The ongoing slump in oil prices, which has seen crude fall so sharply from the 52-week high set in October that $1 trillion has been wiped off energy stocks, will cut deep into the pockets of major producers like Saudi Arabia, Russia, Nigeria and Angola. As the world heads into an “unprecedented time of uncertainty” in oil markets, however, it’s not only OPEC members who will suffer. Even countries who are less naturally exposed to fluctuations in oil rents, such as Malaysia and Canada, are more vulnerable than usual to the current oil price crash thanks to poor policymaking.
As recently as early October, Brent crude was trading at almost $87 per barrel, amid predictions of $100 a barrel. Since then, the commodity has endured an unprecedented run of losses. Affected simultaneously by a glut in supply and a drop-off in demand, oil is now valued at almost half of what it was two months ago, after recording its biggest single-day drop in three years.
The projected decrease in supplies precipitated by American sanctions on Iranian oil has failed to materialize, thanks to the Trump administration unexpectedly issuing waivers for eight countries, including major importers China and India. More worryingly, this abundance in supply may only account for roughly 15 percent of the current slump in prices, with the rest caused by depressed demand linked to sluggish economies.
OPEC under pressure
As the industry holds its breath hoping that the December 6th meeting will stabilize crude prices, lethargic demand is far more concerning than outsized supply, as OPEC countries do not have direct control over it. Indeed, it’s estimated that OPEC was responsible for only 15 percent of the global increase in oil production between October 2017 and October 2018, while several of its biggest members are struggling to break even: de facto cartel leader Saudi Arabia needs oil prices to average out at $70 just to balance the books. Smaller OPEC countries are even more exposed: Nigeria and Angola, for example, rely on crude for more than 80 percent of their exports.
Other emerging markets endangered
It’s unsurprising that those emerging markets whose GDP depends on oil will suffer bitterly as crude prices plummet. Less widely analyzed, but just as troubling, are countries which have left themselves vulnerable to an oil slump through their own policy choices rather than an abundance of petroleum resources. Related: Legendary Oil Trader Expects Crude Prices To Rebound
For example, after years of weaning itself off of petroleum dependence, Malaysia is newly threatened by the oil price crash, thanks to risky policy decisions from its Prime Minister, Mahathir Mohamad. Since the 93-year-old ex-strongman regained the premiership in May, Kuala Lumpur has bled $3 billion in foreign investment over apprehension that he will continue the same controversial economic policies which characterized his first stint as PM from 1981 to 2003.
Mahathir has not assuaged those concerns by scrapping the goods-and-services tax (GST) which constituted roughly 20% of governmental revenue. Malaysian finance officials have raised alarm about the GST’s abolition, emphasizing that the previous government had instituted the tax to reduce the country’s dependence on petroleum and to shore up the Malaysian economy in case of another oil price crash.
Mahathir’s expansionary 2019 budget had counted on oil rents to patch the hole left by the abolition of the GST. Unfortunately, this plan required state oil and gas giant Petronas to fork over an extraordinary special dividend—a proposition which prompted Moody’s to downgrade Petronas’ outlook to negative—and assumed a Brent crude price of $72 a barrel—a figure that, less than a month after the budget was released, seems dangerously optimistic.
Former Malaysian Prime Minister Najib Razak has lampooned the budget, noting that his administration had planned its finances around a crude oil price $18 below the global rate out of prudence: “if the conditions improve, we will get a bonus. If it gets worse, we would have already made preparations”. With Brent breaching $60 and Petronas dragging down the Malaysian stock exchange, Mahathir’s administration may regret not having made such preparations.
Canada’s calamitous infrastructural problems
Malaysia’s beleaguered premier is not the only leader whose poorly-crafted policies have left his country unnecessarily exposed to the whims of the oil market. Bottlenecks have been building in Alberta for years as more crude is extracted from the Athabasca oil sands than existing pipelines can carry, an issue Justin Trudeau’s Liberal government has failed to address.
Trudeau made a risky bid to cancel the Northern Gateway pipeline in favor of the Trans Mountain project, which would have tripled the amount of petroleum products being shipped out of Alberta. The PM’s gamble backfired in August, when Canada’s Federal Court of Appeal blocked construction on Trans Mountain. With the Keystone XL and Energy East projects also sidelined—the latter likely for political reasons rather than concerns about profitability—Trudeau has been left facing mounting criticism and an ever-deepening oil crisis in Canada’s richest province. Related: A Unique Play In Solar
Ottawa’s seeming inability to see a pipeline project to completion means that Canada has an overabundance of crude oil with nowhere to ship it to, forcing Canadian producers to sell oil at a steep discount. This is a particularly serious problem when global prices are already sinking—Canadian oil recently fell to just $13.46 per barrel, the cheapest worldwide.
The differential between Canadian and global oil prices means that Alberta is losing a staggering $100 million per day, a loss which is not only hamstringing future investment in the industry, but imperiling the entire nation’s economy. Under Canada’s system of revenue sharing, Ottawa counts on some $22 billion from oil-rich Alberta to distribute to less affluent provinces.
Stormy waters ahead
Canadian coffers are bleeding at an alarming rate as global oil prices drop, with no end in sight to the predicament. With U.S. shale output expected to reach record levels next month and continue growth into the 2020s—though America is hampered by its own pipeline capacity problems— the ongoing supply glut could suppress oil prices for the foreseeable future.
The remarkable recovery in oil prices since the last crash in 2016 allowed oil producers, both inside and outside OPEC, to breathe a sigh of relief. Regrettably, it also gave countries like Malaysia and Canada breathing room to pursue policies which have left them needlessly vulnerable to crude’s next downward swing.
By Richard Talley for Oilprice.com
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