Market Meltdown Means More Pain For Oil Producers – OpEd


By Zachary Fillingham

Supply-side downward price pressure has been the story of global energy prices over the past year: newfound supply from the Shale Revolution, OPEC’s gambit of market-share grabbing inundation, and new supply coming online from Iraq and soon Iran. The result was a plunge in oil prices from $115 in mid-June 2014 to below $70 by mid-December, and then to the low $40s as of last week.

Now we are seeing signs of a new economic crisis, one that began in Asia and spread to Europe and North America. China’s stock market meltdown has gathered pace and the recent yuan devaluation stands as a grim omen of not only tepid Chinese growth, but a lack of currency stability in the region should the crisis deepen. The 8% drop in Chinese exports in July is leading to a few uncomfortable questions of oversupply and a lack of global demand – systemic issues that transcend the sphere of domestic economic policy in China – and a looming currency war will only serve to make things worse.

The precise bottom of this newest sell-off in global equity markets is open to speculation, but in terms of oil prices it represents demand-side downward pressure and, depending on how things pan out, the potential for a whole lot more of it. WTI crude was down over 3% in pre-market trading to flirt with the sub-$39 range.

This is a scenario that is various degrees of terrifying for oil-producing economies, many of which have weathered the past eight months with a combination of fiscal austerity, asset sales, debt issuance, and burning through foreign reserves – basically holding on for dear life and hoping for a price rebound which now looks to have been pushed further into the future.

Many governments were caught off guard by the drop in oil prices back in 2014, and after ten months of struggling they are now left with a reduced toolbox with which to insulate their economies. Others have been brought to the edge of the abyss over thus period, and another round of price drops threatens to push them in.

Here are a few oil producers that stand to lose big from a further dip in global oil prices:


Oil accounts for over 95% of Venezuela’s exports and 25% of its gross domestic product. Without oil sales to generate foreign currency to pay for other key imports, supermarket shelves are increasingly barren and industry is grinding to a halt up and down the country. The Maduro government has been borrowing from anyone willing to lend (a rapidly shrinking pool) and printing mountains of money to pay its bills. The predictable result has been inflation spikes of an indeterminate degree because the government stopped posting official statistics last December. Outside estimates have put Venezuela’s inflation rate at anywhere from 200-780%, well within the range of the dreaded ‘hyperinflation’ branding.

Government and state-owned corporate debt has now grown to $130 billion, $6 billion of which is due this year, leading to fears of a looming default.

Venezuela can be considered an extreme case and a deserving member of the RBC’s ‘Fragile Five’ club of economically unstable oil producers (the others are Libya, Iraq, Algeria, and Nigeria). Its economic reckoning is a matter of ‘when,’ not ‘if,’ and a prolonged dip into the $30 range could bring about a messy default in a matter of months.

According to Deutsche Bank, the Russian government needs an oil price of $89 per barrel to balance its budget.


Russia is suffering from a prolonged recession where all attempts at diversification away from energy reliance, such as a weak ruble-fueled manufacturing renaissance, have failed. At this point an oil price recovery is the only thing that can rescue the squeezed Russian middle class. The Russian economy has already contracted over 4.6% in the second quarter (it shrunk 2.2% 1Q 2015), the ruble has lost 40% of its value over the past year, and inflation is hovering at around 15%. Though not nearly as dire as Venezuela’s outlook, the Russian economy has been feeling the pinch from oil prices for a long time now. It is estimated that the Central Bank of Russia has used $140 billion of its foreign reserves to prop up the rouble since January 2014, leaving it with around $360 billion to work with should another crisis be waiting around the corner. Moscow has also had to grapple with international fallout and Western sanctions following its occupation and annexation of Ukraine’s Crimean Peninsula in early 2014.

This parade of bad economic news occurred against the backdrop of a modest price recovery into the $50s-$60s over the first half of 2015. The pain can be expected to be considerably worse should demand-side factors combine with a supply glut to produce a prolonged period of $30-range oil prices.

One positive factor for Russia is its low levels of debt vis-à-vis many developed economies that binge borrowed in the wake of the 2008 financial crisis.

According to Deutsche Bank, the Russian government needs an oil price of $78 per barrel to balance its budget.


