Deflated by Oil Price's Dive

By Steven Mufson and Philip P. Pan
Washington Post Staff Writers
Friday, October 24, 2008

The world's petro-powers -- the oil-exporting nations armed with vast, high-priced crude reserves -- are looking a little less imposing now that prices are tumbling.

Instead of flexing their financial muscle abroad, cash-rich oil exporters have been forced to bolster institutions at home, spending billions of dollars to prop up banks, currencies, stock markets and other aspects of their economies.

Around the world, oil price shock has given way to aftershock. Yesterday, crude oil prices briefly touched a 16-month low before closing at $67.84 a barrel, up $1.09 but less than half their July peak as traders worried that a global economic slowdown will shrink demand for petroleum products.

For oil exporters, the price decline has compounded the global financial crisis. Kazakhstan has raided its once sacrosanct national oil fund to bolster banks that borrowed from abroad; Iran, which drained much of its rainy day fund to pump up its economy even before oil prices fell, is now having trouble financing oil and gas development projects; Venezuela might run a deficit to pay for massive social spending; Mexico has spent billions of dollars defending the peso; and Russia, Saudi Arabia and the United Arab Emirates have dipped into their cash hoards to rescue domestic financial institutions.

The sudden change in fortune will dominate the agenda at today's emergency meeting of the Organization of the Petroleum Exporting Countries; the 13-member cartel that is expected to slash output by 1 million to 2 million barrels a day to stop the slide in oil prices.

"The meeting this week shows they're concerned and they need to micromanage [output] some more," said Fareed Mohamedi, head of country strategies at PFC Energy, a Washington consulting firm.

To members of OPEC, this moment recalls the Asian financial crisis in 1997, when the oil cartel increased production to ease international economic pressures only to see oil prices collapse. Now, in a new economic crisis, OPEC members will only be debating how big a cutback is needed.

There is, however, no need to pass the tin cup for oil exporting countries, analysts note. The six members of the Gulf Cooperation Council have $2 trillion of financial reserves. Russia's and Kazakhstan's financial reserves are big enough, for now, to stave off the kind of crisis that shook both nations in 1998. Even populous and impoverished Nigeria has paid off foreign debts and built up reserves.

Moreover, the average oil price has still been higher than in the previous year, according to OPEC. Kuwait's finance ministry said last week that it had collected $54 billion in revenue in the first half of the year, more than it had anticipated for the entire year.

The spike in prices has also happened so quickly that oil exporting nations haven't had time to raise the price assumptions used for spending plans. The Saudi 2008 budget assumes prices between $40 and $45 a barrel.

"Many of these countries were much more prudent than they were in past," said Robin West, chairman of PFC Energy. As a result, he said, most oil exporters "are still in pretty good cash positions for now."

The biggest exceptions are Iran and Venezuela, two of the Bush administration's main adversaries.

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