Offshore oil rig in the Gulf of Mexico off California

An offshore oil rig in the Gulf of Mexico

For most American consumers, the recent plummet in gas prices spells good news.  A trip to the pump doesn’t cost nearly as much as it did last year, with the average price of gas in the US dropping below $2.50 per gallon—the lowest price since October 2009.  Yet across the globe, not all consumers have been as lucky.  With the steep drop-off shaking economies of major oil-producing countries, this winter have become much bleaker for many living under the crumbling hands of the global economy’s oil giants, and the domino effect of the recent economic drop shows no indication of slowing down over the next year.

Stagnant global demand and a steady, increased supply of crude oil from both North America and the Middle East has caused the price of the commodity to drop to its lowest price since 2009.  Crude oil sits below $58 per barrel as of mid-December, falling from more than over $100 per barrel the same time last year.  OPEC, under pressure by Saudi Arabia, shows no signs of budging on its decision to maintain current crude output volumes even as the price per barrel threatens to reach dangerous lows. The cartel seeks to force out American oil producers, who operate at a much higher cost than its mostly Middle Eastern member states while relying themselves on built up economic reserves to sustain losses until American producers shut down, decreasing supply and naturally increasing prices back to profitable levels.

The economic implications of OPEC’s decision continue to ripple across the globe with far-reaching consequences.  Major economies have been put in disarray as global investors push currencies on almost every continent into freefall.  Beset from Western economic sanctions atop the decline in oil prices, Russia’s ruble has stumbled to a near six-year low against the US dollar, suffering its steepest drop in 16 years. Venezuela, one of the only two South American OPEC member states, has fared no better; with oil accounting for 95% of the country’s exports, the price of Venezuelan bonds has plummeted as investors now worry Venezuela may default on its debt. In Africa, Nigeria, whose government receives more than 75% of revenue from oil exports, has felt the backlash of the crumble, cutting its fiscal budget by 12% while the naira continues to hit record lows below 190 to the dollar.

Oil-importing nations including the US, China, Japan, and many within Western Europe have and will likely continue to benefit from the recent plunges. However, some emerging markets not dependent on oil exports have suffered as a result of instability within global financial markets caused by the recent oil price volatility. Many currencies, already pushed down by strong demand for the US dollar as the American recovery continues unabated, continue to drop. The Indian rupee has hit 13-month lows and contagious drawdowns of Asian currencies have led to a chain effect that has in pulled out over $3 billion of foreign investments from the stock markets of South Korea and Taiwan. With the Russian ruble facing significant depreciation, trading partners of the oil giant face significant exposure to further jostling as investors evaluate unnecessary risk and look into more stable currencies.  The International Monetary Fund (IMF), however, remains confident that recent drops will lead to economic growth: since oil consumers often spend more of their gains than oil producers cut back on their consumption, a redistribution of wealth from oil producers to consumers should spark net growth in the long run.

While US Federal Reserve Chair Janet Yellen is hopeful the US will come out positive despite inevitable decreases in US domestic drilling, the recent trend of oil prices will have lasting impacts on individual states and smaller industries across the board.  Alaska’s Department of Revenue anticipates multi-billion-dollar deficits as the state’s oil revenue is expected to fall from $5 billion to significantly under $2 billion, with the numbers continuing to fall as calculations made on the average price of oil per barrel suddenly become dramatic overestimates due to dropping numbers.  And while the airline industry suddenly finds itself much more profitable, the fracking industry is quickly being forced to improve the efficiency of their methods and the precision of their approach —a change that ultimately signals an early Christmas present for the environment-conscious activist and the risk-averse investor—lest the North American fracking and shale industry fall to the rising costs incurred by OPEC competition.

Another aspect to consider of this recent decline in oil prices is the effect on the alternative and renewable energy industry, whose future is largely dictated by interest in the field caused by high oil prices.  In the short run, lower crude prices have significantly damaged alternative energy stocks, with shares of companies such as First Solar Inc. (NASDAQ: FSLR) tumbling around 34%; SunPower Corp. (NASDAQ:SPWR) falling 31%; SolarCity Corp. (NASDAQ:SCTY) dropping 25%; and Fuel Cell Energy Inc. (NASDAQ: FCEL) losing about 36% of its value from last October to December.  On the other hand, energy analysts at AllianceBernstein, a global asset management firm, remain confident: cost per unit of energy of renewable energy and fossil fuels are in the long run heading in opposite directions, and considering the importance of renewable energy in developing areas, investment in the industry should eventually recover, presenting a good opportunity to buy into the sector in the present while oil prices as low. Furthermore, solar companies as a whole remain up 7% for the year, indicating the market’s cautious optimism on the prospects of the industry.

As global markets continue to oscillate between safety and danger, it remains to be seen how exactly the global economy will restructure itself once oil prices re-stabilize.  Meanwhile, the condition of consumers living in major oil-producing nations is only worsening.  As domestic and foreign investors rush to transfer funds to more stable currencies, small business owners in Venezuela struggle to acquire the foreign currency necessary to buy imported goods sold or used in local business.  Upper and middle class homeowners in Russia flood stores in hopes of buying large-value items while the ruble still has value. In both countries, consumers among every class have begun to make great lengths to acquire food and basic necessities.  Lines have gotten longer and longer outside grocery stores as consumers attempt to acquire food and staple goods in daylong waits, a task made even more difficult for some consumers after the Venezuelan government began rationing food for its citizens in October, going so far as installing fingerprint scanners in some stores to prevent hoarding.  Items such as cooking oil and milk remain scarce, and often times even after long waits, price-controlled items such as chicken, rice, toothpaste, detergent, and water are sold out and in shortage.  In Venezuela, while gas per gallon sits at a fixed price of US $0.08, simple consumable items such as diapers require going as far as showing a child’s birth certificate to purchase, highlighting the sharp contrast in the impact of dropping oil prices on consumer prospects between oil producing countries and oil importing countries. Yet, as with the case of Alaska and the United States, the plummeting prices are wielding disparate economic consequences even within countries that are benefitting overall. Clearly, slumping oil prices pick winners and losers on a broad scale: just how much the winners will gain and the losers will lose remains ambiguous, however. The ramifications will only become clearer as the complex interactions of US oil producers, OPEC countries, and global consumers plays out in the year to come.

 

Written by thefinancier

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