A sharp decline in world oil prices will be a mixed blessing for the world's bankers who have extended hundreds of billions of dollars of loans to developing countries and troubled domestic industries.
Bankers with loans to Mexico, Nigeria, Indonesia and Venezuela will shudder. Not only are those countries major debtors, but also they rely heavily on oil revenues to pay off their loans and underwrite the goods they import for their large populations.
On the other hand, bankers with loans to Brazil, India, South Korea and Taiwan will sigh with relief. These countries are major importers of oil, and not only will a big decline in oil prices reduce their import bills sharply, but it also should help to stimulate their economies--as well as those in the rest of the world.
Most bankers will both sigh and shudder, because the banks that have big Brazilian loans on their books usually also are big lenders to Mexico.
Bankers who have specialized in making energy loans to domestic companies already are feeling the pinch. Drilling rigs are idled. Oil prices have declined sharply. Penn Square National Bank of Oklahoma, which failed last July, was terribly managed and went on a lending spree when it should have been getting its house in order. But for all that, the bank might have survived if the oil market had not tumbled.
"I'd hate to be a bank in Texas or Oklahoma, or Canada, for that matter," said a major U.S. bank official. Energy is perhaps Canada's most important industry, and its five big banks have huge loans to the troubled Canadian oil and gas industry.
At the same time, most economists agree that lower oil prices should help to contain inflation, lower interest rates and help revive thousands of companies--from giants such as International Harvester Co. to tiny construction firms in the suburbs--that have had trouble paying off their loans.
On a world scale, more people will be helped by a decline in oil prices than will be hurt by it, said Lawrence Fuller, vice president and chief banking analyst at the brokerage firm Drexel Burnham Lambert Inc.
But the results could be serious for some of the big oil-exporting nations that are also big borrowers, and for their bankers.
"The conventional wisdom is that a $3-a-barrel decline is a non-event. But a $10-a-barrel decline will cause severe problems," said W. Denis Wright, senior vice president and head of Western Hemisphere lending for Chicago's giant Continental Illinois National Bank and Trust Co.
Mexico already has been hurt sharply by declining prices for commodities and lower demand for its oil because of the worldwide recession. The country is not paying back its debts--although it is paying the interest due--and is about to sign a major rescue agreement with the world's banks and the International Monetary Fund.
That agreement is predicated on an Organization of Petroleum Exporting Countries base price of about $34 a barrel. For each dollar-a-barrel drop in oil prices, Mexico's balance of payments deteriorates by about $500 million, Wright said. A $6 or $7 drop would boost Mexico's borrowing needs dramatically.
A new study by Chase Manhattan Bank said that a collapse in oil prices--which the bank's economists say seems the most likely scenario now--could put the world's major oil producers in a tight financial bind for the rest of the decade.
But Drexel Burnham's Fuller said the Chase study overstates the problem. Even Mexico, which is heavily dependent on oil revenues, will not find a decline in oil prices totally harmful: It will help the non-oil sectors of its economy--industry and agriculture. Sales of other commodities that Mexico exports will be helped if the rest of the world economy revives.
Countries such as Saudi Arabia and Kuwait are major oil exporters with small populations that may be forced to scale back grandiose schemes, but still will earn sufficient revenues to be solvent even if oil prices decline by $10 a barrel.
A sharp drop in oil prices will be a boon for countries such as Brazil. That country--whose indebtedness to the rest of the world is about $80 billion, roughly the same as Mexico--spends $9.5 billion a year to import oil. It looks like oil prices might decline 25 percent or more, but even a 10 percent drop would reduce Brazil's import bill by $1 billion.
"That would put loans to Brazil in a substantially different perspective," said Fuller.