The rapid plunge in oil and gasoline prices means huge savings for American consumers, but the steep downward swing may ultimately prove dangerously disruptive to energy-producing countries and companies.
If prices remain low for a protracted period, which seems likely, it’ll send shock waves across the energy sector. For oil-producing countries, that could mean budget shortfalls. For energy companies, the lower profits may force mergers and consolidation that will cost thousands of jobs.
Oil prices have tumbled in recent months from their peak at about $105 a barrel in June to their current lows, below $75 on Wednesday. The Energy Information Administration projected last week that gasoline prices would stay under $3 a gallon throughout next year. A gallon of regular unleaded averages $2.86, the motor club AAA said Wednesday, about 25 cents lower than a month ago.
For American consumers, who used 135.4 billion gallons of gasoline last year, that’s a big savings – nearly $34 billion on an annualized basis.
But for companies and countries that depend on oil prices for their income, it’s a trend that makes them nervous.
Already, the oilfield services giant Halliburton, anticipating lower prices, has announced it will buy rival Baker Hughes in a cash and stock deal worth $34.6 billion.
Venezuela, heavily dependent on oil revenue, is looking for a buyer for its U.S. refining operations that run under the Citgo brand. Global giant BP, whose stock has yet to recover after the disastrous Gulf of Mexico oil spill in 2010, is widely viewed as in play. In fact, veteran energy analyst Fadel Gheit thinks that every private oil company except Exxon Mobil Corp., which is twice as large as its competitors, is now potentially a merger target.
“If oil prices remain sub-$80 for a long period of time, we’re going to see a lot of mergers and acquisitions,” said Gheit, who works for the investment bank Oppenheimer & Co. Inc. When Exxon Corp. and Mobil Corp. merged in 1999, the combined company was able to eliminate 50,000 jobs. “Companies are drawing short lists of targets: plan A, plan B and plan C.”
In the past, when oil was too abundant, producers simply left it in the ground. The curtailed production tightened supplies and drove up prices. That’s going to be tougher to do now, analysts say, which explains why oil ministers from nations that belong to the Organization of the Petroleum Exporting Countries have been deep in consultation before OPEC next meets on Nov. 27.
OPEC’s biggest producer and exporter, Saudi Arabia, doesn’t appear keen to cut production, in part because history has shown that most other OPEC members, who depend on oil to fund their governments, won’t reduce production even after they’ve agreed to.
“For those kinds of countries this is a huge shock, and they’re desperate . . . but Saudi Arabia has made it pretty clear it doesn’t want to cut back to give market share to Iraq and Iran,” said Daniel Yergin, a noted oil historian. “If prices fall further, you’re going to see panic.”
Among the shakiest of OPEC members is Venezuela, grappling with inflation above 60 percent and its government bonds at six-year lows. It’s sure to suffer financial and political fallout if prices drop another $10 or $20 a barrel.
“They can continue at $75 or $80 . . . anything much lower I don’t see them able to sustain,” said Risa Grais-Targow, a senior analyst who specializes in Venezuela for the Eurasia Group, a political-risk consultant for global corporations. “They’re working with a pretty narrow margin.”
That’s what pushed the government of President Nicolas Maduro to look for a buyer for Citgo, which operates refineries in Illinois, Louisiana and Texas. The asking price reportedly is $7 billion. “The issue is going to be whether there are interested buyers,” Grais-Targow said.
The lost oil revenue is also likely to sting Africa’s largest producer, Nigeria, which is grappling with the Islamist insurgent group Boko Haram in the northeast.
Nigeria didn’t create a rainy-day fund when prices soared, and now it must reduce government spending by a pledged 6 percent to offset the 30 percent decline in oil prices. But it has national elections on Feb. 14, and many Nigerians question whether the ruling party will really cut spending before the elections, meaning the country’s already messy finances could get messier.
Even countries that better manage their oil revenue will feel the pinch. Colombia’s balanced-budget requirement might trigger higher taxes as oil revenue slumps, Andre Loes, global bank HSBC’s chief economist for Latin America, said in a note to investors.
The projected 4.7 percent growth rate for next year, Loes cautioned, “would be under threat in the case of continued weakness in oil prices.”
Less clear is how neighbors Iraq and Iran will fare with slumping oil revenues.
Iraq’s exports have reached levels not seen since before the invasion led by the United States in 2003, but the country needs higher oil prices to fund its many needs.
More complicated is how the falling prices will affect Iran. A temporary arrangement lifting international sanctions that had cut its oil exports will expire Monday, and it’s not clear whether that relief will continue.
If talks with Iran over its nuclear program fail and sanctions are reimposed, that will take more Iranian oil off the global market, which might help keep prices from falling further. But if the nuclear talks are extended, prices might dip even lower.
“Markets will interpret this as Iran will be able to increase its exports,” said Simon Henderson, an expert on energy and the Middle East for the Washington Institute for Near East Policy, a research center. “That will contribute to a further weakening of prices.”
With the United States producing 9 million barrels a day and no sign that the lower price has affected that production yet, the oil market is finding new financial targets.
“Prices will continue lower, bottom out in the low $50s between the first quarter and second quarter next year,” predicted John Kilduff, a veteran energy analyst at investment manager Again Capital in New York. At that point, he said, there could be unrest in some oil-producing nations and a related drop in production. “That should get prices back up to $70,” he said.
Kilduff’s suggestion of $50-a-barrel oil is striking, considering that just a few years ago energy analysts were debating whether the price might reach $150 a barrel.
“The market is really recalibrating,” said Yergin, who wrote an award-winning history of oil, “The Prize.”
An abundance of oil isn’t the only factor that’s pushing prices lower. Demand also is flagging. Japan, the world’s third largest economy, was officially classified this week as in recession. Latin America’s biggest economy, Brazil, was already there. The European Union saw its quarterly growth rate register just a blip – 0.2 percent – from July through September.
That’s likely to subvert what’s been the traditional cycle, in which low oil prices boosted consumer spending, raising demand for oil, leading to higher prices. For now, the dynamic appears likely to keep pushing prices down.
CORRECTION: An earlier version of this story misspelled the last name of analyst Risa Grais-Targow in one instance.
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