Steven Mufson / Philip P. Pan
October 24, 2008
The world's petro-powers -- the oil-exporting nations armed with vast, high-priced crude reserves -- are looking a little less imposing now that prices are tumbling.
Instead of flexing their financial muscle abroad, cash-rich oil exporters have been forced to bolster institutions at home, spending billions of dollars to prop up banks, currencies, stock markets and other aspects of their economies.
Around the world, oil price shock has given way to aftershock. Yesterday, crude oil prices briefly touched a 16-month low before closing at $67.84 a barrel, up $1.09 but less than half their July peak as traders worried that a global economic slowdown will shrink demand for petroleum products.
For oil exporters, the price decline has compounded the global financial crisis. Kazakhstan has raided its once sacrosanct national oil fund to bolster banks that borrowed from abroad; Iran, which drained much of its rainy day fund to pump up its economy even before oil prices fell, is now having trouble financing oil and gas development projects; Venezuela might run a deficit to pay for massive social spending; Mexico has spent billions of dollars defending the peso; and Russia, Saudi Arabia and the United Arab Emirates have dipped into their cash hoards to rescue domestic financial institutions.
The sudden change in fortune will dominate the agenda at today's emergency meeting of the Organization of the Petroleum Exporting Countries; the 13-member cartel that is expected to slash output by 1 million to 2 million barrels a day to stop the slide in oil prices.
The meeting this week shows they're concerned and they need to micromanage [output] some more," said Fareed Mohamedi, head of country strategies at PFC Energy, a Washington consulting firm.
To members of OPEC, this moment recalls the Asian financial crisis in 1997, when the oil cartel increased production to ease international economic pressures only to see oil prices collapse. Now, in a new economic crisis, OPEC members will only be debating how big a cutback is needed.
There is, however, no need to pass the tin cup for oil exporting countries, analysts note. The six members of the Gulf Cooperation Council have $2 trillion of financial reserves. Russia's and Kazakhstan's financial reserves are big enough, for now, to stave off the kind of crisis that shook both nations in 1998. Even populous and impoverished Nigeria has paid off foreign debts and built up reserves.
Moreover, the average oil price has still been higher than in the previous year, according to OPEC. Kuwait's finance ministry said last week that it had collected $54 billion in revenue in the first half of the year, more than it had anticipated for the entire year.
The spike in prices has also happened so quickly that oil exporting nations haven't had time to raise the price assumptions used for spending plans. The Saudi 2008 budget assumes prices between $40 and $45 a barrel.
"Many of these countries were much more prudent than they were in past," said Robin West, chairman of PFC Energy. As a result, he said, most oil exporters "are still in pretty good cash positions for now."
The biggest exceptions are Iran and Venezuela, two of the Bush administration's main adversaries.
In Iran, accusations are flying about how much President Mahmoud Ahmadinejad has been spending from the foreign exchange reserves fund, which contained about $40 billion when he was elected president in 2005. The fund could have been a source of economic strength now, when plunging oil prices are compounding problems of international sanctions, the credit crisis, domestic inflation and capital flight.
The oil windfall over the past year ought to have brought the fund up to $130 billion, according to calculations by the Iranian newspaper Ettemaad-e Melli, which is critical of the government. Instead, said Tahmasb Mazaheri, the recently ousted head of Iran's central bank, the government has been "looting" the nation's assets in order to pump up growth while letting inflation soar to about 30 percent.
The new head of Iran's central bank, Mahmoud Bahmani, has warned of hardships. "In recent months oil has dropped to $70, and this has affected all the economic decisions of countries whose budget depends on oil," he said.
"When the money comes in, there are fewer worries. But this drop in income will be a major shock," Morteza Allahdad, a U.S.-educated economist at the Iranian central bank, said. "Unfortunately, we don't know how much money is left in the foreign currency exchange fund to absorb this."
Ahmadinejad has refused to reveal how much is in the fund, saying the account's balance is "a secret."
In Venezuela, President Hugo Chávez has cast the economic meltdown as a sign of American-style capitalism's failure and said that Venezuela, with its $40 billion in central bank reserves, is well-prepared to weather the storm.
"Venezuela has the conditions to bear any oil price, it is not vital for us," Chávez said recently, recalling the early months of his presidency, when prices were low. He added that if oil stabilizes at $80, Venezuela's economy would be stable.
In 2000, a year after Chávez took office, the price Venezuela needed to pay for imports was $34 a barrel. Then, the jump in oil prices -- particularly in the past two years -- gave Chávez the money to pledge billions to overseas projects while increasing social spending at home. That spending has helped maintain Chávez's popularity just below 60 percent as the government prepares for state and municipal elections in November.
"For the last five years, an ever-increasing oil revenue has allowed government to spend both at the same time at home and abroad," said Rámon Espinasa, former chief economist at the state oil company and now an energy consultant for the Inter-American Development Bank. "For the first time, it will have to choose what to prioritize."
Russia is better prepared for falling oil prices than Venezuela or Iran because Prime Minister Vladimir Putin as president taxed oil profits, paid off almost all the government's debts and accumulated more than $530 billion in foreign currency reserves, the third-largest in the world. But the country's corporate sector has borrowed nearly $500 billion.
Although Russia's benchmark Urals crude dropped to $65 a barrel last week, the Kremlin says the price would have to stay depressed for years to affect its budget, which assumes an average price of about $70 a barrel. Finance Minister Alexei Kudrin recently told reporters that even if oil fell as low as $40 to $50 a barrel the government could maintain spending for three years.
"Our economy is rather well prepared for lengthy external shocks," Putin said in televised remarks at a government meeting last week. "We have one of the world's highest rates of gross national savings. Thus, we will largely fund the development of our economy with domestic resources."
But critics say the Kremlin has underestimated the impact of falling oil prices on an economy still reeling from the global credit crunch -- and more dependent than ever on oil and gas, which account for nearly a third of gross domestic product, half of government revenue and two-thirds of exports.
The central bank has already spent billions to support the ruble, and Putin has pledged more than $200 billion to shore up Russian banks and stock markets, which have plunged by more than 70 percent from May highs. In the two weeks ending Oct. 10, the reserves shrank by more than $33 billion, a rate that would exhaust the funds within nine months.
"By itself, the drop in oil prices isn't a major problem, but on top of all the other problems in the economy, it puts even more pressure on the government," said Vladimir Milov, a former deputy energy minister in Putin's government.
If oil prices continue to fall, analysts said, Putin could be forced to choose between making unpopular spending cuts -- the Kremlin recently boosted the military budget -- and using up the reserves, risking a devaluation of the ruble that could cripple Russian firms.
The state-controlled oil and gas firms -- an important constituency for Putin -- had grown especially dependent on foreign credit and now are among the hardest hit in the crisis. The stocks of oil giants such as Gazprom and Rosneft have led the market crash, wiping out hundreds of billions of dollars of equity.
Firms are cutting jobs and suspending projects, and inflation is climbing. But the Kremlin has contained public discontent by limiting television coverage, barring reporters from using the word "crisis."
Meanwhile, Putin and his hand-picked successor, President Dmitry Medvedev, have tried to woo foreign investors back, toning down the defiant, go-it-alone rhetoric used in the aftermath of the Georgian war.
At the meeting last week, Putin allowed that Russia was "entwined with the global economy," a departure from earlier Kremlin assertions that Russia was an island of stability immune to the financial turmoil in the West. But he could not help but point out, as he has done several times in recent weeks, that the United States was the "epicenter" of the crisis and had "infested the entire world economic system."
Correspondents Juan Forero in Bogota, Colombia, and Thomas Erdbrink in Tehran contributed to this report.