International Implications of the Drop in Oil Prices (Updated)
The price of a barrel of oil is almost a third of what it was earlier in the year and expected to go lower:
OIL PRICES could drop below $40 per barrel this month and even further next year due to the global economic downturn, visiting officials of energy information provider Platts yesterday said.
“Prices will continue to go down. We seem to be near the floor prices but then it still going down below $40 per barrel by year-end,” said Jorge Montepeque, Platts global director of market reports.
“Some people are talking about oil prices hitting $35 a barrel,” he added.
From a record high of over $147/barrel just this June, driven by factors such as rising demand and supply concerns, crude is now trading at around $46/barrel as the worldwide economic crisis bites.
Prices are expected to fall further at the start of 2009, said Mr. Montepeque, who addressed a forum on pricing.
“The first quarter is always typically where prices hit the lowest level, essentially March or April, because demand tends to go down,” he said.
This is great news for oil consumers but lousy news for oil producers. Just last week King Abdullah of Saudi Arabia was complaining that “the fair price for oil is $75 a barrel”. Oddly, I don’t remember him seeing things that way when the world price was $146 a barrel.
The falling price of oil has thrown the Russian economy into a tailspin:
The Russian economy, which has expanded at 7 percent a year since 1999, may grow by 1 or 2 percent in 2009, according to Gary Dugan, Merrill Lynch & Co.’s chief investment officer, who predicts an average oil price of $42 a barrel in the first half of next year. The World Bank foresees growth of 3 percent.
Putin promised to avoid “sharp jumps” in the value of the ruble as it fell to the lowest level in almost three years against the dollar. Russia’s international reserves, the world’s third largest, have fallen 24 percent since reaching a peak of $598.1 billion in August as the central bank sold foreign currencies to prop up the national currency, down 16 percent against the U.S. dollar since Aug. 1.
Unemployment there is expected to rise to 10 or 11%.
The falling price of oil is likely to have an impact on areas of concern other than Russia and the KSA including Iran, Pakistan, India, and China. It’s likely to be good news for India, China, and Pakistan. Not long ago Pakistan obtained a World Bank loan much of which was needed to keep its oil subsidies up. That’s less likely to be a problem going forward.
Oil at $36 or even $46 a barrel isn’t the drag on China’s or India’s budgets that $146 dollar a barrel oil is. Iran, contrariwise, will be less able to pursue expensive development projects than it otherwise might have been.
I’d be interested in hearing the thoughts of the commenters on what the likely international implications might be going into 2009 of the low price of crude oil.
The falling price of oil is already causing problems for Mexico:
After expanding by 3.2% in 2007 to $900 billion, Mexico’s GDP growth will slow to 1.5% this year and tumble to somewhere between zero and 0.7% in 2009, predicts RaÃºl Feliz, an economist at CIDE, a Mexico City think tank that specializes in economics and politics. While some of that meager expansion will come from government stimulus spending, its hands are tightly tied because state-owned oil monopoly Pemex (PetrÃ³leos Mexicanos) contributes 37%–$80 billion in 2008–of federal revenue. Next year analysts expect a plunge in petrodollars. Unemployment will jump from its current 4.1%. Throw in part-time workers, who account for roughly one-third of GDP, and the jobless figure soars to 10%. Feliz expects that number to reach 12% next year.
This couldn’t come at a worse time for Mexico. Not only have remittances, the country’s other major source of foreign exchange, been slowing for the past year or so but the country’s embroiled in a war with narcotics traffickers. Some have suggested that war has the potential to delegitimize the government which in turn could throw the country into chaos.