$50 oil: The winners and losers

The tumbling price of oil is a boon for most of the world. Russia, Venezuela and Iran? Not so much.

by Rachel Savage
Last Updated: 25 May 2016

The price of a barrel of Brent Crude crashed through the psychological barrier of $50 (£33) this morning, having lost half of its value in 2014 since its peak of $115 in June.

It’s now risen back above $50 (volatility ahoy!). Nonetheless, Bank of America analysts must be feeling pretty chuffed with themselves – on December 9th they predicted oil would fall to $50 in the near feature, and lo it came to pass.

Other than the smug bankers who called it correctly, who will be cheering as oil indices flash red and who will be choking back sobs as the black stuff loses its golden sheen?

The winners

Consumers

With petrol prices on their way down toward £1 a litre (we haven't seen that since May 2009), and energy bills likely to follow suit if the ‘Big Six’ learnt their lesson from their roasting over last winter, consumers will be the big winners from the tumbling oil prices.

Conservatives

And if people feel their wallets getting ever so slightly pudgier that might even help the Conservatives in the coming general election. Indeed, research firm Oxford Economics has predicted British GDP will be boosted by an average of 0.5% in 2015 and 2016, if oil falls further to $40 a barrel. As Bill Clinton said, to great effect in his 1992 presidential campaign, ‘It’s the economy, stupid.’

Chancellor George Osborne sure knows a bandwagon when he sees one, that’s for sure.

Lower oil prices probably won’t save the Lib Dems from electoral annihilation, though – soz Nick.

Airlines

Airfares will probably fall too, but airlines are likely to pocket at least some of the windfall from cheaper fuel. That was reflected in their share prices today: BA owner IAG was up 1.7%, while Ryanair rose 1.3% and its bitter rival Aer Lingus edged up 1.1%, both in Dublin.

Another bitter rival, EasyJet, however, didn’t take off at all oddly. Its shares hovered around yesterday’s closing price of 1,682p in mid-morning trading, having spiked up to 1,700p when the markets opened after reporting passenger numbers rose 6.5% to 65.3 million in 2014. Can’t win ‘em all.

Other gas guzzling industries will also see their margins boosted by the oil price fall – heavy manufacturers, hauliers, chemicals companies and their ilk.

Non-oil producing nations

Most countries around the world stand to benefit from cheaper oil. The Philippines will be the biggest winner, according to Oxford Economics – GDP growth could increase 1.5% to an average of 7.6% in the next two years.

More importantly for the rest of the world economy, though, is the big boost for China, whose slowing growth some had pinpointed as one factor behind falling oil prices (although oversupply is the main short-term driver). China is the world’s second-largest importer of oil, and each $1 drop in price could save it $2.1bn a year, the Economist estimated back in October.

The falling oil price should also help China clean up its cities’ filthy air, as it will make the switch to more expensive, less-polluting fuels less painful.

It’ll help the US a bit, but as Uncle Sam is simultaneously the world’s biggest importer, producer and consumer of oil any positive impact will probably be cancelled out as more shale gas projects become economically unviable.

The losers

Oil companies

This one’s pretty obvious, of course. Big firms, with their diverse investments, should be able to weather the storm, in part by scaling back expensive investments such as deepwater Arctic drilling. BP and Shell’s shares even rose today, perhaps because investors were piling in to bet they would rebound in the future.

But smaller oil producers around the world, and the whole ecosystem of businesses that serve the industry, are likely to be hit hard. The US’ fracking firms, whose boom fuelled the supply glut that is largely behind falling energy prices, will have to take stock. Canadian tar sands don’t look so attractive. Brazillian drilling in the Atlantic is likely to slow down.

Russia

Oil and gas make up two-thirds of Russia’s exports. It can’t balance its budget with oil below $105 a barrel, let alone $50, according to the IMF. The central bank said in December that the economy could shrink 4.5% this year under a ‘stress scenario’ of oil averaging $60 a barrel. How stressful.
The rouble lost half its value last year, even after the central bank intervened to prop it up. That is making Russian company dollar debts increasingly unpayable, and the currency has continued to fall this year – $1 now buys just over 63 roubles.

Russia’s problems are such that a Blackstone vice chairman has predicted President Vladimir Putin will be out the door this year. MT wouldn’t bet against Vlad-the-lad Putin, but then again not many people saw the oil price fall coming.

Iran

Iran’s economy is buckling under the weight of sanctions over its nuclear programme and oil at 38% of the price the IMF estimates it needs to balance its budget. Its economy probably grew around 1.5% in 2014, according to the World Bank, but that follows two years of swingeing recession.

In fact, things have got so bad that President Rouhani, who took over in 2013 after eight years of economic mismanagement by Mahmoud Ahmedinejad, has threatened to hold a referendum in an effort to head off hardliners trying to torpedo a détente with the West over the nuclear issue.

Oil prices continuing to fall may push Iran into the arms of the West, but at what cost to the Iranian economy?

Venezuela

The whole revolutionary socialism thing isn’t going so well for Venezuela at the moment. It depends on oil for 96% of its foreign exchange and inflation has spiraled to 64%. An ice cream parlour famous for its 900 flavours was forced to close due to a milk shortage (Venezuelans may not miss the trout ice cream, though).

President Nicolas Maduro is currently visiting China to beg for a loan. Venezuela certainly can’t afford the largesse of his iconic, erstwhile autocratic predecessor Hugo Chavez, which included splashing the cash on fellow left-wing governments like Cuba, anymore.

The Gulf countries

Saudi Arabia has said it won’t allow cartel Opec to cut production, even if oil falls to $20 a barrel. While that would no doubt put most of the US’ frackers out of business, to the benefit of the Saudis and their Opec mates, cheaper black gold will still hurt the Gulf.

They can use their enormous sovereign wealth funds to cushion the blow at the moment, but if oil prices stay low for long the Sheikhs and Emirs may have to slow down with the cash splashing on vanity projects like the 2022 World Cup and funding various rival groups in the Syrian civil war.

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