Plunging crude oil prices are diverting hundreds of billions of dollars away from the treasure chests of oil-exporting nations, putting some of the United States’ adversaries under greater stress.
After two years of falling prices, the effects have reverberated across the globe, fueling economic discontent in Venezuela, changing Russia’s economic and political calculations, and dampening Iranian leaders’ hopes of a financial windfall when sanctions linked to its nuclear program will be lifted next year.
At a time of tension for U.S. international relations, cheap oil has dovetailed with some of the Obama administration’s foreign policy goals: pressuring Russian President Vladimir Putin, undermining the popularity of Venezuelan President Nicolás Maduro and tempering the prospects for Iranian oil revenue. At the same time, it is pouring cash into the hands of consumers, boosting tepid economic recoveries in Europe, Japan and the United States.
“Cheap oil hurts revenues for some of our foes and helps some of our friends. The Europeans, South Koreans and Japanese — they’re all winners,” said Robert McNally, director for energy in President George W. Bush’s National Security Council and now head of the Rapidan Group, a consulting firm. “It’s not good for Russia, that’s for sure, and it’s not good for Iran.”
The reason for the deep drop in oil prices continues to be Saudi Arabia’s refusal to cut its oil exports in order to prop up prices.
Instead, the kingdom is producing crude at close to record levels, helping it hang on to market share and reduce development of high-cost competitors — such as Arctic oil, Canadian oil sands, ultra-deepwater Brazilian offshore fields and U.S. shale oil. The Saudis are also fighting to keep market share as crude output rises in Iraq and Iran, longtime Saudi rivals in the market.
In Iran, cheap oil is forcing the government to ratchet down expectations.
The much-anticipated lifting of sanctions as a result of the deal to limit Iran’s nuclear program is expected to result in an additional half-million barrels a day of oil exports by the middle of 2016.
But at current prices, Iran’s income from those sales will still fall short of revenue earned from constrained oil exports a year ago.
Moreover, low prices are making it difficult for Iran to persuade international oil companies to develop Iran’s long-neglected oil and gas fields, which have been off limits since sanctions were broadened in 2012.
“Should Iran come out of sanctions, they will face a very different market than the one they had left in 2012,” Amos Hochstein, the State Department’s special envoy and coordinator for international energy affairs, said in an interview. “They were forced to recede in a world of over $100 oil, and sanctions will be lifted at $36 oil. They will have to work harder to convince companies to come in and take the risk for supporting their energy infrastructure and their energy production.”
Meanwhile, in Russia, low oil prices have compounded damage done by U.S. and European sanctions that were designed to target Russia’s energy and financial sectors. And when Iran increases output, its grade of crude oil will most likely go to Europe, where it will compete directly with Russia’s Urals oil, McNally said.
During a news conference earlier this month, Putin said Russian leaders had to rerun budget calculations because of low oil prices, having already lowered expectations before.
“All our calculations were based on the oil price of $50 a barrel,” Putin said, half the expectations from the end of 2014. He added: “I believe we will have to make further adjustments.”
This year, the Russian government was forced to tap its reserve fund to balance the federal budget and will undoubtedly do so again.
Even after a drop in the high level of U.S. crude oil inventories boosted prices 4 percent from 11-year lows Wednesday, the price of the U.S. benchmark West Texas Intermediate grade of crude closed at $37.60 a barrel. That was down from an average of $59.29 a barrel in December 2014 and from an average of $97.63 in December 2013, according to the Energy Information Administration.
The low oil prices are also hurting many allies of the United States, including the biggest sources of U.S. imports — Canada, Mexico and Saudi Arabia. Brazil and West Africa’s oil producers are also suffering.
“There’s no way to quantify whether cheap oil is good for us, because the bad guys lose and good guys win,” Hochstein cautioned. “It doesn’t work that way. There are winners and losers all across the board.”
At a conference in Doha in early November, Prince Abdulaziz bin Salman al Saud, Saudi Arabia’s vice minister of petroleum and mineral resources, explained the depth of the global impact.
“Around $200 billion of investments in energy have been canceled this year, with energy companies planning to cut another 3 to 8 percent from their investments next year,” Abdulaziz said. “This is the first time since the mid-1980s that the oil and gas industry will have cut investment in two consecutive years.”
He said the capital spending cuts would defer projects capable of producing nearly 5 million barrels a day, about 5 percent of world consumption. The Standard and Poor’s global oil index is down 25.4 percent over the past year.
Some of the investment cuts are coming in the United States, where consumers have welcomed lower gasoline prices. In North Dakota, home to a major part of the shale oil boom, the drilling rig count slid Wednesday to 65, down from 172 a year earlier, according to the state’s Department of Mineral Resources. According to a September KXNews report, The city of Williston tripled the number of hotel rooms — but nearly half of them were empty.
Many independent drilling companies there have been hit hard by low prices. The major banks, including Wells Fargo, have also set aside additional reserves in case some domestic oil and gas producers need to defer — or default on — loan payments.
Scott Sheffield, chief executive of Pioneer Natural Resources, a large Texas-based exploration and production firm, estimates that the domestic U.S. industry will cut budgets another 20 to 30 percent in 2016.
In an email, he said that there would also be more layoffs on top of 250,000 people laid off already.
“The oil industry is being dismantled,” he said, noting that the loss of workers to other industries would make it “hard for industry to respond quickly when an oil shortage occurs.”
For Saudi Arabia and the Organization of the Petroleum Exporting Countries, a drop in investment is fine in the short term.
Abdulaziz said with satisfaction that non-OPEC supplies would fall next year after three years of growth, most of it fueled by rising U.S. output. However, he too warned that too much reduction in world supplies could cause a snapping back of prices.
The balance of the oil market is not just a supply question. The low prices are also feeding worldwide demand for petroleum products, especially in the United States, where there are modest taxes on gasoline.
U.S. gas consumption is up 3 percent this year, and the average fuel efficiency of new passenger vehicles in November was 25 miles per gallon, below the 25.7 mpg level reached in May 2014, according to the University of Michigan’s Transportation Research Institute.
Low prices are “going to destroy and delay investment in new supplies, slow down efficiency gains, encourage consumption and sow the seeds of the next big boom in prices,” McNally said. “And boom-and-bust oil prices are bad for everybody.”