While consumers and retailers may be celebrating falling oil prices, governments and the overall oil industry may not necessarily be joining the jubilation. As the price of oil per barrel drops down to around $40, the oil-rich regions are experiencing downturns, both in government and in the private sector.
Governments that have relied predominantly on their oil revenues to keep their doors open have suddenly seen their coffers dwindle. This has prompted governments to either beg the Organisation of the Petroleum Exporting Countries (OPEC) to force its members to reduce their productive capacities or introduce new taxes.
Venezuelan President Nicolas Maduros has pleaded to OPEC for some assistance on prices. The socialist country has depended upon its massive oil reserves to help fund a majority of its government. Now, in addition to its price controls, the country is on the verge of a full-blown economic collapse.
Travel to North America and the province of Alberta, an oil-rich place in Canada, is mulling over the possibility of instituting a sales tax to help offset the diminishing revenues as its Treasury continues to bleed billions of dollars. Alberta remains the only province in the Great White North without a provincial sales tax, something that Premier Jim Prentice and his predecessors have boasted for so many years.
A new Conference Board of Canada report also suggests that the province may be on the brink of entering a recession sometime this year because of tumbling oil prices. The report was dismissed by Prentice on Wednesday when he spoke with reporters at a press conference.
"I didn’t find [the Conference Board’s] analysis to be particularly cogent, to be frank, and the opinion that they’ve put forward is an outlier amongst all of the other opinions that have been put forward by every one of Canada’s chartered banks and by other respected economic forecasters," said the Alberta premier. "If you take the consensus of all of the other forecasts that have been undertaken, there is a slippage in economic growth in Alberta from something in the range of 3.2 per cent down to something between 1.8 and 2.2 percent. Certainly we intend to make measured, balanced fiscal choices that will continue to keep us in a positive growth mode."
The rest of Canada may suffer, too. As the federal government forecasted a budget surplus just in time for the 2016 general election, a new report from TD Economics projects that Canada will post, once again, a budget deficit because of falling oil prices.
Finance Minister Joe Oliver announced in his fall fiscal update that the government would post a $1.9 billion surplus in 2015-2016, but TD Economics is predicting a $2.3 billion budget deficit and another $600 million deficit in 2016-2017. The budget surplus would finally come to fruition in 2017-2018.
“The conclusion is unambiguous. In the absence of new measures to raise revenue or cut spending, TD is projecting budget deficits in fiscal 2015-16 and 2016-17 as opposed to the surpluses expected at the time of the update,” the report stated, which was authored by TD senior economist Randall Bartlett.
Canada isn’t the only nation facing a recession. The Russian Federation, which has been engulfed with economic sanctions over its conflict with the eastern part of Ukraine, is also entering into recession territory as the ruble continues its freefall thanks to oil prices.
The government of Russia garners at least half of its budget revenues from oil and gas. Therefore, any action, whether positive or negative, severely affects Russia. Because of this, it is believed Russia’s economy will contract about 1.5 percent this year.
In fact, the only way for Russia to break even is if the price of oil returns to $100 per barrel, which many expect won’t happen for some time. Analysts say Russia must heighten its borrowing, enforce budget cut, reduce its military might and spend some of its reserve money in order to avert a financial collapse.
“The main correction is to understand that economic policy should be the main one, it is more important than any geopolitical concerns,” said Konstantin Sonin, a professor at the Higher School of Economics in Moscow, in an interview with the London Guardian. “I think that fall of oil price will force the elite and population to more soberly evaluate Putin’s successes and mistakes.”
What about the United States, the culprit for a lot of the current trends in oil? Well, numerous states are already under siege.
Ostensibly, plummeting oil prices are beginning to incite company bankruptcies, widespread job losses and budget risks. It’s important to note that the shale revolution in the U.S. is an expensive one, and today’s oil prices aren’t paying dividends for the producers, which is why an array of private firms have filed for bankruptcy or are on the verge of doing so.
It was reported that the oil companies left standing are only continuing operations because they have to service their debts - borrowing rose 55 percent at the beginning of 2010 to fund their operations. Credit markets have started bracing for the oil industry to crumble like dominos.
Some place the blame on the Federal Reserve for pumping money into this industry with cheap credit, artificially low interest rates and bubble inducement.
At the same time, citizens, who have personally benefited from these record-low oil prices, may be the victims in a short amount of time. It is being reported that at least four oil-producing states - Alaska, Louisiana, Oklahoma and Texas - are facing budget problems, and more are expected to arise.
Not too many economists are concerned, however, because they argue that most states now have diversified economies, unlike what transpired in the 1980s when the oil crunch affected oil-rich states. In other words, these states won’t experience what Iran, Russia and Venezuela are going through right now.
The ultimate conclusion is that these tumbling oil prices won’t last forever. As previously noted, once the oil production in the U.S. ceases and it becomes astronomically expensive for oil companies, the cost per barrel will start rising again. This is why the Gulf states, such as Saudi Arabia and Qatar, have bided their time because they have the greatest access to cheap oil.
Moral of the story? Resource-rich nations, states and provinces shouldn’t hedge all their bets on these exact same resources.
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