The global benchmark Brent crude oil price index slipped below $50 a barrel on Wednesday for the first time in five years, continuing the dramatic plunge that has seen oil prices halved since last June. Stock markets in oil-rich countries keep tumbling, while some analysts interpret the fall — which has brought a windfall to Americans at the fuel pump — as signaling an imminent financial crisis and potential economic slowdown.
While not easily explained by a single cause, the price cut is widely believed to reflect slackening economic growth and weakening demand from major consumers such as China coupled with an increase in supply due to booming U.S. shale production. Analysts expect the downward trend to continue unless the world’s major producers, especially the Gulf state members of OPEC, move to cut their output in order to stabilize prices — an option they've avoided for now.
In the short term, however, the drop in oil prices could create many more winners than losers, in part because most of the world's population lives in energy-importing countries such as China and India. “The way to think about this is as a big cash transfer from oil producers to oil consumers,” said Paul Ashworth, chief North American economist for Capital Economics.
But in most other countries, too, consumers will save. As of December, the aggregate savings for Americans was estimated at over $90 billion, the Wall Street Journal reported. And that boosts the U.S. economy on balance, by leaving American consumers with more to spend.
Below, Al Jazeera takes a look at the prospects for major players in the global oil industry.
The United States remains the world's largest single consumer of oil, and remains a net importer despite its booming shale production. That means U.S. consumers will see lower heating bills this winter, and gasoline prices will continue to plummet. Businesses stand to benefit, too, as energy costs taper off and consumers find that energy savings have left them with more money to spend.
But the decline in prices could undercut the U.S. fracking boom, which has brought U.S. oil production to levels not seen in several decades. In fact, the growth of fracking — or hydraulic fracturing, the process by which oil or gas are extracted from shale formations using a chemical flush — is considered a key factor dragging down global prices. Some economists say OPEC is deliberately refusing to cut production in part to weaken the competitive threat of the burgeoning U.S. energy industry, whose profitability depends on a higher price due to its comparatively steep production costs.
Even so, most analysts do not see shale production slowing in the short term. The U.S. remains deadset on weaning itself off its longtime reliance on foreign oil and severing energy ties with the tumultuous Middle East, more generally. "If you’ve sunk a lot of money into developing a facility as far as fixed costs, then the marginal costs of continuing to pump are low," said Ashworth of Capital Economics. "So I don’t see any immediate reaction."
Already under pressure from Western sanctions imposed over meddling in Ukraine, diving oil prices have sent the Russian ruble into a nosedive. Russia, whose oil and gas exports constitute over two-thirds of its export income, stands to lose about $100 billion in revenues if oil prices stay as low as they are.
Current estimates project a 4 percent contraction of Russia's GDP as a result of the falling oil price, said Rachel Ziemba, an emerging markets and oil expert with Roubini Global Economics. Government policies to maintain financial stability and avoid default are also contributing, she said. And there are wider concerns for investors about Russia’s growing geopolitical isolation, and the Kremlin's insistence on staying the course in Ukraine even as the economy slides toward recession.
But Russia’s Energy Minister, Alexander Novak, has maintained that Moscow will not curb oil production to stabilize prices. “If we cut, the importer countries will increase their production, and this will mean a loss of our niche market,” Novak told reporters last month.
Gulf states / OPEC
The lion’s share of responsibility for allowing prices to fall so low has fallen on the shoulders of Saudi Arabia, the world’s largest oil exporter and leader of OPEC. There’s good reason it might be compelled to stop the slide: Saudi Arabia is looking at revenue losses of up to $100 billion if the price does not rebound.
But the prognosis for Saudi Arabia, along with fellow Gulf petro-states Kuwait and the UAE who have been seriously hit by the price drop, is not so disastrous in the short term. These countries have deep pockets in the form of foreign currency reserves that will allow them to sustain their oil-based economies for the coming months, analysts say. And their production costs — about $5 per barrel in Saudi Arabia — are the lowest in the world. They may be counting on the fact that higher-cost producers, like U.S. shale, will be forced to stem production sooner, thereby ceding market share to the Gulf.
Not to mention that the last time Saudi Arabia cut its production amid a similar price decline in 1980s, it was rewarded with a loss of market share. When Riyadh slashed production by nearly 75 percent between 1980 and 1986, investors responded by turning their attention — and funds — to building up the nascent oil infrastructure in Norway and the U.K.
The more populous OPEC members, with greater domestic budgetary demands, could suffer more. Iran, weighed down by international sanctions and a sinking currency, could see a 5 percent decline in its GDP as a direct result of the price drop. Nigeria and Angola are in similar straits. “They have strong domestic demand, their fiscal position has been impaired and they will have to devalue currencies and cut spending,” Ziemba said.
Of all the world’s oil producers, the government of Venezuela — whose shrinking foreign currency reserves rely 96 percent on oil exports — could be hit hardest by the falling price. With an inflation rate close to 60 percent fueling social turbulence, some analysts fear the country could default on its debts if oil prices don’t rebound. Even with a higher oil price, the country’s sizeable debt burdens and major deficit could spell trouble.
Cutting fuel subsidies to free up funds has been floated as a possible solution, but President Nicholas Maduro is already under fire for economic mismanagement and may lack the political capital to make a decision that would impose that much economic pain on the population. Venezuela will be able to stave off default even if oil falls to the low $30s, Francisco Rodriguez, an analyst with Bank of America Merrill Lynch, told Bloomberg. Venezuela will also be motivated to avoid defaulting because doing so would allow creditors to seize some of the country’s foreign oil refineries.
For his part, Maduro has sought to redirect blame for his country's foundering oil-based economy. In a speech late last month, he accused the U.S. of flooding the market with shale-oil in order to wage an "oil war" on Venezuela and Russia.
The biggest winners from falling oil prices, so far, appear to be emerging Asian economies (with the exception of Malaysia, an oil exporter), which consume a massive volume of foreign oil to fuel their burgeoning economies. According to Capital Economics, oil accounts for up to 18 percent of total imports in Asia and 3.4 percent of the region’s GDP. Lower prices, analysts say, could result in an expansion of the region’s GDP — perhaps overcoming the effect of flagging growth in China and Japan that should otherwise be dragging Asia down.
India and Indonesia have been cast as bright lights, given those fast-growing countries' high oil consumption and dire need for investment in infrastructure. For Indonesia, the timing of the oil price fall was especially fortuitous, given new president Joko Widodo’s recent decision to scrap gas subsidies to cover budget shortfalls.
But China, which last year surpassed the U.S. as the world’s biggest importer of crude oil, could stand to gain the most. Even if oil prices leveled off in the $80 per barrel range, China would see a $50 billion boost, the Wall Street Journal reported.
Cheap oil alone may not offset China’s otherwise slowing growth, however. “Lower oil prices have helped, but the domestic structural issues are more important in determining Chinese growth,” said Rachel Ziemba. “China's one of the largest oil consumers, but its actually relatively efficient in its energy use, relying more highly on coal for power.”