Emerging Leaders Competition 2015, Project Firefly.
In Asia who benefits and loses the most from falling oil prices?
There will come a time when oil will no longer be needed, a relic of the past. There may come a time when we will take children to the museum to see a barrel of oil as a reminder a human stupidity and self destruction impulses. But now is the time to see a barrel below 50$. Now is a time to see oil empires loose their superb and people grumble or smile. Now is a time to learn about oil more than ever, on the world economy and Asiatic countries bounds to the largest traded commodity. From villages of the Ural Mountains to fishermen villages on the Indonesian archipelago every one is affected by the fluctuations of the oil prices. I would not be writing on oil prices as it price suffered a small decrease. But the price fell sharply and regularly. From a pic above 115$ at the end of June 2014, the barrel has for several months now plunged to price territory unseen since the great recession. The surprise comes from one fact. The world is not experiencing a major and worldwide-shared new slowdown; the problem is on the supply side. The American economy is strong, adds jobs and displays solid growth figures. The only continent with major problems is Europe, a continent that slowly turns its back to fossil resources. But European and American consumers will benefit from the new prices. On the other hand Asia offers a contrasted reaction to the slump of oil prices and the question is to know who benefits the most and who losses the most with low oil prices.
For countries that have been blessed with huge oil reserves most had to let dictatorship take control. From Gulf monarchies to Russia, neither can boast sparkling democratic societies. They have the most to loose. “They” are the leaders, monarchs, and oligarchs but also peoples. None of these nations could have escaped poverty and underdevelopment (from a western point of view) so quickly without the help of the black gold. The leaders were pouring money to quietly extinguish the flames of revolts through social programs, but lacked the political will to diversify their economies. With the slump of prices, economic development is impaired and so is a political stability dearly acquired.
The biggest looser is Russia. Russia's economy is highly dependent on its hydrocarbons, and oil and gas revenues accounted for more than 50% of the federal budget revenues in 2014. With strong prices in oil Russia acquired some of its past power. Foreign and indoor policies are elaborated around the energy sector. The lack of diversity in the Russian economy could be offset as long as prices in oil were strong and therefore could buy development and influence. The low prices may lead Russia to soften its position on the Ukrainian conflict and the sanctions imposed from the West. The loss of influence in the world’s affairs will be the first consequence of cheap oil. Secondly, without strong prices in oil, outside investors have no incentives to invest in one of the worst place to do business. No other sectors offer the returns that the energy could display. The capitals will flee the country, helped greatly by the economic sanctions. Chances that an uprising dislodge Mr. Putin are inexistent (for now) but; he is no more than a wounded king on a field of ruins, leader of an angry and hungry nation.
The gulf countries are also big losers, especially Saudi Arabia. In the same boat with Russia on the dependency on high priced oil, the kingdom has money to lose but little else. The reserves in currency obtained during the good years will probably soften the landing. The monarchy can wait some years until it dries out. In the meantime, with a very low break-even price Saudi Arabia try to starve other oil producers with high cost in production. A loss for a gain, so long as it does not last forever. And concerning the small countries surrounding Saudi Arabia, they may dispose of some reserve but may suffer from a political instability were the social programs abolished.
Iran is affected by the current price on a political level rather than economically. The sanctions that fell on the country at the end on 2011 and 2012 cut the country from its main oil and gas buyers leading the country to recession. Those were the consequences of an apparent willingness to pursue nuclear power. Cheap oil may accelerate the process of negotiation between the group of six (nuclear powers + Germany). The Ayatollahs may want to release some of the pressure that cheap oil put on the economy and the books. Longer the oil stay low, the likelier is the Islamic Republic to delay its nuclear ambitions. A plan that would ensure that Saudi Arabia continue to have the upper hand on the OPEC’s future and influence over the region.
Syria and Irak offers an improbable situation. They are both loser and winner. In the midst of war, ISIS, the Islamic group currently battling against an international coalition to establish a caliphate over the two countries, suffers from low prices. Money is always the big issue of war and with a barrel of oil below 50$ paying for a war efforts might not be so easy. This is good news for the international coalition and the stability of the region. However Irak depends on oil for its budget and low prices do not help a government barely standing and a population torn apart from everywhere. With low prices, instability is the preeminent problem. As for Syria, Rebels, ISIS and the Al Assad clan may all suffer form low prices, but it is surely not their first concern.
Battered oil prices create a window of opportunity for oil importing countries. These nations must use this window to usher in fiscal and structural reforms, which can boost long-run growth and development.
The biggest winner is China. It is the largest energy consumer and producer in the world. China's national oil companies have rapidly expanded their purchases of international oil and gas assets since 2008 in order to secure more oil and gas supplies, make long-term commercial investments, and gain technical expertise in more challenging oil and natural gas plays. The low prices may help to boost a slowing growth on the short run, in particular it benefits the oil-hungry air, road and sea transport industries. However in the long run, were the low prices to continue, the clean energy sector, into which so much was invested, in China would suffer. The question is: Will the Chinese leaders continue the current investment in the clean energies or take the easy road of cheap oil? The health of the planet and the development of China depend on this choice, for the short and long run.
In 2011 the tsunami caused the interruption of nuclear energy in Japan and since then alternatives had to be chosen. Importing oil. Decreasing oil prices will reduce the burden on the economy and improve the trade deficit that had worsened for some time. The current situation may bring some fresh air on a long time stagnant economy. As for South Korea, the economy will probably welcome cheap oil, helping the export industry confirming the positive trade balance and help the consumers.
Three interesting countries are India, Indonesia and Malaysia. The first two elected in 2014 new leaders, and both vowed to cut the subsidies on oil. Falling oil prices make their jobs much easier to accomplish. The population will not suffer as much as it should have and the spared money will be used on more productive programs, these bold moves will in the long-term benefit the overall population. The rest of the South East Asia will also benefit their industries and consumption. This is good news for the development of this two poor country and the rest of the world.
As a conclusion it is wise to add that the current situation on the oil market affect Asian countries differently. Even though oil represents the globalized world the reactions offered by the nation’s economies and political systems must be analysed thoroughly and separately for better understanding on the falling oil prices consequences.