Home' Trinidad and Tobago Guardian : October 30th 2014 Contents BG10 ENERGY
BUSINESS GUARDIAN www.guardian.co.tt OCTOBER 2014 • WEEK FIVE
The collapse of the Soviet
Union in 1991 had many
causes. None was as basic
as the fall in the inflation-
adjusted price of oil, its main
export, by two-thirds
between 1980 and 1986. By the same token,
the 14-year rule of President Vladimir Putin
of Russia, heir to what remained, has been
bolstered by a threefold rise in the oil price.
Now the oil price is falling again. Since
June it has dropped from about US$115 for
a barrel of Brent crude to US$85 or so, a
reduction of roughly a quarter. If prices
settle at today s level, the bill for oil con-
sumers will be about US$1 trillion a year
That would be a shot in the arm for a
stagnating world economy. It would also
have big political consequences. For some
governments it would be a rare opportunity,
and for others a threat.
Predicting oil prices is a mug s game, as
anyone who s tried it knows. The fall of the
past three months is partly the result of
unexpected, and maybe short-lived, devel-
opments. Who would have guessed that
chaotic, war-torn Libya would somehow be
pumping 40 per cent more oil at the end
of September than it had only a month ear-
lier? Saudi Arabia s decision to boost output
to protect its market share, hurt American
shale producers and override new develop-
ments in the Arctic also was a surprise. Per-
haps the fall was exaggerated by hedge-
fund investors dumping oil that they had
been holding in the false expectation of
Geopolitical shocks can surprise on the
upside as well as the downside. Saudi Arabia
may well decide to resume its self-appointed
post as swing producer and cut output to
push up prices once more. With war stalking
Iraq, Libya still fragile and Nigeria prey to
insurgency, supply is vulnerable to chaotic
Many of the causes of lower prices have
staying power, however. The economic
malaise weighing down on demand is not
about to lift, despite the tonic of cheaper
oil. Conservation, spurred by high prices
and green regulation, is more like a ratchet
than a piece of elastic. The average new car
consumes 25 per cent less gasoline per mile
than 10 years ago. Some observers think
that the rich world has reached "peak car,"
and that driving is in long-term decline.
Even if they are wrong, and lower prices
encourage people to drive more, energy-
saving ideas will not suddenly be uninvent-
ed.Much of the extra supply is baked in.
Most oil investment takes years of planning
and, after a certain point, cannot easily be
turned off. The fracking revolution is also
likely to rage on. Since the start of 2010,
the United States, the main winner, has
increased its output by more than three
million barrels per day to 8.5 million.
Shale oil is relatively expensive, because
it comes from many small, short-lived wells.
Analysts claim that a third of wells lose
money below US$80 a barrel, so shale-oil
production will adjust, helping put a floor
under the price. That floor will sag, though.
Break-even points are falling. In past price
squeezes oilmen confounded the experts by
finding unimagined savings. This time will
be no different.
For governments in consuming countries,
the price fall offers some budgetary breathing
room. Fuel subsidies hog scandalous
amounts of money in many developing
countries; 20 per cent of public spending
in Indonesia and 14 per cent in India, includ-
ing fertiliser and food.
Lower prices give governments the oppor-
tunity to spend the money more productively
or to return it to the taxpayers. This week
India led the way by announcing an end to
diesel-fuel subsidies. Others should follow
Prime Minister Narendra Modi s lead.
For those governments that have used
the windfall revenues from higher prices to
run aggressive foreign policies, by contrast,
things could get uncomfortable. The most
vulnerable are Iran, Russia and Venezuela.
The first to crack could be Venezuela,
home to the anti-American "Bolivarian rev-
olution," which the late President Hugo
Chávez tried to export around his region.
Venezuela s budget is based on oil at US$120
a barrel. Even before the price fall, the coun-
try was struggling to pay its debts. Foreign-
exchange reserves are dwindling, inflation
is rampant and Venezuelans are enduring
shortages of everyday goods such as flour
and toilet paper.
Iran also is in a tricky position. It needs
oil at about US$140 a barrel to balance a
profligate budget padded with the extrav-
agant spending schemes of former President
Mahmoud Ahmedinejad. Sanctions designed
to curb its nuclear programme make it espe-
cially vulnerable. Some Iranians claim that
Sunni Saudi Arabia is conspiring with the
United States to use the oil price to put
pressure on its Shia rival. Whatever the
motivation, the falling price certainly is hav-
ing that effect.
Compared with these two, Russia can
bide its time. A falling currency means that
the ruble value of oil sales has dropped less
than its dollar value, cushioning tax revenues
and limiting the budget deficit.
