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Last Resort: How Volatile Nations Addicted To High Oil Prices Could Stop Oil's Plunge oilpro.com
oilpro.com
The recent plunge in oil prices has sent shockwaves across the global
economic and political order. If oil prices remain low, some volatile, oilexporting countries will be driven to the brink of financial collapse. As long
as oil prices fall, these countries will be forced to scale back social and
defense spending. The socioeconomic outlook for some very dangerous
nations has entered a destabilization spiral directly because of lower oil
prices. The destabilization of volatile nations increases the risk of a supply
disruption, which could cause a spike in oil prices.
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Last Resort: How Volatile Nations Addicted To High Oil Prices Could Stop Oil's Plunge oilpro.com
These nations have not yet resorted to unilateral action to push oil prices
higher, but they do have options at their disposal, and they are on the verge
of financial crisis. In these nations, financial crises mean social uprising,
political upheaval, and loss of military control. None of these outcomes are
appealing to the incumbent leaders that often wield immense unilateral
control over their nation's defense infrastructure and foreign policy. It may
be only a matter of time until some country with their back against the wall
pulls the trigger on aggressive action to push oil prices higher.
In our view, Saudi can only push oil prices down so far and for so long before
a supply disruption will send prices back up again (perhaps temporarily, but
up none-the-less). In this post, we try to answer three important questions:
i) what dangerous nations could act out on their own to support oil prices,
ii) how long will these volatile countries take the pain of lower oil prices,
and ii) what might they do to cause oil prices to rally?
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Last Resort: How Volatile Nations Addicted To High Oil Prices Could Stop Oil's Plunge oilpro.com
Russia
Socio-Economic Crisis Background
In Russia, energy export revenue represents more than half of the
government's budget. The strong public support President Vladimir Putin
previously held due to the improved economic performance of the nation
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Last Resort: How Volatile Nations Addicted To High Oil Prices Could Stop Oil's Plunge oilpro.com
during his tenure has been thrown into doubt on the collapse of the ruble in
late December, which threw the country into financial panic. The Russian
central bank estimates that GDP could drop by 5% in 2015. Further, inflation
is at 10% but is expected to accelerate quickly.
O&G revenue represents more than half of the Russian federal budget and
two-thirds of its export revenue (approximately 300 billion annually). The
IEA estimates that 68% of Russia's foreign currency earnings are sourced
from the oil-export business, and about half of its annual budget is
underwritten by the industry. Granted, western sanctions imposed earlier
this year on the oil and gas sector have harmed the country's economy, but
in recent weeks it has been concern over the nation's corporate sector,
especially the fact that Russian companies must repay $100 billion-worth of
foreign debt in 2015, that has fostered most of the turmoil.
Actions Russia Could Take To Send Oil Prices Higher
With a breakeven price of $102/barrel, all of this provides the rationale for
Russia's need for oil prices to rise. If the situation continues to deteriorate,
further military incursions into Crimea and the related coordinated
manipulation of the provision of energy to Europe, could impact supply,
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Last Resort: How Volatile Nations Addicted To High Oil Prices Could Stop Oil's Plunge oilpro.com
driving prices northward. Russia might also increase their support for
dangerous MENA factions, potentially pushing these nations towards a
conflict that would cause oil prices to spike. And that sort of spike is
precisely what Russia needs right now.
Iran
Social-Economic Crisis Background
Months of declining oil prices and uncertainty whether the country will
secure a nuclear deal rescinding international sanctions has caused the
weakening of Iran's rial, which has lost about 8% of its value since late
November. And Iran has been hit so hard by falling oil prices that its
government is now offering young men the choice of buying their way out of
an obligatory two years of military service, the New York Times recently
reported. Existing sanctions on Iran are already withholding roughly 1
M/bd of Iranian oil off the market, according to the IMF. Thus, with Iran
already exporting less oil now than it did prior to the sanctions regime,
falling prices have further curtailed the country's economic outlook.
Almost Half Iran's Government Revenue Comes From Oil
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Last Resort: How Volatile Nations Addicted To High Oil Prices Could Stop Oil's Plunge oilpro.com
Venezuela
Social-Economic Crisis Background
The holder of the world's largest estimated oil reserves, Venezuela received
95% of its export earnings from petroleum before prices fell. The country is
now experiencing difficulty in funding domestic projects and a foreign
policy founded in what the New York Times recently dubbed "oil-financed
largess," including shipments of discounted petroleum to Cuba and
elsewhere. President Nicolas Maduro has said the country will continue to
pay down its debts amid concerns on bank markets that Venezuela might
default on its loans. However, inflation at present is north of 60%, and there
are shortages of many basic goods, and many experts say the economy is in
recession.
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Last Resort: How Volatile Nations Addicted To High Oil Prices Could Stop Oil's Plunge oilpro.com
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Last Resort: How Volatile Nations Addicted To High Oil Prices Could Stop Oil's Plunge oilpro.com
Libya
Social-Economic Crisis Background
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Last Resort: How Volatile Nations Addicted To High Oil Prices Could Stop Oil's Plunge oilpro.com
Libya has had two parallel governments since August when the Fajr Libya
forces captured Tripoli, evicting the internationally recognized
administration out of the capital. Several tanks caught fire at the Es Sider
oil terminal (the country's largest) on December 25 due to rocket attacks
launched by the Fajr Libya from speed boats as part of a failed attempt to
seize control of the country's main oil terminals.
