Oil prices fall sharply: Will poor populations benefit?

To anyone living in a developing country that is not an oil-producer, the present drop in the price of oil is very welcome.

Ever since the world’s major oil-producing nations, through the Organization of the Petroleum Exporting Countries (OPEC), dramatically increased prices in 1973, the economies of developing countries have struggled. The purpose of the price increase then was to punish the US and Western European countries for their support of Israel against Arab nations in a war in October 1973.{{more}}

However, since the effect of the oil price was global, it hurt non-oil producing developing countries much more than the US and Western Europe, which had greater capacity and resilience to recover. The injurious effect was most debilitating to the manufacturing sector in these developing countries, but no economic activity was excluded from the damage.

In 2008 and 2009, the price of a barrel of oil rose as high as US$143.68 although, on those occasions, commodity traders were blameable and not the governments of oil-producing countries.

At the time of writing, the price of Brent crude oil has fallen to US$84 a barrel, with predictions by experts that it could drop to US$75. In many developing countries, including those in the Caribbean, there will probably be a delay before the benefits of lower oil prices reach the productive sectors of the economy and the consumers. This is because governments and oil importing companies hold on to windfall surpluses for as long as they can. But, it is really in the interest of governments, the consumer and the private sector that the benefits of today’s lower prices be distributed quickly. Lower oil prices for every sector of the economy will help to stimulate and spread economic activity that is now vitally needed. The British Financial Times Newspaper estimates that on a global basis “the decline in prices would generate a $1.8bn daily windfall, about $660bn annualized.”

The reason for the present drop in oil prices is not a result of humanitarian concern for the poor or the effect of market forces. Instead, it is economic politics at play. The government of Saudi Arabia had decided that, in its own interest, it wants to keep oil prices low so as to maintain its share of the global market. Simply stated, the Saudi government feels threatened by the booming shale oil and gas sector being led by the US, whose oil production has increased by 65 per cent since 2008.

Authoritative studies say the US “shale production has reached 8.7 million barrels a day, about a million barrels a day more than just a year ago and the highest level in nearly a quarter century.” This has caused a significant reduction in imports from OPEC since 2008, forcing many of their members to compete with one another for markets.

In deciding to keep prices low, the Saudi calculation appears to be that if returns from oil sales decline, the fracking companies (that produce shale oil and gas) will be pushed into uneconomic situations, forcing them either to cut back or suspend production. Should this gambit work, conventional oil producers, such as Saudi Arabia, would continue to receive significant revenues over a longer period of time, and they would retain the reins of oil’s power.

There is evidence to suggest that the Saudi calculation is shrewd. When commodity prices fall, high-cost producers are hit first and hardest. In the Caribbean, the decline of the sugar industry is the best testament to that reality. As oil prices have declined in the past few months, shale oil and other non-fossil fuel projects in the US have either been shelved or cancelled.

Whether in agreement with Saudi Arabia or just to maintain their own market share, other OPEC members in the Middle East – Kuwait, Iraq, Iran and the United Arab Emirates – have also cut their prices.

But not all OPEC members are happy. Particularly unhappy is Venezuela, which needs oil prices at about US$115 a barrel. The Venezuelan government is so displeased that it unsuccessfully called for an emergency meeting of OPEC to discuss the situation. The view of the majority of the organization’s member states is to defer any debate to an already scheduled meeting in Vienna on November 27.

One non-OPEC oil-producing country that is particularly disturbed about the decline in the price of oil is Russia. To balance its budget, the Russian government should be selling oil at US$98 a barrel this year and US$105 next year. Apart from the dent in the Russian budget and its effect on domestic programmes, the fall in revenue from lower oil prices will also force the country’s leader, Vladimir Putin, to make a choice between spending on domestic projects or involvement in theatres such as Ukraine.

In the Caribbean, Trinidad and Tobago (TT) is the major oil producer and its national budget is based on oil prices at US$80 a barrel. Even though TT is not a member of the 12-nation OPEC, it could hardly compete effectively and keep market share if it pitches its oil-price at a level higher than OPEC members. Therefore, it will lose revenues. No doubt, the authorities in Port-of-Spain are already constructing a plan for coping should the world price for oil drop below the crucial mark of US$80 per barrel. The country is fortunate that it has a substantial Heritage and Stabilization Fund from which, if necessary, the government can draw to help it through fiscal and budget adjustments.

It is left to be seen if a drop in revenues to Venezuela will have an adverse effect on Petro Caribe – the scheme under which Venezuela sells oil to many Caribbean countries through a part-loan arrangement. In the short term, it is unlikely that the Maduro government in Caracas would revise the terms. However, if a suggestion by Kuwait’s oil minister, Ali al-Omair, comes to pass, that prices could drop to around $77 per barrel – US$38 per barrel less than Venezuela needs – Petro Caribe will undoubtedly be reviewed.

In the meantime, a lower price for oil is good for developing countries. It should mean less costly electricity, water and transportation. Those countries that get the benefit, particularly small states, should spread the joy throughout their economies, and give their populations a breather – however briefly it might last.

(The writer is a Consultant,

Senior Fellow at London