Friday, 21 November 2008

From the Kremlin to Caracas, how oil collapse changes everything

As the price of a barrel falls to below $50 for the first time in years - to a third of its value just a few months ago - petrol will be cheaper but the shockwaves mean crisis for oil-producing nations and further instability for a battered global economy

Russia

Russia is lurching towards a major economic crisis, experts predicted yesterday, following news that the price of oil had slumped to under $50 (£33.72) a barrel. The collapse was likely to have catastrophic consequences including a possible devaluation of the rouble and a severe drop in living standards next year, they said.

With oil prices tumbling and his credibility at stake, Russia's prime minister, Vladimir Putin, yesterday insisted that the economy was still robust. The country would survive the global financial turmoil - which he blamed on the US - he told delegates from his United Russia party.

But the Kremlin is aware that any loss of confidence in the Russian economy could lead to a loss of confidence in Putin and his ally Dmitry Medvedev, who took over from Putin as president in May.

Putin said his administration would do everything it could to prevent a recurrence of the last oil-related crash in 1998, which saw the savings of many ordinary Russians wiped out. But the plummeting oil price leaves him little room for manoeuvre. Experts suggest Russia's economy is facing profound difficulties, despite two huge stabilisation funds accumulated during the booming oil years.

The fall in oil prices from $147 this July has blown a hole in the government's budget calculations. It is now facing a $150bn shortfall in its spending plans and will have to slash expenditure in 2009. Putin sought to assure hard-up Russians that their social benefits would not be affected. "We will do everything in our power ... so that the collapses of the past years should never be repeated," he said.

The oil slump, however, exacerbates Russia's already severe problems. Since May Russian markets have lost 70% of their value. Russia's central bank has spent $57.5bn trying to prop up the ailing currency. "If the trend continues, with the government supporting the rouble, oil prices falling and a slowing economy, we are going to have a major crisis," said Chris Weafer, of the Moscow brokerage Uralsib.
Luke Harding in Moscow

Iran

Iran is the second largest Opec oil producer and already feeling the pain of declining prices more than any other in the Middle East. Its "rainy day" oil stabilisation fund, used to release profits when revenues decline, is reportedly badly depleted as a result of mismanagement by Mahmoud Ahmadinejad's government. The precise figure is a state secret, but a member of parliament revealed recently it was $7bn - just enough to cover one year of imported petrol.

Ahmadinejad has seen two central bank governors resign and faces daily criticism of his policies. A strike by the powerful "bazaari" class over a new VAT tax - which would have aggravated inflation already at nearly 30% - was seen as a warning. Iran is especially vulnerable because 80% of its revenue comes from oil. The IMF calculated recently that for Iran to balance its budget, the price of crude oil must not fall below $95 a barrel. With prices now below $50 the shortfall could be staggering.

The effect of declining oil prices will be felt both domestically and internationally. Ahmadinejad is expected to stand for a second presidential term next June but the lack of cash will restrict his plans to replace subsidies with direct cash payments - widely seen as a vote-buying tactic. US and UN sanctions imposed over the nuclear issue are already limiting Iran's ability to issue letters of credit and thus increasing its cost of trade.

Saudi Arabia has been happy to use high Opec production levels and low prices to contain Tehran's plans for regional hegemony. US experts and lobbyists now talk openly of exploiting the drop in oil prices to make the sanctions more effective.
Ian Black, Middle East editor

Saudi Arabia

Saudi Arabia, the world's leading oil producer and exporter, is expected to cut back on current spending and also adjust ambitious long-term development plans in the light of the slump in prices.

But cautious fiscal policies will place the kingdom in a relatively strong position, with the current budget based on a price of around $45-50 a barrel. Expansion next year will require around $55-62.

The worry must be that in a country with no elections, parliament, political parties or taxes, the combination of slowing development projects and a widening gap between the wealthy elite and ordinary people could be destabilising.

Publicly, the message from the top has been that there is no need to panic, even as falling prices of crude oil and the global financial crisis were becoming inextricably linked and starting to wreak havoc in the Gulf economies.

By mid-November, the stock exchanges of Dubai, Saudi Arabia and Kuwait had declined by 62.5%, 50.4% and 29.5% respectively. Kuwait, which sits on 9% of world oil reserves, is expected to see its first budget deficit in 10 years if prices continue to fall. That will mean a long-term incentive to diversify away from oil.

In Kuwait, Qatar, and the United Arab Emirates, government-run investment funds have also suffered from heavy exposure to US and European stocks. But the UAE's Abu Dhabi Investment Authority has assets of $500bn to $1tn.

Dubai, the glitziest part of the UAE, which has seen an oil-fuelled boom in property but has little oil of its own, is starting to see a slowdown. But some welcome that as a way of reducing the number of foreign expatriates and re-establishing a disappearing sense of national identity.
Ian Black, Middle East editor

Venezuela

Hugo Chávez has reduced Venezuela's support for foreign allies and is poised to make deeper cuts at home and abroad as plunging oil revenues hit his socialist revolution. The government has warned of austerity measures after years of high spending on social programmes, nationalisations, arms and diplomacy. South America's energy giant relies on oil for half its exports and 95% of government revenue, leaving the president's ambitions vulnerable to a crunch.

"Oil revenues are the weapons he has been using to fight this war. He is going to have to make big changes," said Pietro Pitts, of Latin Petroleum magazine. "He will have to cut spending, or devalue the bolivar, or both."

Chávez recently said Venezuela would ride out any financial storm and that oil prices of $80 or $90 a barrel would be sufficient. This now looks optimistic. With next year's budget in tatters, and foreign investment slowing, the government made cuts even before the latest price fall. Last month it postponed construction of a $4bn refinery in Nicaragua, a key ally, and announced tougher terms for subsidising oil exports to some Caribbean countries.

The state oil company slashed spending on the social programmes which have underpinned Chávez's popularity. Aid to Bolivia and Ecuador, and subsidised oil to Cuba, may be hit next. The finance minister, Alí Rodríguez, said the 2009 budget "will have significant restrictions" compared with this year's $63.9bn and officials would have to cut back on luxuries.

Some analysts think Venezuela can weather the crisis with the help of rumoured $40bn reserves. But Venezuela is racked by 36% inflation, and previous governments crashed when oil crashed.
Rory Carroll in Caracas

Posted by Britannia Radio at 21:01