Trouble Trickles From Steep Drop in Oil Prices

A worker monitors an automated manifold as it directs oil in Cushing, Okla.
A worker monitors an automated manifold as it directs oil in Cushing, Okla. (By Shane Bevel -- Bloomberg News)
By Steven Mufson
Washington Post Staff Writer
Friday, February 20, 2009

The precipitous fall in the price of oil in recent months, while good for consumers, has contributed to the confusion in the global economy, wreaking havoc with the budgets and economies of oil-exporting nations and putting many expensive energy projects on hold.

In Canada, where President Obama visited yesterday, the drop in oil prices has done more to slow development of controversial oil sands projects than the protests of environmental groups, who note that the energy-intensive process of mining those sands contributes to global warming. Executives in the past have said oil must cost $60 to $90 a barrel to justify the investment.

In Kuwait this month, the government unveiled a $5 billion rescue plan for banks, pledging to guarantee 50 percent of new loans to ease a credit crunch in the oil-rich nation. The country's biggest investment bank, Global Investment House, said last month it had defaulted on most of its debt, while an Islamic rival said in December it needed up to $1 billion in loans.

Russia, which last year was flush with oil and gas revenue, bolstered its deteriorating financial position this week by promising to supply China with 300,000 barrels a day of Siberian oil over the next 20 years in return for $25 billion in loans to Russian state-owned oil and pipeline firms with large debt payments coming due this year.

In Venezuela, Hugo Chávez won a referendum that would allow him to extend his presidency. But Chávez, who became president during widespread discontent in 1998 when oil prices were extremely low, must deal with an oil slump of his own. Oil accounts for 95 percent of exports and about half of fiscal revenue, analysts say.

"The last five years saw the rebirth of the use of oil as a critical instrument of foreign policy by key resource countries, Iran, Russia and Venezuela in particular," said Ed Morse, managing director and chief economist of LCM Research. "With oil and natural gas prices having collapsed, the power of their weapons has been waning rapidly, turning creditor into debtor nations and depriving them of the revenue required to fulfill their international goals."

Just one year ago, the price of oil finished trading at more than $100 a barrel for the first time, fueling speculation about a new era of oil prices. Yesterday, oil finished trading in New York at $39.15 a barrel, and that after surging 13 percent for the day.

The overwhelming cause of the collapse in oil prices has been the faltering world economy, which has fueled the drop in consumption.

Oil use in China, which most forecasters a year ago assumed would be the engine for increasing global demand, has screeched to a halt. Paul Ting, an independent oil analyst, says preliminary estimates suggest that petroleum consumption in China fell more than 6 percent in January compared with the month in 2008. Crude oil imports hit a 14-month low, he said.

In the United States, where passenger vehicles use about one of nine barrels produced worldwide, strapped motorists in December traveled less than they did a year ago, even though gasoline prices are more than $1 a gallon cheaper.

The Federal Highway Administration said it was the 14th consecutive month in which American motorists drove fewer miles. In 2008, U.S. motorists drove 3.6 percent less, or 107.9 billion fewer miles, than in 2007, the FHA said. Total miles driven, which normally rise every year with the population and number of cars on the road, fell slightly below 2004 levels.

The Organization of the Petroleum Exporting Countries has cut production three times since September. It plans to meet again March 15, and senior officials of the cartel said additional cuts in output are likely. But OPEC has been having trouble keeping up with shrinking global demand.

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