependent nation in the world, with income from the oil industry making up approximately 95 percent of Venezuela’s export revenues and nearly all of the country’s government funding (Kassai et al, 2018). As global oil prices continue to collapse, energy analysts and economists predict that countries dependent on oil revenue with suffer seriously from increases in poverty and periods of intense political instability.
Oil Price Negativity
As oil prices turned negative for the first time in history, many of the world’s major oil exporters have been struggling to save their economies. With economic growth increasingly intertwined with oil revenue, low oil prices may cripple many of the world’s biggest economies. The U.S. West Texas Intermediate (WTI) crude oil price contract for May deliveries fell by more than 100 percent to a historic low of negative $37.63 per barrel on Monday April 20th. Since the New York Mercantile Exchange began selling oil futures in 1983, the price of WTI has never even been close to dropping this far below zero. This oil price crash came at a time when the global coronavirus pandemic continued to devastate oil demand, even as the world was already overburdened by refineries and producers that were running out of places to store excess oil. As a result of this problematic situation, oil producers were effectively forced to have to pay to have their oil taken away from their production sites and refineries.
While negative oil prices were once viewed as an impossible scenario, a perfect storm in the oil industry caused prices to collapse unlike any other previous time in history. As the coronavirus crisis obliterated global demand, OPEC and its allies became engaged in an extended period of oil production negotiations, which ultimately lead to an oil price war between Russia and Saudi Arabia. While a resolution was eventually made to put an end to the price war, the agreement couldn’t prevent oil prices from turning negative. OPEC and its allies agreed to cut oil production by 9.7 million barrels a day beginning on May 1st. However, as the coronavirus pandemic has continued to hinder oil demand, the OPEC production cut deal ultimately was unsuccessful at stabilizing oil prices.
Impacts on the Nigerian Economy
Nigeria has been one of the hardest hit countries in Africa when it comes to the historic collapse in oil prices. As Africa’s largest economy, Nigeria has long been one of the continent’s main economic powerhouses. However, the vast majority of Nigeria’s wealth, economic development, and population growth have been propelled by the oil-rich regions of the Niger Delta. Nigeria’s government relies heavily on oil revenue for 90 percent of the country’s budget (Adunbi, 2015).
Even before the oil price collapse, the World Bank released a report outlining how the coronavirus pandemic would effectively lead sub-Saharan Africa into its first economic recession in 25 years. As a result of the massive drop in oil revenue, the country has been forced to apply for more than $7 billion in emergency funding from international lenders like the International Monetary Fund, the African Development Bank, the World Bank, and the Islamic Development Bank (Smith, 2020).
African Balance Sheets
Economic researchers from NKC African Economics have extensively evaluated the balance sheets of African countries that are dependent on oil revenue. “The countries on the West Coast (of Africa) the most dependent on oil exports for export revenues and government income – Nigeria, Angola, Gabon, Congo Republic – will be scrambling to borrow from lenders who will have serious doubts about their ability to repay, and who will be tough negotiators when it comes to determining the value of the mineral assets these governments will try suggesting as collateral” (Smith, 2020). The NKC African Economics researchers highlight the importance of oil revenue for these African nations. Without the revenue from oil, these countries are expected to experience serious levels of geopolitical instability.
As part of the OPEC member agreement to cut oil production, Nigeria has agreed to reduce its oil output from around 1.8 million barrels a day to just under 1.4 million barrels a day (Smith, 2020). Nigeria’s National Oil Minister Timipre Sylva has been working with OPEC to ensure that Nigeria is able to meet its share of the agreement. However, NKC African Economics oil analyst Cobus de Hart said in a press release that, “We currently do not expect Nigeria to reduce production by nearly that much, as the country has reflected very poor compliance with OPEC agreements in the past” (Smith, 2020). The notion that not all members of OPEC will be complying with the production cuts has continued to place downward pressure on oil prices. If production levels remain stable, the world will continue to be flooded with excess crude oil.
Impacts on Russia
When it comes to oil production in Russia, the rise and fall of revolutions and government regimes have historically moved concurrently with the rise and fall of crude oil prices (Kaplan, 2020). For example, many historians and economists point to the fall of oil prices as one of the factors that facilitated the collapse of the former Soviet Union. On the other hand, President Vladimir Putin’s reign has largely been met with an extended period of stability in Russia, as oil prices remained high throughout much of his time as the country’s leader.
