The global demand for oil is declining as the United States moves toward self-sufficiency and is the only nation in a positive economic trend. Global economy other than USA turning down since 2007 including China and Russia no less Europe.
The oil price has fallen in the past week for the first time since one and a half years under the $ 100 mark dropping to test the $90 level. Because of the weak economic outlook for Europe, Russia, and China, the IEA has now reviewed its global demand forecast for 2014 and 2015 downward. They expect 2014 global demand of only 92.6 million barrels per day – an increase of 900,000 barrels per day from the previous year. For 2015, the organization expects global demand of 93.8 million barrels per day – an increase of 1.2 million barrels per day.
At the start of 2014, oil prices were already below the break-even point for Iran, Venezuela, Nigeria, and Iraq. But now, as prices drop below $90 per barrel, they're falling below the break-even point for Libya, Russia, and Saudi Arabia.
At the moment, it's looking like Russia's economy could be in serious trouble, Iran's is in flux — and Saudi Arabia seems far more positive about the situation.
Dwindling oil prices could crush Russia's economy
Russia's situation is getting most of the attention these days. The country was already suffering from weak growth — on pace to expand just 0.4 percent in 2014.
Now the dive in global oil prices is putting even further strain on the nation's economy. Russia account its oil revenues budget for about 45 percent, and the government's spending plans for 2015 had assumed that prices would stay in the $100-per-barrel range. If oil continues to sink below that, the country will either have to draw down from its $74 billion foreign-exchange reserves or cut back on planned spending — something that Russian President Vladimir Putin suggested was possible on Tuesday.
The Russian government’s recent draft federal budget for 2015 and projections for 2016 and 2017 give an overview of just how much falling commodity prices will impact government accounts. So far, despite sanctions and oil prices in decline since June, Russia will end the year with a surplus of 196.8 billion rubles ($5.04 billion). This amount has been in decline since the first quarter, however. A deficit is being budgeted for the next three years.
The key element of Russia’s budget planning is oil.
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| (Russian budget in the red. But Russian president Vladimir Putin says government will not raise taxes to compensate for falling oil revenues.) |
Investors do not believe that Russia will use oil and gas as a weapon in its sanctions war against the West. In such a scenario, Russia would limit exports of natural gas to a dependent European Union. In theory, this would drive up prices as Russia tightens supplies.
Iran's economy was recovering, before the price drop
One big problem for Iran is that it also needs oil prices well north of $100 per barrel to balance its budget, especially since Western sanctions have made it much harder to export crude. And if oil prices keep falling, the Iranian government may need to make up revenues elsewhere — say, by paring back fuel subsidies for its citizens (always an unpopular move, at least in the short term).
Saudi Arabia seems more sanguine
Meanwhile, oil prices have now dropped below Saudi Arabia's break-even point — around $83 per barrel. But, so far, many the country's leaders sound a little more confident that they can survive the hit.
Saudi Arabia could respond by trying to cut back on its own oil production in order to prop up global prices. (The country is such a massive oil producer that it has a lot of control here.) But for the time being, the Saudis are signaling that they're prepared for low prices, possibly even a year or two with oil at $80 per barrel.
One question is how far Saudi Arabia can let prices fall without incurring too much domestic pain. In September, the International Monetary Fund warned that Saudi Arabia would run a deficit of roughly 1.4% in 2015, not least since the country has been ramping up big infrastructure projects and doling out foreign aid around the Middle East of late. That shortfall would force the country to start drawing down its massive foreign-exchange reserves.
So far, Saudi Arabia seems prepared to wait it out. According to the Financial Times, even if oil prices stayed at $80 per barrel for a year, the country would only need to draw down about $10 or $20 billion of its $750 billion in foreign-exchange reserves.
Saudi Arabia, the largest oil producer in OPEC, lowered his deliveries in August by 330,000 barrels per day to 9.68 million barrels a day in response to the low demand of the customers. Saudi Arabia’s production will see further decreases in hopes of stabilizing the price of oil. Saudi’s oil exports may already fallen to 7 million barrels per day – the lowest level since September, 2011.
Crude oil and India
The slide in crude oil prices to four-year lows is a huge positive for India as the country can produce one fourths of its consumption and depends on imports.
India's net imports of crude oil amount to about a billion barrels every year. So, if crude oil prices average about $100 per barrel in the current fiscal the country's import bill will fall by $10 billion (about Rs 61,000 crore), which is close to one-third of the current account deficit. Analysts say that if crude oil averages at $100 per barrel this fiscal, India's CAD will reduce to 1.3% of GDP from 1.7% in the previous year.
The Indian crude oil prices on the MCX have fallen sharply to around Rs 5,100 per barrel.
The good news is that the low fuel prices can give a push up to economies of the Emerging markets which are still finding their footing. The concerns with Euro Zone have been immense with IMF pointing on risks of recession unless action taken.
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