Oil price plunge - its winners and losers

Another day, another five-year low in energy prices; the last time oil was so cheap was back in May 2009. And, if the latest projections from the International Energy Agency prove to be correct, oil prices are set to remain in the doldrums for most of the coming year.

That is undoubtedly good news for some nations. However, low energy prices also portend fundamental power shifts and realignments, and this time is no exception: 2015 may well turn out to be the year of cheap energy, but could also be the year in which we may experience some profoundly unsettling shock waves to current global security arrangements.

For developed economies, lower energy prices are always welcome and seen as a bonanza. In the popular imagination - and particularly with motorists in the United States who equate burning large quantities of "gasoline" with their constitutional rights - this should invariably be translated into lower prices at the petrol pumps.

But while the savings which car owners can expect next year are not a trifle, it is the overall impact on national economies which really matters.

And it's staggering: If low oil prices are maintained throughout 2015, this will result in a net transfer of income from energy producers to key Western consumers worth around US$1.3 trillion (S$1.7 trillion).

Add to this a declining cost for natural gas and coal, which are also affected by oil prices, and the net transfer from energy producers to consumers is even higher: It may be equivalent to the annual gross domestic product of a rich country such as Britain or France.

Most of this transferred wealth does not end up in sovereign wealth funds, but in boosting personal consumption, which helps economic growth.

Falling energy prices also dampen inflation, allowing national banks to lower interest rates, thereby helping investment. Nor are these effects confined to Western nations: Japan, India and China are also enjoying a boost.

Yet there is also a darker narrative which needs to be taken into account: the impact of falling oil prices on energy-producing nations.

As a rule, there are three ways of measuring the severity of this impact: the length of time oil prices remain depressed, the oil price level at which each energy-producing country manages to balance its government revenues with spending and, finally, the extent to which a country relies on oil for its revenues.

Sadly, on all these counts, trouble is brewing.

Though Western economies may rebound from their current flat growth, it is unlikely that they will return to the oil consumption levels seen in the mid-2000s; the same applies to China's economy. Energy-saving technologies are making great strides, reducing demand for fossil fuels even further. And if this were not enough, there is the shale oil and natural gas revolution unleashed by the US.

To be sure, there are plenty of detractors who find it convenient to dismiss the shale energy phenomenon as a passing fad.

But shale sceptics are wrong, partly because the fracking technology which releases oil and gas from geological formations is still in its infancy and its cost is therefore guaranteed to drop, but also because of the sheer scale of its transformation: Since the start of this decade, the US has drilled over 20,000 new wells, 10 times more than Saudi Arabia has done.

The US could well become, this coming year, the world's biggest energy producer, and although the Europeans will never be able to match America's agility, they, too, will become big shale producers, as will China. In short, downward pressures on global oil prices are neither a fluke, nor a temporary affair.

How much this would be a disaster for today's energy exporters depends on each nation.

The so-called "fiscal break-even point" at which a country manages to balance its revenues with its spending varies: Kuwait, for instance, needs to sell oil at only US$50 a barrel to balance its budget, and is therefore the most resilient.

Other countries which have a small population and plenty of oil - Norway and the United Arab Emirates - are also doing well: Norway, for instance, can balance its revenues with expenditure even if prices were to drop to around US$35 a barrel.

But for countries like Russia, the "fiscal break-even point" comes only if oil hits US$90 a barrel, while for Iran and Venezuela, that figure is more like US$110 a barrel, something which they may not see again for years.

The picture is not much better if one looks at how much oil accounts for the fiscal receipts of energy-producing nations: In the case of Russia, that figure is about 75 percent, while Venezuela relies on oil for over 90 percent of its fiscal receipts; Nigeria and Angola in Africa are not much better, with about 85 percent each.

These vulnerabilities will count for a great deal during the coming year.

Most of the energy exporters have learnt from past experience, and have built up large currency reserves to cushion themselves from precisely such downturns. But they are already discovering that these reserves are not enough to compensate for their lack of economic diversification.

Russia had reserves of around US$560 billion when the downturn in energy prices began.

The country now has only $460 billion, and even this figure is an exaggeration, since it includes two separate funds which are supposed to fund pensions and expenditure on future generations and were not meant to be included in the national reserves calculations.

Nigeria is already running out of cash, as is Iran. And Venezuela has no serious resources to speak of.

All these governments will find it virtually impossible to slash their expenditure, if only because high levels of domestic spending is how local politicians buy the acquiescence of their people.

Energy revenues smooth over relations between Nigeria's various states and ethnic groups; without these, the country risks falling apart.

And it is oil largesse rather than patriotic flag-waving which has sustained Russian President Vladimir Putin's domestic popularity. In any case, flags are not edible: Mr Putin will need cash to import the food on which Russia depends.

US commentator Thomas Friedman once penned a study in which he claimed that the "First Law of Petropolitics" is that high oil prices embolden energy exporters to adopt more confrontational foreign policies.

Armies of academics have subsequently tested this hypothesis and found it to be largely correct: When countries are flush with petrodollars, they also act more aggressively.

Why that should be so is not clear; the suspicion is that energy exporters may feel invulnerable to outside pressure when their oil or gas are such hot commodities, or that they simply can afford to take more risks when cash is not a problem, as Venezuela has done by financing any anti-US movement in Latin America over the years.

Be that as it may, can one predict that lower energy prices also mean less confrontation? Not necessarily.

In the case of Iran, reduced oil revenues will do nothing to dent the hardliners' opposition to a nuclear deal with the US, particularly since it will be clear that, even if a deal results in the lifting of the sanctions on Iran, this will not mean extra revenues to the Iranian treasury.

Indeed, the cash crunch which Iran is currently suffering from discredits President Hassan Rouhani, a reformist and relative moderate.

The same applies to Russia. President Putin remains in self- denial: He refuses to believe that the current fall in energy prices is not due to some US-led plot, and he is determined not to buckle under pressure.

German Chancellor Angela Merkel recently spent more than four hours trying to persuade Mr Putin to take an honourable way out of his military involvement in Ukraine, but got nowhere; as is often the case with Russia, Moscow's response when it feels cornered is to double the stakes by increasing the confrontation.

Ultimately, however, the world's energy exporters will have to acknowledge that the relevance of both their products and the powers of Opec, the cartel which fixes oil prices, are in irreversible decline.

Energy prices are now buffeted by new technologies and new producers; the real concern for energy exporters is no longer just to make sure that prices don't fall any further, but rather to protect themselves from unconventional energy competition.

This is a global revolution of great importance. And it will be surprising if it remains completely bloodless. For few revolutions unfold without generating any violence.

This article was first published on December 15, 2014.
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