Herein we speculate over oil addicted countries. Nowadays oil industry is one of the most important components of the world economy, which exert influence on the development and stability of many countries, financial markets, commodity markets, as well as international relations. Oil is a powerful weapon in the hands of exporting countries, which at the same time could backfire on them. From December 2014 to January 2016 collapse in the price of oil shook the oil-dependent economies. In front of everybody, erstwhile powerful oil nations became poorer, their currencies depreciated and human wellbeing reduced. Now we see the recovery of oil prices. However, how long the largest oil exporters will enjoy bullish trend? And which countries are the most dependent on volatility in oil prices? I’m going to consider these issues in this article.
Oil market: it seems that the bullish trend will over
Starting this year, oil prices has shown upward dynamics, which infused hope into market players that prices will reach at least the levels of 2014. However, I don’t share this positive outlook. My negative view on oil prices is based on expectation of the world economic recession, which will lead to a decrease in oil and oil products consumption.
In spite of the optimistic statistics and estimates, there are more and more signs of the looming crisis. The United States continues to wage a war against the world. Trade wars and sanctions affect more and more economies (especially oil economies), as well as strong strengthening of the USD puts downward pressure on the value of world currencies.
Against the backdrop of the tightening of short-term lending conditions, the oil demand may reduce in the mid-term. The depreciation of national currencies coupled with current higher oil prices, also makes fuel more expensive for consumers. Also there is a growth rate reduction in Europe, Japan, India and China in combo with an increase in inventories in the US, that whip up market tension. Also my negative outlook on the oil prices is confirmed by analysts’ consensus.
The most dependent economies
The top 10 oil exporters account for approximately 70% of world total exports. Surely, depending on the diversification of economy the volatility in crude oil prices to different extents affects the stability of each exporter. In this article I’m going to consider 5 of them (Saudi Arabia, Russia, Kuwait, Nigeria, Kazakhstan), which in my view are characterized by internal or external conflicts, emerging economies, centralization of power in the hands of one person or clan, as well as closed political system. In the future, if you are interested, I will consider the remaining top exporters.
Saudi Arabia is the largest exporter of oil in the world. According to the strategy expounded in the National Transformation Program 2020 and Saudi Vision 2030, the government is planning to reduce the country’s dependence on oil. In this strategy pride of place goes to the transformation of the Public Investment Fund (PIF) into $2 trln sovereign welfare fund, which will be funded by sale of state-owned assets, lands, as well as initial public offering (IPO) of the state-owned oil company Saudi Aramco. However, Saudi Aramco’s IPO is constantly postponed, which gives rise to doubt about the reality of public offering. Anyway, time will show.
The government plans to invest 50% of fund amounts to the foreign assets and hopes that investment yield will reduce the country’s dependence on oil. But I’m skeptical about achieving of this targets. In my view the returns on these investments will be lower than even earnings from oil sales at falling prices in 2014-2017. Therefore, I think that the main driver of Saudi Arabia’s economic growth will remain the crude oil export.
In my view, Russian economy is one of the most diversified among the oil exporters concerned in this article. However, against the backdrop of the collapse in the price of oil in 2014-2016, Russian rouble demonstrated fatal depreciation against US dollar. In this regard, the government had to support oil companies and banks using the funds of sovereign wealth fund, so I’m not sure about pensions for the Russian future generations…
Surely, besides volatility in oil prices, Russia has a lot of problems, such as sanctions, capital exports, troubled international relations, outflow of foreign investment, as well as social discontents due to immunity of Putin’s inner circle. By the way about Putin’s inner circle… After fair criticism of Gazprom and Rosneft, Sberbank CIB fired the analyst Alex Fak and the head of research Alexandr Kudrin.
According to the OPEC meeting in June, most likely that Russia will increase oil production in the nearest future. Given by higher oil prices in 2018, Russia will show Real GDP growth of 1.8%. But as I noted above, I expect the world economic recession, which will decrease Russian oil export and the growth rate of Russian economy will slowdown.
Like most oil-dependent countries, Kuwait is also planning to reduce reliance on hydrocarbons. The government current plan is based on development of infrastructure projects. But I’m skeptical that government could achieve its goals. First of all, if Kuwait continues to develop large-scale infrastructure projects, the country will need to finance these stimulating measures by funds of sovereign wealth fund, which will be challenging with crash in oil prices. Secondly, on the back of bullish trend of oil prices, I think that Kuwait will postpone the implementation of its strategy. Also oil investment continues to increase, which confirms my assumptions. Therefore oil and oil products will continue to generate more than 80% of country’s export earnings.
According to the OPEC meeting in June, most likely that Kuwait will increase oil production in the nearest future. Given by higher oil prices in 2018, Kuwait will demonstrate Real GDP growth of 1.9%, as well as the economic growth will continue in 2019. However, against the backdrop of the world economic recession, the growth rate of Kuwait’s economy will decrease.
Nigeria is one of the most politically instable oil exporters, due to constant threat of overthrowing a government on the back of social discontents with economic difficulties in the country. In the mid-term I don’t expect any structural reforms to stimulate economy and measures to reduce dependence on oil export, therefore economic turbulence and reliance on volatility in commodity prices will continue. The situation is aggravated by the government concerns about an increase in consumer prices as a result of the implementation of new reforms, that will be disastrous for the current government. In addition, in a politically volatile environment it is nonsense to think that any government plan will be fully implemented.
Current higher oil prices will probably provide the growth of Nigerian economy in 2018. However, this positive effect will not be long and in 2019 we will see a slowdown in economic expansion. It is worth noting that in the current conditions Nigerian companies can’t compete with international producers, due to high cost of capital, poor infrastructure and low-level skills. Country needs a change and I believe that after election in 2019 we will see some positive signs, which will provide the recovery of economy in 2020.
By the end of 2017, Kazakhstan was the ten in the list of world largest oil exporters. However, in spite of the country’s wealth of natural resources and diversified economy, the volatility in oil prices has impact on the stability of the economy of Kazakhstan.
The value of Kazakhstan tenge depends on oil prices, as well as on the value of the Russian rouble. For instance, after new US sanctions against Russia on April 6, 2018, the RUB depreciated by 12% against USD and KZT in turn lost about 5% of its value. Broadly speaking, I found a lot of similarities between Russia and Kazakhstan – all-time political leaders, resource-based economies, low social standard of living and wealth of presidents’ inner circles, etc.
I expect that in 2018 rising oil export and higher oil prices will reduce Kazakhstan’s current-account deficit and provide the growth of the county’s economy. However, in subsequent years the situation will be similar to the Russian economy. Against the backdrop of the world economic recession, which will reduce the country’s oil export, we will see the slowdown in Kazakhstan’s economic growth.
In spite of current recovery of oil prices, I forecast the fall in oil prices due to expectations of the world economic recession, which will lead to a decrease in oil and oil products consumption.
In my view, there are more and more signs of the looming crisis. The United States continues to wage a war against the world. Trade wars and sanctions affect more and more economies (especially oil economies), as well as strong strengthening of the USD puts downward pressure on the value of world currencies. Surely, the upcoming collapse in the price of oil will shake the oil-dependent economies.
As an example, I considered five oil-dependent countries (Saudi Arabia, Russia, Kuwait, Nigeria, Kazakhstan), which, in my view, are characterized by internal or external conflicts, emerging economies, centralization of power in the hands of one person or clan, as well as closed political system. And each of these countries will continue to suffer from the fall in oil prices, until disposes to disposal of oil curse.