When most of the world’s oil producers seemed to reach a headline-grabbing production deal before the Asian markets opened for the week, the hope was that a price recovery was on hand. The oil ministry of Nigeria even put a number on the forecasted recovery, saying, “this will enable the rebalancing of the oil markets and the expected rebound of prices by $15 per barrel in the short term.” Now that markets have seen more and digested the contents of this deal, it seems they are unimpressed.
In the world’s financial capitals, oil cartel meetings and deals draw attention to the major oil benchmarks. In oil producing regions in the United States, there is a sinking sense of dread for oil workers and firms alike as jobs evaporate and businesses fall over the cusp into insolvency. This is the harsh nature of the market driven boom and bust of the oil business in the free market. But across the globe, these events are bringing restless nights to autocrats and could destabilize political systems.
Though the price of oil has not been very impressive at any point this year, it has already dropped over 65% from 2020 highs. Economies centered on energy and governments that lack diversified streams of revenue are particularly susceptible to tumult in this situation. In democratic systems, political unrest can lead to transitions via elections, which are normal occurrences. However, in autocracies and in governments that are democracies in name only, economic turmoil from plunging energy revenue can be more disruptive and can lead to political crackdowns and even revolutions.
Now that this weekend’s deal has seemingly failed to solve their oil price problem, several autocratic and nominally democratic political leaders are facing critical decisions. Let’s look at some of these countries. Since transparency is generally lacking, exact and verifiable financial data is often missing. However, in place we can refer to how the CIA describes their reliance on a strong oil market.
Russia is currently the third largest oil producer. The CIA says, “Russia remains a predominantly statist economy,” and, “Russia is heavily dependent on the movement of world commodity prices as reliance on commodity exports makes it vulnerable to boom and bust cycles that follow the volatile swings in global prices.”
Saudi Arabia is the second largest producer of oil. The CIA says, “Saudi Arabia has an oil-based economy,” and, “Riyadh is struggling to reduce unemployment among its own nationals.” Recent filings from Saudi Aramco have claimed that the oil industry still contributes more than 60% of the government’s budget, while the government employs a majority of all working Saudis. In short, despite claims that the economy is diversifying, it is still heavily dependent on oil.
Kuwait’s economy is even more heavily tied to oil. According to the CIA, in recent years, “Petroleum accounts for over half of GDP, 92% of export revenues, and 90% of government income.” The CIA notes significant failures in recent attempts to diversify the Kuwaiti economy.
Azerbaijan is a much smaller producer, but it is also heavily dependent on oil and in that country diversification means little more that natural gas production. The CIA notes, “Oil exports… remain the main economic driver, but efforts to boost Azerbaijan’s gas production are underway.” Furthermore, “Azerbaijan has made limited progress with market-based economic reforms,” and, “Long-term prospects depend on world oil prices.”
When oil prices fell in the second half of 2014, it shocked these countries and others. Oil did not stabilize until the middle of 2016, and it has yet to return to the triple digit prices seen in June 2014 and earlier. But back then several of these autocratic countries had more maneuverability based on larger cash reserves built during years of very high oil prices. Furthermore, five years ago the prices dropped because of over-production, whereas in 2020 they have dropped because a third of the global oil demand disappeared. Five years ago, the oil producers themselves caused the crisis, but this weekend they showed that in 2020 there is little they can do to fix the current crisis.
For a strong-man or an autocrat whose country relies on oil sales, the question must be, “How desperate am I?” What are they willing to do to hold on to power? And for the oil industry and oil traders, the question is will any of those authoritarian calculations mean drastic steps that might prop up prices?
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