Rich Miller
A NEW age of abundant and cheap energy supplies is redrawing the world’s geopolitical landscape, weakening and potentially threatening the legitimacy of some governments while enhancing the power of others.
Some changes are already evident. Surging US oil production enabled America and its allies to impose tough sanctions on Iran without having to worry much about the loss of imports. Russia, meanwhile, faces what President Vladimir Putin called a possibly “catastrophic” slump in prices for its oil as its economy is battered by US and European sanctions over its role in Ukraine.
“A new era of lower prices is being ushered in” by the US shale oil and gas revolution, Ed Morse, the global head of commodities research for Citigroup in New York, said.
Plunging oil prices in the latter half of the 1980s helped pave the way for the break-up of the Soviet Union by robbing it of revenue to survive. The depressed market also may have influenced Saddam Hussein’s decision to invade fellow producer Kuwait in 1990, triggering the first Gulf War.
Russia again looks likely to suffer from the fallout in oil markets, along with Iran and Venezuela, while the US and China come out ahead.
Oil is “the most geopolitically important commodity”, said Reva Bhalla, vice-president of global analysis at Stratfor in Austin, Texas. “It drives economies around the world.”
Benchmark oil prices in New York have dropped more than 30 percent during the last five months to around $75 (R824) a barrel as US crude production reached the highest in more than three decades, driven by shale fields in North Dakota and Texas. Output was 9.06 million barrels a day in the first week of November, the most since at least January 1983, when the weekly data series from the Energy Information Administration began.
Daniel Yergin, the author of a Pulitzer Prize-winning history of the commodity, said: “For 10 years, the defining factor in the oil market was the growth of China and Chinese oil demand. Now the defining factor is the astonishing growth of US oil production.”
Saudi Arabia and Kuwait have begun what energy economist Philip Verleger calls a “price war of necessity” in response, aimed at protecting their market share and forcing producers in the US and elsewhere to reduce output.
So far, US companies aren’t flinching, believing they have more staying power than many of Saudi Arabia’s 11 partners in Opec (Organisation of Petroleum Exporting Countries).
Archie Dunham, the chairman of shale producer Chesapeake Energy in Oklahoma City, said: “If they take the price down to $60 or $70 a barrel, you will see a slowdown in the US. But you’re not going to see it stop.”
Leonardo Maugeri, a former Italian oil executive now at Harvard University, said
the most probable case is a four- or five-year cycle with prices in a general range of $65 to $80 a barrel, he said. That compares with an average of about $88 from 2008 to 2013 and a high of more than $140 at one point during that period.
The big question was whether oil-producing nations would react with accommodation or confrontation, said James Burkhard, vice-president and head of oil-market research for IHS.
Russia is the biggest loser, according to a Bloomberg Global Poll of international investors last week. Revenue related to the sale of oil and natural gas accounts for about half of the country’s budget.
Neil Shearing, the chief emerging-markets economist at Capital Economics in London, said the combination of US and European sanctions and declining oil prices meant a period of extended economic stagnation for Putin.
Russia’s economy will contract by 1.7 percent next year after stalling out in 2014, IHS forecasts. It projects inflation will rise to 8.4 percent from 7.6 percent, boosted by a depreciating currency. The rouble has fallen about 30 percent against the dollar this year.
The economic woes thus far haven’t undercut the Russian leader’s support at home or his determination to stand up to the US and European criticism over Ukraine. “Thanks to sanctions, the population has rallied behind Putin,” said Alexei Mukhin, the head of the Centre for Political Information in Moscow. “People are ready to put up with hardship in order to resist the West.” This could change the longer oil prices stay down and the more the economy weakens. Nariman Behravesh, IHS’s chief economist, said: “It will erode Putin’s support” if it goes on for another six months to a year.
Iran has seen its revenue from oil exports fall by about 30 percent, President Hassan Rouhani told parliament near the end of October. The nation needs to achieve a break-even sales price of $143 a barrel this year to keep its budget in balance, according to data compiled by Bloomberg.
Like Russia, Iran’s economy has been weakened by economic sanctions – in its case over its nuclear programme.
The steps by the US and its allies have almost closed Iran’s oil and gas fields to investment in the last decade, limiting the country’s access to technology to boost output.
The decline in crude prices and a November 24 deadline for a nuclear accord are raising pressure on Rouhani, elected last year on a platform to end Iran’s isolation and revive growth.
If he does strike a deal and sanctions are lifted, it could put further downward pressure on oil prices as the country increases its exports. London hedge fund manager Pierre Andurand is betting on this. He sees Brent crude declining to $65 to $70 a barrel as Iran boosts output after reaching a nuclear agreement.
Falling prices also are bad news for Venezuela and its increasingly unpopular President Nicolas Maduro. The country’s economy already is in deep trouble, with inflation of 63 percent in the 12 months through August.
Venezuela lost 30 percent of its foreign-exchange revenue in the last month because of a “tremendous” drop in oil prices, Maduro recently said.
Social turmoil in Venezuela could “paradoxically” help prop up prices “a bit” if output there was disrupted, said Michael Levi, a senior fellow for energy and environment at the Council on Foreign Relations in New York.
The US is emerging as a big winner, according to the November 11-12 poll of investors, analysts and traders who are Bloomberg subscribers.
Increasing energy independence means the US is less vulnerable to supply disruptions overseas, said Robert Hormats, a former undersecretary at the US State Department. Independence also provides added leverage in international negotiations, whether with Iran over its nuclear programme or with Russia over its intentions in Ukraine.
China is another big winner, as it imports almost 60 percent of its crude, says Lin Boqiang, a director of the energy economics research centre at Xiamen University.
The world’s second-biggest economy probably will take advantage of the savings to build up its strategic reserves, says Lin.
“China will always have an upper hand in dealing with Russia as long as crude prices stay low,” Lin said. “Russia needs the energy income dearly.” – Bloomberg