It’s been a rough summer for the global markets, especially crashing Chinese stocks, tumbling emerging market currencies and oil have been causing the “perfect storm” in all continents of the world.
Although oil prices have been under pressure for several months triggered by oversupply concerns, the fall accelerated in the recent weeks due to fears of a sharp slowdown in the world’s second largest economy, China. Brent crude dropped on Monday below the key $45 a barrel for the first time since March 2009, trading lower from its year high of $103.19 per barrel in August 2014, down 56 percent.
So far, world’s biggest oil producers failed to intervene melting oil prices by controlling the output. Even though oil prices came down below fiscal break-even levels for many OPEC (Organization of the Petroleum Exporting Countries) members, it didn’t cut oil production to hike prices.
According to estimates by Reuters, OPEC production is more than 32 million barrels a day in July, while Saudi Arabia and Iraq are producing at record levels. Analysts argue that by not cutting production, biggest producers are fighting against their market share from the US and non-OPEC producers. If OPEC would cut production to raise prices, it would have provided boost for more shale production and lead to further market share losses to the US.
Meanwhile, thanks to achieving a long term comprehensive nuclear deal with the West, sanctions on Iran will be lifted and Iran’s near future come back is also contributing to the oil glut. It’s not yet clear how quickly Iran could ramp up its production. Iran said it could be back to producing 1 billion barrels a day in the coming months, however, according to analysts, Iran doesn’t have the infrastructure to operate such production.
At the same time, falling prices is affecting Iran also negatively. International Monetary Fund (IMF) stated that it needs $100 per barrel to balance its budget. Iran’s Oil Minister Bijan Zanganeh called for an emergency OPEC meeting on Sunday, in efforts to stabilise the oil prices. A similar call came from another OPEC member, Algeria earlier this month, but other members said no to the call.
On the other hand, some analysts argue that rising dollar plays a more important role in falling oil prices, than the global demand and slowdown in China. US Federal Reserve’s potential monetary tightening has been pushing up the dollar.
While some expect the Fed to hike interest rates soonest in September, some argue that the central bank will wait until next year to hike rates for the first time in nine years. Commodity prices in the US dollar makes them more expensive for those who are using other currencies than the dollar.
When all these reasons are combined together, major oil dependent countries are facing fiscal troubles, their economies shrink and unemployment rises.
For instance Venezuela has the world’s biggest oil reserves with 24.9 percent. But it was already suffering economically even before the prices started to fall due to economic mismanagement. At the same time, oil makes up 96 percent of its exports. Last year Venezuela contracted 4 percent, while this year it’s expected to shrink 7 percent. ,
Another major oil dependent country is Russia and because of the combined impact of falling oil prices and sanctions, its economy is not doing well. Higher oil prices contribute positively to Russian growth. But the country loses about $2 billion in revenues for every dollar fall in the oil price. Since oil and gas imports make up 50 percent of the government’s income, the economy is expected to contract 3.4 percent in 2015. Additionally, Gazprom, a big financier of the Russian government is expected to lose 30 percent of its revenue.
Saudi Arabia has been the toughest opposing member of OPEC cutting output. But in order not to lose its market share to cheaper alternatives, the country insisted on keeping the prices low. According to the IMF, it needs to sell oil for $106 per barrel. While low prices have so far cost Saudi Arabia’s economy $178 billion, analysts believe it has enough cash reserves to have low oil prices for a while.
Due to ISIS insurgencies that controls one third of Iraq, the government has lost control over the several key oil refineries in the north. Combined with falling oil prices, these have shaken the country’s former levels of oil trade. While oil exports make up 90 percent of Baghdad’s revenue, major obstacles in reaching a deal on oil revenue sharing with the Kurdish Regional Government cause deeper trouble.
While major oil exporters suffer on weaker prices and their currencies plummet against the dollar, oil importing countries should have been benefiting from these falls. However, as the Turkish lira, Malaysian ringgit, South African rand test historical lows against the dollar, falling oil prices don’t reflect as a drop in local markets.