Who wins and who loses when the price of oil drops?


A man fills a big car in the United States

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A fall in oil prices is normally a reason to celebrate in gas-hungry countries. The average American burns 10 liters of oil or petroleum products a day in normal times.

But for the oil-producing countries – the “global hub” – such a drop in the cost of crude oil can spell disaster and hardship for millions of people.

It is easy to understand why oil is called black gold. When the price was high, oil revenues filled the coffers of the companies and governments of the countries that produced it. This has helped feed people and make public services flourish.

But now having oil can be a curse rather than a blessing.

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The International Energy Agency had previously warned that Ecuador, Nigeria and Iraq could be the most affected, with incomes falling by 50 to 85% – and this assuming oil prices of $ 30 the barrel. Now it’s less than $ 20 a barrel.

All of their economies were already under pressure, all heavily dependent on oil.

Fuel accounts for 98.5% of Iraq’s export earnings (precious stones, precious metals, fruits and nuts make up the bulk of the rest). The agency says the Iraqi government will now face a $ 50 billion spending deficit for the year, even if it had to pay only its officials, which made spending in areas like health care. vulnerable at the worst time.

A country’s spending on oil production also dictates its vulnerability. Saudi Arabia has one of the lowest bills for oil extraction – but its dependence on commodities means it could also face a funding shortfall of more than $ 100 billion. dollars. It is still recovering from the last significant drop in oil prices in 2014. Attempts to push in areas such as tourism have not been enough to close the gap.

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Oil prices need to be around $ 85 a barrel to balance the books on government spending.

Ironically, it was Saudi Arabia that accelerated the volatility of oil prices by threatening to increase production to punish its rival Russia – a country much less vulnerable to fluctuations in the price of crude oil.

President Trump weighed in to pledge support for the US oil and gas industry (in addition to the $ 650 billion in subsidies the fossil fuel sector already receives). While it is storage and distribution problems that have caused such a marked shift in the pricing of West Texas Intermediate, oil production accounts for a much smaller proportion of the US economy than in many other countries. And that makes the United States less vulnerable.

The lower price is, in theory, a bonus for its drivers and factories – and those elsewhere. In general, countries that are net users should get a boost – but most of it is very low-key right now, given movement and production restrictions.

But that will benefit the biggest oil customer, China, which accounts for a fifth of imports and which, according to reports, stores crude oil at the base as it turns on its production lines.

Overall, as the price of oil fell, the risk of a deeper recession for producers increased. However, if it continues, the fall could help recovery in other countries further afield.


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