Nigeria’s newly elected President Muhammadu Buhari inherited a tenuous economic situation from his predecessor: government revenue flows squeezed by low oil prices, rife fuel shortages due to a lack of domestic refineries, inflation rates hovering around 9%, low foreign reserves, flagging foreign direct investment, and a currency that has lost around 8% against the dollar this year. And as of yet, President Buhari hasn’t even completed the first requisite step for rectifying the situation by forming a cabinet.

The Nigerian government must diversify away from the energy sector and increase revenues, a difficult challenge given the fact that oil accounts for around 70% of government revenue and 95% of Nigeria’s exports. The elephant in the room will be the highly contentious fuel subsidies that continue to eat away at the government’s fiscal wiggle room (some estimates put the subsidy at costing 20% of the government’s budget). Though these subsidies may seem a natural target for cutting, Buhari campaigned on a strong message of keeping them in place. However, a further plunge in oil prices would create a sense of crisis that might help him backpedal on the promise.

A sign of just how serious the revenue problem is: federal and state governments are increasingly finding themselves in arrears over unpaid pensions, salaries, import fees, and fuel subsidies. Fundamentals of the wider economy are also being affected. The National Bureau of Statistics recently announced that job creation was down 70% in second quarter 2015.

Nigeria’s foreign reserves fell from $34.24 billion in December 2014 to $29.36 billion in March 2015, mostly on government interventions to protect the naira. They have since recovered to $31.5 billion following the imposition of capital controls.

The final part of the list can be found here (subscribers only)

This article was published by Geopolitical

Geopolitical Monitor is an open-source intelligence collection and forecasting service, providing research, analysis and up to date coverage on situations and events that have a substantive impact on political, military and economic affairs.

One thought on “Market Meltdown Means More Pain For Oil Producers – OpEd

  • August 30, 2015 at 4:18 pm

    It does seem to me that the overall insanity of neo-liberal economics is well illustrated by the present oil glut and the seriously depressed price of a form of energy absolutely required to keep an industrialized world-wide economy functioning, as well as for that economy to continue to grow food for unrestrained growth in the world population. We have an over-supply of perfectly unnecessary products seeking a declining number of buyers, a great many of whom are unemployed, so unemployed that they swell the numbers of jihadi fighters available to fuel the civil unrest throughout the Middle East and in Ukraine, unrest deliberately stoked by Israel and its client state, the U.S.
    This author says nothing at all about the zombie banks, whose
    greed stoked the 2008 financial disaster, from which the world has not recovered, and shows no signs of recovering. The tiny investor class shows no sign of restraint in its demands for repayment of debts that overstretched governments cannot repay without a painful restructuring that makes the plight of the citizenry uniformly worse in the countries who have received the dubious “benefits” of IMF loans. The world’s most consumable products are now weapons of every conceivable design and type, being peddled everywhere by hysterical liars like Gen. Breedlove of NATO. What this looks like to me is a mad consumption of oil that we ought to be earnestly conserving, because when it’s gone, there will not be any more of it and this entire house of cards that we refer to as the world economy will simply collapse into the madness of WWIII, during which nuclear weapons will inevitably be used because the stakes will be too high to maintain restraint.
    If all that is not depressing enough, the United States has gone all out to frack every patch of shale it can get its hands on–in a world already glutted with too much oil on the market–regardless of the enormous risk to our underground aquifers, which are, whether anyone wants to know it or not, regularly contaminated by fracking chemicals regarded as “proprietary” information by the companies doing the fracking. The US will shortly find that oil and natural gas are not drinkable, and that water is the real element without which none of us can live. Yet state governments like that of California and Oregon continue to allow the bottled water companies to buy up water supplies desperately needed for agriculture.
    Let us give credit to the human race so enamored of the notion of making money that it has devised an economic system that exploits everyone for the limited profits of the few (we call it global capitalism) and that will end in a cataclysm of destruction unparalleled by any disaster in its brief 5000 year history. And let us give it credit for ultimate cleverness in persuading gullible citizens worldwide that elections mean that they have a voice with “representatives” whose time in office has been entirely bought and paid for by the investors who bankroll their increasingly expensive election campaigns quite legally while they buy hideaways in far off places to which to retire when the great conflagration is taking place worldwide. After which, they will once more emerge to do the lending survivors will require–if there are any survivors. The most peculiar thing of all is that for the past 250 years, these strange creatures have taken great pride in their possession of a quality they are incapable of using: reason.


Leave a Reply

Your email address will not be published. Required fields are marked *