OPEC Inaction Could Bankrupt Russia and Venezuela

As oil prices fall back to their 90-day lows and industry analysts make pessimistic predictions about OPEC’s ability to reign in supply, it’s useful for investors to take a look at how three different countries have handled falling oil prices.

America Struggles

American domestic production has been undeniably hurt by low crude oil prices for many reasons. Oil costs more money to pump here, because of a combination of higher wages and stricter environmental standards. So when crude oil prices fall, American companies cut their workforces and shut down rigs, minimize their exposure to the marketplace, and ride out the storm.

Another thing that American energy producers do is borrow a lot of money. Fortunately, the capital markets are healthy enough to support the high levels of lending that oil companies have needed over the past two years.

Going forward, American oil companies can expect more lending, more rig closures, and more layoffs. (See also: Baker Hughes: US Oil Rig Count Drops.) But the damages will be contained to the energy sector, and the American economy as a whole will remain fundamentally healthy, if not exactly thriving.

Russia Panics

Russia stands in sharp contrast to America. Oil companies in Russia are owned either by the government outright, like Gazprom, or operated by close allies of the current administration, like Bashneft. So when crude oil prices fall, it’s a national problem.

The layoffs and streamlining that happen in America aren’t allowed to happen in Russia for political and social reasons. For instance, Gazprom is continuing to pay out dividends of 50% of its earnings, because many investors are oligarchs with intimate ties to the current Russian government.

Production is also being increased year over year, in part to save face and in part to meet regional export obligations. Regardless, they’re losing money on every barrel. (See: Falling Oil Prices Could Bankrupt These Countries.)

Russian capital markets are also very different. In order for oil companies to increase production despite falling profits, they need huge capital infusions. The state either underwrites them itself or operates on behalf of the nationalized oil companies, as it did recently when Russia secured a large loan from Japan.

Although Russia has laid off fewer workers, it has experienced a plunging GDP as the government essentially bears the losses of the entire energy industry. Russia is wealthy enough to continue doing that for now, but another year of cheap oil will really take a toll.

Their GDP has already fallen an estimated 45%, and there’s no indication that it’s reached a floor.

Venezuela Implodes

Venezuelan energy markets have all of the problems of Russian markets, but the government is too poor to prop up oil companies. That has resulted in a huge national implosion which has left workers either laid off or without paychecks, and their families going hungry. (For more, see: Can a Venezuelan Revolt Impact Oil Prices?)

The country has truly massive offshore reserves, and currently exports about 20% of the world’s oil. Venezuela is also an OPEC member, but not a happy one. Venezuela has pushed hard for increased OPEC output despite the impact on pricing, because it needs every cent to shore up its failed economy. (See also: Venezuela’s Food Shortage Explained.)

As a relatively poor country, Venezuela lacks access to strong capital markets. Instead, it turns to outsiders to raise cash, allowing access to its oilfields for a share of the profits or engaging in bizarre quid pro quo schemes. Venezuela’s strategy results in a higher proportion of foreign workers and long-term deals that aren’t in the country’s best financial interests.

For instance, in order to secure medical care for its people, Venezuela has cut a deal with Cuba to supply them with oil for a 40% discount. In return, Cuban doctors will treat Venezuelan citizens. This system of exchanging services for crude oil is known as the Petrocaribe alliance, and it has grown into an increasingly complex web of favors since 2005.

Needless to say, this isn’t the healthiest way to manage one of the world’s largest oil monopolies, and the entire country has paid the price. Oil production in Venezuela is currently at a 13-year low, and the country’s energy infrastructure is in shambles.

Low Prices Hurt Producers and Workers

Low crude oil prices are great for consumers around the world. But they hurt energy producers, and especially their employees.

The energy sector has been hit hard, and investors are rightfully wary about jumping in. But even with low oil prices, the American energy market is still one of the healthiest in the world.

Source: Investopedia


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