The Kremlin can draw on money it has
saved in reserve funds, though these are
smaller than they were a few years ago and
it already had budgeted to run them down.
Russia probably can cope with today s prices
for 18 months to two years, but the money
eventually will run out.
Putin s military modernisation, which has
absorbed 20 per cent of public spending,
now looks like an extravagance. Sanctions
are stifling the economy and making it hard
to borrow. Poorer Russians will be less able
to afford imported food and consumer goods.
If the oil price stays where it is, it will foster
Democrats and liberals should welcome
the curb that the oil price imposes on coun-
tries such as Iran, Russia and Venezuela,
but there also is an increased risk of insta-
bility. Iran s relatively outward-looking Pres-
ident Hassan Rouhani was elected to improve
If the economy sinks, it could strengthen
the hand of his hardline opponents. Similarly
a default in Venezuela could have dire con-
sequences not only for Venezuelans but also
for the Caribbean countries that have come
to depend on Bolivarian aid. And Putin,
deprived of economic legitimacy, could well
plunge deeper into the xenophobic nation-
alism that has fueled his campaign in
Cheaper oil is welcome, but it is not trou-
ble-free. The Economist
China is finding oil supplies 14,000 miles away, aided
by the global rout in prices that s left producers vying for
PetroChina Company said it bought Colombian crude
for a northern refinery for the first time because it was
good value. The transaction underscores how the world s
second-biggest oil consumer is benefiting as producers
from the Middle East to Latin America vie for customers
Brent oil futures tumbled to the lowest level since 2010
as the highest US output in almost 30 years cuts its con-
sumption of foreign crude. OPEC s biggest producers are
reducing prices to defend their market share. China con-
sumed the second-biggest amount of crude on record in
September and imported the largest volume ever for that
time of year, customs data show.
"China will just look to get the cheapest crude possible
from whatever source it can," Virendra Chauhan, a Lon-
don-based analyst at Energy Aspects Ltd, said by phone
October 21. "I expect a lot more volumes flowing to China
The country s crude imports rose 7.8 per cent to 27.6
million tons, or 6.74 million barrels a day, in September
from last year, the data show. The number of supertankers
sailing toward China s ports surged to a nine-month high
last week, according to IHS Fairplay vessel-tracking signals
compiled by Bloomberg as of October 17.
China s purchases of Colombian crude totalled 7.8
million metric tons from January to September, more
than twice the amount a year earlier, customs data showed
October 22. Shipments from Saudi Arabia, its biggest
supplier, shrank about 11 per cent to 36.6 million tons,
according to the data.
Colombian oil output increased about ten per cent
since 2011 and the nation is seeking sales in Asia to com-
pensate for the weakening in short-haul exports as US
production increases, said Bernard Leung, a Bloomberg
oil strategist in Singapore.
China s supplies from Colombia cost an average of
US$94.56 a barrel last month while Saudi shipments were
purchased for US$102.30, according to data compiled by
Saudi Arabia, the largest oil exporter, earlier this month
reduced the price of its Arab Light crude for Asia to the
lowest level since December 2008, sparking speculation
that a price war was set to start among members of the
Organisation of Petroleum Exporting Countries. OPEC
members Kuwait, Iran and Iraq also cut official selling
prices this month.
Refiners including PetroChina processed 42.02 million
tons of crude in September, or about 10.3 million barrels
a day, according to data from the National Bureau of Sta-
tistics in Beijing. That s up 9.1 per cent from a year earlier
and the most since a record 10.5 million in February.
China s refining capacity will rise 20 per cent to 800
million tons a year by 2020, from about 668 million at
the end of this year, China National Petroleum Corp s
Economic and Technology Research Institute said in a
report in January.
"Chinese buyers are jumping on the opportunity to
buy crude on the cheap at the moment," David Wech,
the managing director of JBC Energy GmbH in Vienna,
said in an October 17 e-mail. "Refining margins have
surely benefited from weak outright crude prices."
PetroChina s Liaohe refinery processed about 30,000
tonnes of Colombian crude as of October 20, its parent
company, China National Petroleum, said on its Web site
October 21. The plant ran 792,000 tonnes of imported
oil last year, or about 15 per cent of its total throughput.
Suppliers included Russia, Brazil and Venezuela. Mao
Zefeng, PetroChina s Beijing-based spokesman, didn t
answer five calls to his mobile phone seeking comment.
Cheaper oil: Many
winners, a few bad losers
China scores cheap oil
14,000 miles away as
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