How long can oil prices stay down?
The Associated Press
CARACAS, Venezuela, March 23 - Plummeting crude prices have begun to wreak havoc in the economies of the world's oil-producing nations. Governments are slashing budgets and growth forecasts, companies are scrapping investment and citizens from Quito to Tehran are preparing for hard times. "Our economy is built on oil, so we are bracing for a real depression," said an Iranian businessman, Omid Rostamani. Last week, futures prices for North Sea Brent blend dropped to $11.90 a barrel, the lowest in a decade. Prices for other petroleum types also have slumped, and oil-dependent countries stand to lose billions of dollars if prices don't recover soon. The result may be less money for badly needed social programs in places including Mexico and Indonesia.
Demand Lowest In Years
Lackluster demand blamed on Asia's financial crisis and an
unusually warm winter produced the million-barrel-a-day glut
on world markets that sent prices tumbling. Oil ministers of
Saudi Arabia, Venezuela and Mexico announced Sunday that
they have agreed to work together to reduce output by at least
1.6 million barrels a day. Details of the plan, announced in a statement released in the Saudi capital Riyadh, have yet to be worked out. The cutback was not a formal agreement to reduce the
Organization of Petroleum Exporting Countries' overall
production ceiling or the quotas of individual members. It was
not clear how many of OPEC's 11 members would abide by it. Low prices already have inflicted some pain. Oil companies in Alberta, Canada, have announced layoffs and reduced heavy crude production. Russia, which depends on the energy sector for half of government revenues, announced this past week it would ease the tax burden on struggling oil firms. Some high-cost wells, such as an Hibernia consortium
offshore platform hear Newfoundland, soon could be producing oil that costs more to pump than it earns on the market.
Middle Eastern Nations Hit Hard
In Saudi Arabia, the world's largest oil exporter, the currency
has been sliding because of Saudis trading in riyals for dollars
in anticipation of a weaker economy. Share prices for Saudi companies have fallen by 15 percent since December. The Saudi oil company, Aramco, was considering big spending cuts, which experts say likely would lead to the delay or cancellations of several major refinery projects. In recent weeks, Saudi Arabia has blamed the price slump on OPEC partner Venezuela, accusing it of over producing.
Venezuela, the largest foreign supplier of oil to the United States, has been the biggest violator of OPEC quotas. In the past, Venezuela has reacted to low prices by printing and borrowing money, falling into what oil executive Jose Toro Hardy called a "vicious circle of debt, devaluation and inflation." This time, the country has reduced spending instead. Officials cut the national budget by $1.2 billion, and the state-run oil company, Petroleos de Venezuela, announced $900 million in spending cuts. "There will be less growth as a result, but at least we won't have the long-term economic distortions of the past," said Toro, who sits on Petroleos de Venezuela's board of directors.
Many Nations Affected
Here is how some oil countries have fared during the price slump:
Kuwait, which depends on oil for more than 90 percent of
government revenue, has cut the national budget by 25 percent. Its oil has been selling at around $10 a barrel, compared to $17 in November. Kuwait's goal of balancing its budget by 2000 "cannot be achieved unless a miracle takes place," said economist Amer al-Tamimi.
Norway , the world's second-largest oil exporter, enjoys a
gigantic budget surplus, which low oil prices could reduce to
merely big. "This isn't exactly giving the economy breathing
problems," Deputy Finance Minister Erlend Skjoerstad said.
Iran has said it loses $1 billion a year for every $1 drop in
the price of oil. Saddled with nearly $17 billion in foreign debt,
the government has doubled import duties to slow foreign purchases. Rostamani, the businessman, said his civil engineering firm has canceled projects. "Just about all businesses have begun to retrench," he said.
Mexico, where the state oil monopoly Pemex provides 40 percent of government revenue, has trimmed its budget once and soon may do so again. As in Venezuela and Ecuador, budget cuts threaten investment in health, education and housing. |
