Crude oil prices have dropped a lot. At close to $150 per barrel, they were threatening to pull down shutters on oil-intensive industries. In that sense, their moderation spells huge relief. The prices are, however, not very different from what they were roughly four years ago. Global average crude prices touched $44 in October 2004. They dropped for a while and recovered to reach the same level in February 2005.
Now that crude prices have started behaving again, can the world breathe easy? Oil-importing countries certainly can. These include the US and Japan which import 11.8 million barrels and 5.3 million barrels respectively per day. China and India are the leading emerging market oil-importers. They pick up 2.9 million barrels and 1.5 million barrels respectively per day. China?s high export growth has ensured it a trade surplus despite importing crude at high prices. But several emerging markets, including India, have rising trade deficits mainly due to high oil prices. These economies are certainly better off. With crude prices being where they are, they should be able to manage their current accounts comfortably.
There are countries that are unhappy with the collapse in crude prices. These include the Opec drawn from the Middle East, Latin America and Africa. They also include top non-Opec oil exporters like Russia, Norway and Mexico.
The Gulf is facing drastic changes in its economic outlook. The region is critically dependent on revenues from oil exports.
There are reports that 2009 and 2010 might turn out to be very difficult years for the region. The turbulence in the Dubai financial market underlines weak regional fundamentals and prolonged uncertainty for the Gulf economies and countries.
On the other hand, Russia has devalued its currency five times during the last five weeks. The sharp drop in oil prices has led to a run on its foreign exchange reserves forcing it to undertake multiple currency revisions. At the same time, President Hugo Chavez has admitted that Venezuela is in for tough times if oil prices tumble further. Nigeria, another major oil exporter, has switched to contractionary fiscal policies following the price drops.
Thus the world is clearly divided into happy and unhappy clubs over oil. It always was so in a way. Access to hydrocarbons traditionally imparted monopolistic advantages to oil-exporters. The current recession, however, has put at least a temporary halt to such ambitions.
The Opec has responded to the price drop on expected lines. In its extraordinary meeting held in Algeria on December 17, it decided to cut production. From January 1 2009, it will cut output by 4.2 million barrels per day. This is almost 7 per cent of Opec?s current turnover of 29.045 million barrels per day. In consumption terms, the cut is equivalent to the combined daily oil imports of Germany and India. The Opec is also in talks with leading non-Opec oil exporters like Russia for encouraging them to curb supplies.
The Opec cut and the settling in of the global winter are likely to impact crude prices. Seasonal demand for energy is highest during winters. As crude supplies fall during winter, their prices are likely to harden. However, this should not last long. The far-reaching effects of the global downturn are yet to be felt. These will probably start showing up from the second and third quarters of 2009. This is when many of the existing forward contracts on delivery of crude will expire.
The outlook for oil exporters remains grim. On a different note, the current prices are not good news for oil exploration and drilling. Indeed, if prices drop further then they are likely to stop new explorations. There are already preliminary reports of investor expectations in drilling taking a hit as oil prices show little signs of stabilising.
For India, low oil prices are good for balance of payments. But they may not be so for refined petroleum exports. The latter have been doing well in recent times and have been mostly value-driven. If prices plunge further, then India?s export profile might undergo significant changes.
The author is a visiting research fellow at the Institute of South Asian in the National University of Singapore. These are his personal views