The Big Story about Low Oil Prices
Yippee! Gas costs less. But, despite all the headline news about other geopolitical issues and crises, this is truly one to follow. And it's murky.
The whiz-bang graph below is nearly unreadable. Hidden within, are weighty implications for world stability. (The Financial Times article, linked below the graph, is worth reading, even though all the experts mostly waffle in their comments.)
http://www.ft.com/intl/cms/s/2/3f5e4914-8490-11e4-ba4f-00144feabdc0.html
Basically, the countries with a red dot are in deep doodoo.
Who cares? Well, for starters, Russia is a belligerent, nuclear-armed nation which is presently feeling put-upon by the West. So, I'll use Russia as an example, to pick apart the data-rich graph. Where my labels state "oil," that includes all petroleum (oil, natural gas, petrochemicals).
The most shocking item is the break-even price per barrel. Today, for every barrel of oil exported by Russia, it costs them $105, but the world price is only $60. The larger the big red dot, the greater the impact of low prices. If oil exports are an insignificant percent of the national income, then that's not a major problem. For Russia, we see that oil exports are one half the total national income. Oops! But Russia's economy does other things (e.g. manufacturing for local consumption), so it only comes to 13.5% of the national economic activity. Russians support Putin, because times are good--well they were. Now the ruble has collapsed in value, interest rates are approaching 20%, and things are looking iffy.
By contrast, Venezuela has all of its eggs in one basket. Furthermore, nearly all of Venezuela's oil income is spent on social subsidies that encourage their people to support their government. Bad news for Venezuela. They spend all their oil income.
Saudi Arabia, which also looks grim on the graph, has for decades saved over half of their oil income, so they have tons of wiggle room. They can wait-out years of low oil prices.
I'll leave you to ponder the situations in Iran, Norway, Nigeria and Mexico.
The countries with a yellow dot are the winners, when oil prices are low.
Winners at the macro level obscure losers within their borders.
While the US economy as a whole benefits from low oil prices, many small oil producers can no longer make money. If the prices continue to fall, they will go out of business.
Take-home lesson:
Bob
Yippee! Gas costs less. But, despite all the headline news about other geopolitical issues and crises, this is truly one to follow. And it's murky.
The whiz-bang graph below is nearly unreadable. Hidden within, are weighty implications for world stability. (The Financial Times article, linked below the graph, is worth reading, even though all the experts mostly waffle in their comments.)
http://www.ft.com/intl/cms/s/2/3f5e4914-8490-11e4-ba4f-00144feabdc0.html
Basically, the countries with a red dot are in deep doodoo.
Who cares? Well, for starters, Russia is a belligerent, nuclear-armed nation which is presently feeling put-upon by the West. So, I'll use Russia as an example, to pick apart the data-rich graph. Where my labels state "oil," that includes all petroleum (oil, natural gas, petrochemicals).
The most shocking item is the break-even price per barrel. Today, for every barrel of oil exported by Russia, it costs them $105, but the world price is only $60. The larger the big red dot, the greater the impact of low prices. If oil exports are an insignificant percent of the national income, then that's not a major problem. For Russia, we see that oil exports are one half the total national income. Oops! But Russia's economy does other things (e.g. manufacturing for local consumption), so it only comes to 13.5% of the national economic activity. Russians support Putin, because times are good--well they were. Now the ruble has collapsed in value, interest rates are approaching 20%, and things are looking iffy.
By contrast, Venezuela has all of its eggs in one basket. Furthermore, nearly all of Venezuela's oil income is spent on social subsidies that encourage their people to support their government. Bad news for Venezuela. They spend all their oil income.
Saudi Arabia, which also looks grim on the graph, has for decades saved over half of their oil income, so they have tons of wiggle room. They can wait-out years of low oil prices.
I'll leave you to ponder the situations in Iran, Norway, Nigeria and Mexico.
The countries with a yellow dot are the winners, when oil prices are low.
Winners at the macro level obscure losers within their borders.
While the US economy as a whole benefits from low oil prices, many small oil producers can no longer make money. If the prices continue to fall, they will go out of business.
Take-home lesson:
- Saudi Arabia will do fine
- Venezuela may plunge into political chaos
- Russia may lash out
- A highly specialized economy carries the potential for both high profits and catastrophic loss
Bob
