Oil producers have been spoofing bumpy vehicles this year, and are seen as the first surprising sign of looming disruption as prices have fallen to the lowest levels in four years.
A price drop will benefit countries looking to cut their fuel bills. However, in oil-producing countries, lower prices can feed economic problems and political unrest as governments cut their spending significantly.
Analysts who had already predicted a decline in oil prices due to softening demand amid rising global production, said the overall climate of tariff trade wars and the uncertainty could deepen the disaster for producers.
“The sudden price and overall volatility are sending a very strong signal that the global economy is rattling this year and leading to a decline in oil demand,” said Gregory Brew, an oil and gas geopolitics expert at Eurasia Group, a New York-based risk analysis organization.
Wealthy producers may be able to ease the blow
Earlier this year, benchmark crude prices remained stable at around $73 per barrel per height, sufficient to maintain budgets for most producers. But some countries, like Saudi Arabia and the United Arab Emirates, have ambitious development plans for the price of at least $90 barrels, analysts say.
Saudi Arabia and the United Arab Emirates have allocated hundreds of billions of dollars to huge projects seeking to diversify their economy from oil. Saudi Arabia is paying for a non-annual budget Vision 2030 development program, but the huge, futuristic urban project Neom relies on oil revenues.
To maintain these plans at low prices, these rich Gulf countries will have to withdraw or borrow money from the huge reserves, analysts said. Saudi Arabia, the United Arab Emirates and Kuwait all have easy access to international credit and can maintain it for many years with citizens who are unlikely to feel its effectiveness, analysts said.
Another story between Iran and Iraq
In Iran, international sanctions have cut oil clients. Although China is in its environment, demand for oil has slowed significantly. And there are small, independent refineries that are vulnerable to secondary sanctions, which the US has imposed on two people in recent months. It is very likely that Iran will need to offer a sudden discount to attract buyers, analysts said.
Iran is negotiating with Washington on the future of its nuclear program. Any contract can provide sanctions relief. But that’s rarely the case this year.
Iran is also facing increased pressure to reduce spending by reducing domestic energy subsidies. When it did that in 2019, anti-government riots broke out and were suppressed by force. “It’s very important to keep energy prices very low because if they don’t, they know that there’s a relatively high risk of uprisings, riots and demonstrations,” said Homayoun Falakshahi, an analyst at research firm KPLER.
Neighboring Iraq relies on oil for an estimated 80% of its government revenue, so the fall in prices will force it to take steps to not pay public sector pay for chunks of time. The state is not under sanctions, so that’s also costly, but it can be borrowed internationally to cover the bill.
Vulnerability in Libya, Nigeria and Venezuela
The two Libyan governments each own different half of the country. One receives oil payments from overseas, and the other operates a bank that manages the oil fields. Analysts say the price drop could raise tensions between the two as it jokingly hits revenue.
Nigeria’s economy remains severely vulnerable to declining oil revenues and relies on supporting energy price subsidies. A nearly finished, newly completed private refinery can alleviate fuel supply issues that can cause political unrest.
Apart from Iran, the other global producer most exposed to price volatility is Venezuela, whose economy collapsed during the 2014-15 price decline. When public sector businesses and bloated government salaries collapsed, as they were so dependent on high oil prices, analysts said that subsequent economic issues sparked widespread protests that the government overthrew violently overthrown.
Support from Russia and Iran helped Panben, a potential radioactive fallout, this time, as it is unlikely that Venezuela will face a fuel shortage of the kind that has driven widespread blackouts and public outrage due to increased production and refinement capabilities.
And there’s Russia
In Russia, about a third of the federal budget assumes about $70 per barrel for oil, coming from energy revenue. Due to sanctions, Russia will discount oil at around $10 per barrel. The $60 price coincides with the price cap imposed in 2022 after invading Ukraine.
The robust oil and gas sales to China and India in particular helped to isolate ordinary Russians from many economic fallouts from the war. But the Kremlin has already dined into reserve funds, and even lower prices will put the war and everything else on the challenge.
Moscow probably still has enough cash reserves to get confused, but in the short term it could be painful, analysts said.
