You can count on two things in the new year: oil prices will occasionally rise—as they have today. And one million barrels per day of new supply will join the already gushing global surplus, guaranteeing that prices also will dive, as they did last week and generally have been doing since June.
Today’s spike in prices suggests traders are looking for pretexts to bid the market back up if only as a way to sell again on the way back down, as increased production in the US, Kurdistan, and Mexico contribute to the deluge of new supply expected in the coming year.
Given this context, you can be assured that in 2015, oil will continue to drive a list of winners and losers on a global scale. Here are a few of them.
Consumers the world over will do well
US gasoline prices have dropped for more than 90 straight days. They now average $2.28 a gallon, which is remarkable considering that just a few months ago, some of us were routinely paying $4 and sometimes close to $5. Diesel prices are down in Europe, too, but not nearly as much as in the US because of taxes.
Not so coincidentally, the US economy surged by 5% last quarter, and does not appear to be slowing down. South Korea’s economy will grow at least 0.5% faster next year. India’s inflation is down by 3.5 percentage points from 2013. Such is the potency of lower fuel prices, which are churching through consumerist countries—Indonesia, India, Japan, and Turkey among them. When you average the impact over a year, it puts an extra $1.3 trillion in consumers’ pockets versus six months ago.
All of which makes it surprising that many linear-minded economists are sticking with pre-oil-plunge forecasts suggesting little or no economic boon from the fall in prices. Some have even argued that the plummet is possibly a negative dynamic because it may reflect something deeply awry with the global economy. That is twisted reasoning: In all the modern oil price collapses—in the mid-1980s, in the late 1990s and in the late 2000s—economies surged. As perhaps the most basic of the building blocks of economies, oil, when it is priced moderately, is a driver of broadly healthy micro- and macroeconomic growth.
In short, economists: get real.
Fighting armies will benefit, but not all of them
The US military, still fighting in Afghanistan and Iraq, could save $5 billion on its $14.5 billion-a-year fuel bill. Israel, which imports all of its oil, also will pay less. So will the Taliban. ISIL, however, is both a winner and a loser, since it uses much fuel but also produces and sells a lot. When oil was at $78 a barrel, ISIL was selling its supplies for $20 a barrel to the black market. We do not have the current black market price in Raqqa, but you get the picture.
OPEC will be in surprisingly good shape
OPEC is losing money and is said to be moving toward irrelevance, but it is hard to to make that argument stick. The cartel is fighting a war for dominance and controls about one-third of the daily global supply. Looking ahead, it seems likely that when the smoke clears and prices return to $80 a barrel or more, its influence will snap back. For cartel members who use this time of disarray to really clean up their economic systems, the low price bout could be a blessing.
Russia has a tough year ahead
Just how grim is the outlook for Russia? Here’s one data point: Russian banks and companies owe $600 billion to the outside world, and western sanctions prevent most of them from using US or European banks to refinance it. So where will the money come from?
Clearly, Russian president Vladimir Putin needs to contemplate his political tactics anew. For instance, he can stay at loggerheads with the West, but he’ll simultaneously need to encourage his home-grown technology and manufacturing industries to up their game. In short, he’ll have to jettison his fear of loss of control and let go. Does that sound like the Putin we’ve come to know?
South Sudan and Venezuela will suffer, too …
Venezuela, probably the world’s worst-run petro-state, is facing a strong possibility of outright default next year. South Sudan, receiving among the lowest oil prices in the world because of high pipeline transportation rates and low-quality crude, is suffering an economic crisis that will continue into 2015.
… but not China
China seems to be benefitting from just about every angle of the upheaval in oil prices and petro-politics; for one, it’s now buying much more cheap oil from a desperate Russia and much less from Saudi Arabia.
Major oil companies will have to retrench
Renewable energy companies will be losers—who is going to spend the money for an alternative energy system when the incumbent fuel is so cheap? But major oil companies won’t be exactly happy, either. If oil were to average $65 a barrel, ExxonMobil would lose $15 billion next year. BP faces a double-whammy: not only is its income down, it is seriously exposed to Russia as a 20% stakeholder in Rosneft, the state-controlled oil company. Last fiscal year, BP received $690 million in dividends from Rosneft. Next year, the haul may be zero given the stress under which Rosneft is operating.
Rosneft will owe $19.5 billion in debt payments next year and $8 billion in 2016. It’s not clear where, apart from the state itself, Rosneft will get this cash. Not satisfied with that albatross, BP is nevertheless in talks (paywall) with Rosneft to separately buy a share of Taas-Yuriakh, an east Siberian oilfield. Some folks like to pile on the misery.
Saudi Arabia will not have it easy
With a roughly 50% cut in income, or some $150 billion a year, Saudi may only be pretending to be playing it cool. Even though it did not spend all the money it earned from oil exports when prices were high, the Kingdom will not genuinely want such losses to go on for five years, the time period that its outside explainers claim it’s prepared to wait out US shale oil. Those losses would add up to precisely $750 billion, equal to its current foreign reserves.
There is only a remote chance that we’re actually facing five years of such low prices. But it could happen. The Saudi leadership is showing the stress, recently distancing itself from militant strains and local acolytes of the Wahhabis, the fundamentalists it until now had confidently countenanced. Now, the palace is taking no chances.