Thick black smoke rises out of a storage tank at Es Sider oil facility; Source:
Telegraph
On Monday, December 29, Brent rose to $60/barrel amid concerns about a
supply disruption in Libya, as the north African country struggles with
protests and port blockades that have reduced output from the 1.6 M/bd
levels seen prior to the 2011 ouster of Muammar Qaddafi. WTI futures
traded at $55.50/barrel on Dec. 29, up $0.76 from the previous session. Since
a new wave of fighting between government forces and the Fajr Libya forces
erupted in mid-December, Libya has witnessed a fall in oil production to
almost 350,000 bpd from the previous 800,000 bpd.
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Last Resort: How Volatile Nations Addicted To High Oil Prices Could Stop Oil's Plunge oilpro.com
Iraq
Social-Economic Crisis Background
Officials of OPEC's second-largest producer said December 24 that OPEC
will need to "step in" amid additional declines in oil prices, which are fair at
roughly $70 to $80 per barrel. Iraqi Oil Minister Adel Abdul Mahdi told
Bloomberg on December 25 that "If prices keep falling to very low levels
where the whole equation is not balanced, then definitely OPEC has to step
in." Earlier that week, Iraq's government approved a budget based on $60
oil. With a fiscal breakeven cost of $111 per barrel, according to Citigroup,
together with ongoing ISIS violence in the country's north, Iraq is in a
precarious position.
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Last Resort: How Volatile Nations Addicted To High Oil Prices Could Stop Oil's Plunge oilpro.com
Iraqs largest oil refinery is the Baiji facility, located about 50 miles north of
Tikrit
So far, ISIS attacks have been mostly limited to Iraq's northern region. In
terms of oil infrastructure, so-called "mobile refineries" have been targeted.
But because Iraq's major oilfields are located in the south, production has
thus far not been impacted. If ISIS were to move south, significant supply
disruptions could result, thus driving prices higher.
Actions Iraq Could Take To Send Oil Prices Higher
A central interest of Iraqi leadership and ISIS leadership is now aligned:
increase oil prices to secure future revenues. Could lower oil prices weaken
Iraq's resolve to fight ISIS? Might they withdraw troops to at least create
the perception in the market place of ISIS's power grab jeopardizing oil
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Last Resort: How Volatile Nations Addicted To High Oil Prices Could Stop Oil's Plunge oilpro.com
resources? In our view, this scenario is now a possibility, and it would cause
oil prices to rise as it did this past summer when ISIS first started to make
headlines and threaten oil infrastructure.
Algeria Snapshot
In late December, Algeria's Minister of Energy and Mines Youcef Yousfi
urged OPEC to cut production to raise prices in order to help a number of
member countries from plunging headlong into a crisis. "OPEC should
intervene to correct the imbalances by cutting oil output to push prices up
and defend incomes of the member countries." He also said that Algeria does
not share the opinion of OPEC's primary suppliers (Saudi, UAE, & Kuwait)
who hold that they should not interfere as the market will settle the price
alone.
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Last Resort: How Volatile Nations Addicted To High Oil Prices Could Stop Oil's Plunge oilpro.com
announced that public sector hiring would be put on hold in 2015. This is
especially significant, given that about 60% of the jobs in the country are
government jobs.
Nigeria Snapshot
Africa's largest economy depends on high oil prices. Oil and natural gas
income represents the Nigerian government's largest source of income,
representing about 80% of the government's total annual revenue and
nearly all its exports, according to Deutsche Bank. With a breakeven price
estimated at $128/barrel, the country requires an oil price about twice the
current level to realize a balanced budget. The naira's 11% loss in value this
has paralleled the fall in oil prices. Adding to Nigeria's difficulties is that two
oil unions went on strike earlier this week precisely in response to the
government's 10% cut in its budget due to depressed oil prices.
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Last Resort: How Volatile Nations Addicted To High Oil Prices Could Stop Oil's Plunge oilpro.com
Late last month, the Nigerian finance ministry lowered the country's
projected economic growth in 2015- from the previous 6.4% estimate to
5.5%. The new budget is based on a $65/barrel price, rather than the
previous assumption of $77.40. Finance Minister Ngozi Okonjo-Iweala
went so far as to encourage Nigerians "to begin thinking of the country [as]
a non-oil country."
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Last Resort: How Volatile Nations Addicted To High Oil Prices Could Stop Oil's Plunge oilpro.com
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Last Resort: How Volatile Nations Addicted To High Oil Prices Could Stop Oil's Plunge oilpro.com
Source: Fortune
In the buildup to the invasion, Iraq and Kuwait had been producing 4.3
M/bd. This potential loss, jointed to the threats to Saudi Arabian oil
production, yielded a rise in prices from $21/barrel at the end of July to
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Last Resort: How Volatile Nations Addicted To High Oil Prices Could Stop Oil's Plunge oilpro.com
Original URL:
http://oilpro.com /post/9280/last-resort-how-volatile-nations-addicted-to-high-oilprices-could-stop-oils-plunge
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