Russia is the leader of a group known as the non-OPEC allies, which includes other countries like Mexico, Brazil, Norway, and Azerbaijan. Russia relies on oil revenue for nearly two-thirds of its total export earnings and 40 percent of the country’s total budget (Smith, 2020). Much of Russia’s $150 billion sovereign wealth fund has been made possible by decades of high oil prices. Although, as low oil prices continue to reduce government revenue, Russian leaders have been forced to tap into the fund to sustain social spending programs. Russia’s breakeven point for oil prices is $42 per barrel. Until that price is met, Russia will continue to burn through cash.
While the price of oil in Russia did not fall below zero as it did in the U.S., it has been hovering in the single digits. According to Russian newspaper Vedomosti, the price of Russian Urals (Russia’s main oil brand) sank to $8 per barrel, which is the lowest price that has been seen since 1998 (Smith, 2020). Analysts at BMB Russia say, “This is not an encouraging sign for Russian economic policymakers who predicted oil prices would recover to $30-40 per barrel after the OPEC deal comes into effect on May 1st” (Smith, 2020). Although, even with the OPEC deal, the prospect of some OPEC members failing to reduce production continues to weaken oil prices.
The Collapse of American Oil Dominance
The United States has not been immune to the impacts of the oil price collapse. In fact, the U.S. shale oil industry has been one of the hardest hit sectors of oil producers in the world. For the majority of American shale oil producers to stay in business, the average price for West Texas Intermediate (WTI) crude oil needs to hover at a minimum of between $40 to $45 per barrel just to break even. Since shale oil extraction is relatively expensive compared to traditional oil extraction, a higher oil price is needed for it to make sense financially. Economists say that nearly 100 American oil and gas companies could file for bankruptcy over the course of the year (Obaid, 2020). However, this figure could balloon dramatically if oil prices continue to stay well below $40 per barrel.
Between March and May, American crude oil production is expected to fall from 12.7 million barrels per day to around 11.9 million barrels per day, which is representative of a loss of around 800,000 barrels per day (Obaid, 2020). In a world not dominated by news related to the coronavirus pandemic, a loss of 800,000 barrels of oil per day would send oil prices rising. However, demand has plummeted so much that this loss will barely have an impact on the global oil supply glut.
A Loss of Energy Independence
The American dream of energy independence is coming to an end. As more deeply indebted U.S. shale oil producers continue to collapse, areas like the Texas Permian Basin will experience immense economic hardships. While the shale oil industry had previously helped make the U.S. the world’s biggest oil producer, a collapse in production is likely to leave Saudi Arabia and Russia vying for the top spot as the world’s largest oil producer. According to US Energy Secretary Dan Brouillette, the total U.S. petroleum output could drop by a staggering two to three million barrels per day by the end of 2020 (Obaid, 2020). As the American oil industry collapses, the country may end up increasingly dependent on other countries for oil, as it once was in the past. The U.S. has an oil-hungry economy that will continue to rely on fossil fuels for the coming decades. As other countries continue to be able to produce oil using cheaper methods, the American economy will likely revert to importing more oil from countries like Saudi Arabia.
An International Crisis
Nations around the world are facing new threats from low oil prices. Those that are dependent on oil revenue will be forced to fend off threats from increases in poverty and political instability. It is clear that Russia, Saudi Arabia, and the United States will ultimately be able to weather the financial storm caused by extremely low oil prices. With large financial cushions, these developed nations have the ability to withstand these calamitous events. However, less developed nations in the Middle East, Africa, and South America are facing an incredible economic threat that will impact the livelihoods of millions of citizens.
Countries like South Sudan, Venezuela, Angola, and Ecuador were struggling to achieve economic security prior to the collapse in oil prices. As the oil market rout continues, these less developed nations will need to seek economic support from the international community to ensure that the economic fallout doesn’t lead to a struggle over food, medicine, and other essential items. While many of these nations were looking forward to the prospect of rising oil prices in 2020, the coronavirus pandemic has instead created massive new budget shortfalls that may lead to an intense period of socioeconomic instability.
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