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In Saudi-Russia oil price war, India is a big winner
Oil price shocks always divide the world’s economies into winners and losers, sometimes producing lasting geopolitical change — and this time is unlikely to be different. But to misquote Tolstoy, every oil crisis distributes happiness and unhappiness in its own way.
Crude’s biggest drop in three decades on Monday coincided with the spreading coronavirus, slow growth in China, a wave of de-globalisation affecting trade, and the emergence of the US as the world’s largest oil producer. Even for some consumer nations, gains from lower oil prices may this time be overwhelmed by the collapse in demand caused by Covid-19.
Perhaps the biggest worldwide change, though, is that inflation and interest rates are already at rock bottom. That means central banks may have very little capacity to cushion the deflationary effects of falling oil costs, according to Gabriel Sterne, head of global strategy services at Oxford Economics, a UK consultancy.
It’s hard to predict the impact of sub-$30 oil on governments around the world. Importing nations in Asia and central Europe would normally be expected to win, and major producers in the Middle East, northern Europe and the Americas to lose. But it’s not that simple.
The Americas: Winners
The US has historically won big from falling oil prices, and President Donald Trump was quick to celebrate with a tweet on Monday.
But a lot has changed since the 1980s, and this time it’s a lot less clear. The US was the world’s largest oil producer in 2019, beating Saudi Arabia thanks to an explosion of shale fracking. With shale producers highly leveraged, a sustained price drop could drive some companies under and savage investment plans across the industry, creating a drag on job creation and growth.
The upshot is that “a US that in the past had a lot to gain from lower oil prices, now has something to lose,” said Tom Orlik, chief economist for Bloomberg Economics. Bloomberg economics on what the oil plunge means for global growth
Indeed, wiping out that competition was one reason cited for Russia’s action that helped precipitate the oil-price crash. And any major setback for shale could offset the feelgood factor voters get from low gasoline prices, which could impact Trump’s chances at re-election in November. In fact, says Sterne of Oxford Economics, a shale meltdown would tip the US firmly into the losers camp from $30 oil.
Low crude prices should also benefit PERU, a net importer which bought $5.6 billion of oil products last year, although it may also delay the exploration investment needed to boost local output.
The picture is more nuanced again for Brazil, where President Jair Bolsonaro could get some relief in his dealings with truck drivers, whose strike against rising diesel prices two years ago brought the country to a standstill. At the same time, plans by state-controlled oil company Petroleo Brasileiro SA to sell assets and cut debt will likely hit a wall.
The Americas: Losers
If the US is a borderline case, Venezuela is not. Oil is already sold at a deep discount, due to the US sanctions that reduce the country’s ability to export crude. The collapse in international prices will mean even less cash for Petroleos de Venezuela SA, one of the few remaining lifelines for Nicolas Maduro’s embattled regime.
An analysis from Allianz Research on Monday put Ecuador and Colombia at the top of their list of countries most exposed if oil stays below $45, losing well over a percentage point of growth each. Ecuador looks increasingly likely to default on its debt, amid doubts over disbursements of an International Monetary Fund (IMF) loan.
Mexico, meanwhile, stands to lose about 0.15% of GDP (gross domestic product), according to Oxford Economics and more according to Allianz. The government could struggle with plans to expand the role of its oil company Petroleos Mexicanos in the energy sector, while the peso’s recent plunge could hamstring the central bank’s ability to follow the Fed’s emergency rate cut.
Argentina’s plans to develop its Vaca Muerta shale gas reserve, already suffering under the administration of leftist Alberto Fernandez, will have to wait even longer. The market volatility will also complicate government plans to refinance debt.
Canada’s economy was already on a soft footing at the end of last year, and some economists say the oil shock could tip it into recession. Canada exported just over $59 billion of crude and bitumen in 2018, when benchmark oil prices averaged $57 a barrel.
Asia: Winners
China benefits from lower oil prices as a major importer, but this time it may take a while for the effects to materialise: It already has high stockpiles of oil and liquid natural gas, while the coronavirus is hindering travel and manufacturing and creating uncertainty.
Under those circumstances, excessive volatility in the markets may hinder China’s economic recovery, as it needs stability across the globe to prevent further shocks to supply chains. Those concerns were on full display on Monday, when the foreign ministry took the unusual step of commenting on commodity market developments.
The dramatic fall in oil prices also could have political consequences for friendly countries ranging from Iran to Venezuela — a headache Beijing doesn’t need.
India, the world’s third largest crude consumer, should be among the big beneficiaries since its import bill will fall significantly. Cheaper oil could also help Prime Minister Narendra Modi’s government by allowing it to increase taxes on fuels, rather than pass the entire benefit of the price decline to consumers. This couldn’t come at a better time for Modi, whose government is under pressure over slowing growth and the biggest bank failure in India’s history.
Lower oil prices are also generally good for resource-poor Japan, with cheaper gas helping consumers hit by a crisis of confidence over the coronavirus and a damaging sales-tax hike. It means lower costs for businesses as well, potentially supporting profits through a looming downturn.
But the volatility is a double-edged sword. The dramatic fall on Monday helped propel a flood of haven-seeking funds into the yen, pushing it to heights not seen in more than three years. And cheaper fuel will make it even harder for Prime Minister Shinzo Abe to reach his inflation targets, which he’s already struggled to hit despite unprecedented monetary easing.
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