Thread: Oil's Drop Squeezes Producers

Economies of Iran, Venezuela Vulnerable as Crude Price Falls but Demand Stays Low


Big oil-producing countries are showing signs of distress as the global credit crunch and falling crude prices begin to squeeze government budgets and delay projects.

Fears that the boom days are fading appear strongest in Iran and Venezuela, whose governments have come to rely on oil prices to prop up otherwise shaky economies. Both countries this week led a chorus within the Organization of Petroleum Exporting Countries calling for an emergency meeting of the cartel, now set for Nov. 18, to weigh a production cut.

The global economic crisis is eating into oil demand, particularly in the U.S. and Europe, and helping drive down crude prices. Some forecasters said that despite a strong thirst for oil in Asia and the Middle East, global oil consumption could flatten out next year, potentially ending nearly a decade of steady demand growth.
In early afternoon trading, benchmark crude for November delivery fell $1.59, or 1.8%, to $87.36, on the New York Mercantile Exchange. Crude has plunged around $60 a barrel from its July high, and analysts said signs of a deep recession among industrialized countries could move prices down further.
Oil exporters have racked up cash surpluses as prices soared to historic highs. Saudi Arabia, the world's largest exporter, is expected to record $138 billion this year, up from $95 billion last year.
But government spending also has soared within OPEC and among other big producers such as Russia, based in part on the expectation that oil prices would remain high.
Standard & Poor's said last week that Venezuela's budget balance "could deteriorate quickly" if crude prices fall sharply. The nationalization of a number of industrial companies is expected to cost the government around $6 billion, or about 2% of gross domestic product, in 2008, according to Standard & Poor's.
PFC Energy, a Washington consultancy, estimates that Venezuela needs an oil price of nearly $95 a barrel to assure macroeconomic stability, three times what they needed in 2000. By contrast, Saudi Arabia requires an oil price of $55 a barrel, more than double from eight years ago, according to PFC estimates.
PFC believes Iran's price threshold to be similar to Saudi Arabia's. But the International Monetary Fund warned recently that Iran will have to cut state subsidies and shave government spending if oil prices stay below $90 a barrel.
Russia also could face cutbacks, as its budget for 2009 counts on a price of $82 a barrel for Russian Urals crude, which sells at a discount to the U.S. benchmark.
For much of this year, the oil-driven economies of the Persian Gulf have been largely buffered from the financial turmoil in the U.S. and Europe. But that appears to be changing.
Investors in the six Gulf states, which include OPEC members Saudi Arabia, the United Arab Emirates, Kuwait and Qatar, have taken a pounding this year, amassing almost $350 billion in stock-market losses since January, according to Zawya Dow Jones estimates.
Those losses go some way in explaining why credit in some areas is drying up.
Consultants at Medley Global Advisors said big Middle East power and water projects, vital to meeting the region's electricity demand, are facing financing delays and rising capital costs. Some petrochemical projects, which provide raw materials to make plastics and fertilizers, also are under pressure.
"The global credit crunch has seen the number of international banks lending to the power and water sector decline," said Medley energy director Bill Farren-Price.
The financial turmoil doesn't appear to have affected big state-run oil-exploration projects in the Gulf, largely because national companies such as Saudi Arabian Oil Co., or Aramco, typically finance these projects with cash.
But signs are emerging in other OPEC countries that energy projects could get caught in the financial fallout. The industry's efforts to pump more oil and natural gas already are suffering from high costs, technical challenges and political barriers.
A senior Nigerian oil official said the financial environment has weakened the West African government's ability to tap local and foreign banks to help bankroll its share of oil and natural-gas projects with energy companies such as Royal Dutch Shell PLC. Nigeria's joint-venture projects with foreign companies are important to the government's goal of boosting production to four million barrels a day over the next decade or so.
Libya's National Oil Co. also may have to delay or scupper some projects if financing problems worsen, said company chief Shokri Ghanem, who is also the North African nation's top representative to OPEC. Mr. Ghanem declined to say what type of projects were at risk, but said, "we aren't sure if all the finance is going to be there."
OPEC is likely to reduce production to defend prices from falling below $80 a barrel. But some analysts said that heightened costs elsewhere in the oil patch may keep prices from falling much further anyway.
A study released by Bernstein Research of New York this week argues that oil prices will remain linked to the cost of producing supplies from difficult but crucial fields deep offshore and elsewhere, a cost the research firm puts at between $75 and $80 a barrel. By 2012, the firm said, that cost likely will have jumped to $105 a barrel.

I really feel bad for these guys - my heart goes out to them and they shouldn't be feeling the pain from the global financial fallout, since they were the Innocent parties

Hey Paul,

Cost effectiveness of the Oil Sands project has always been hotly debated along with the amount of energy being used to produce the oil.

It is an alternative, but a costly alternative all the way around. Wasn't California going to prohibit the import of oil from projects like Oil Sands because of the green factors ?

Later and have a good one.

Tom