As I’m
not a commodities trader (shocker!), I have not been in the habit of following
the daily ups and downs of the price of oil.
Except
that, lately, you’d have to be living under a rock not to know that the price
of Brent crude and West Texas Intermediate have collapsed, breaching the $30-level
and hitting a 12-year-low.
Of
course, the weakness in the oil market has already been big news for months now,
as prices nosedived from around 60-70 dollars just seven months ago.
In
this new year, however, cheap oil has become THE economic story. The price
seems to be heading ever lower ($28 today), and nerves are getting frayed over the
ramifications for the global economy at large. Things will only get worse for
oil now that sanctions against Iran have been lifted, allowing that nation to
openly add its considerable oil production to the glut.
Naturally – unless you are in the oil business, and many people are – you might see crude at $30, or even lower,
as a net positive. Gasoline prices in the US have dipped below two dollars a gallon,
almost half of the price 18 months ago, creating a windfall for American
drivers. Gas in Finland is also relatively cheap now, around $6 a gallon,
compared to the more normal $9. (I remember that when I worked at my father’s
service station back in high school, and before the 1973 oil shock, gas
was a mere 0.29¢ a gallon.)
Strangely,
Obama’s critics, so eager to blame him when gas was almost $4, seem to be
withholding their praise for him for making gas so cheap now – perhaps suddenly
realizing that presidents don’t have much to do with the price of
gas. Funny how that works.
For
American families trying to live on a tight budget, cheap gas brings welcome relief,
of course. On the downside, however, I worry that cheaper gas just gives
road-happy Americans even less incentive to alter their wasteful lifestyles.
The privilege of pumping carbon into the air just got a lot cheaper, so why
hold back? Drive, baby drive!
Still,
where cheaper oil is a having a not-so-positive effect is with the producers,
especially those countries that depend too much for their own good on
drilling deep into the ground and pumping petroleum to the surface.
Oil-producing
nations, most prominently Saudi Arabia and Venezuela, have been in the media
spotlight as the current glut exposes how their over-dependence on exploiting
fossil fuels threatens to unbalance their economies. Finland’s neighbor Russia
is also certainly one of those nations that has gotten a lot of media attention as a country facing
tougher times if the oil glut continues. The reports are often bleak.
A friend on Facebook recently wondered why you don’t hear similarly dire news about
some less-known oil producers, especially another Finnish neighbor, Norway.
That
got me wondering, as well: what exactly
is Norway’s situation, and how does it compare to Russia’s own much more publicized
dire straits.
In
some ways, Norway and Russia are in the same boat. Petroleum makes up between
66-70% of Russia’s exports, a significant enough share. Norway relies less on
hydrocarbons, but only by a little, something like 64% of its exports. Both are
largely one-trick ponies and both are seriously affected by the downturn in
oil.
There
is a nifty measurement, the Economic Complexity Index, that expresses how complex
a nation’s economy is, based in large part on the diversity of the country’s
exports. Both Norway (in 33rd place) and Russia (50th)
are ranked well below more economically balanced nations, such as the US (14th)
and Germany (2nd). I was a bit surprised to see that Finland ranks a very
respectable 8th. Good for Suomi.
So,
both Russia and Norway are similarly disadvantaged by having too many of their eggs, so
to speak, in the same basket. There seem to be big differences, however, in how well each
country might be able to cope if that basket of eggs is upended.
Reuters
has reported that the budget for the Russian government is projecting a 3% deficit
for this year – based on oil at $50. If
oil stays at $30, the deficit will grow to 5%. That’s not necessarily a huge
deficit, mind you. Still, oil at $20 or less, as some analysts have predicted,
will put even more strain on government finances.
Making
up for the shortfall might force Russia to inflict additional economic pain on its
citizens, who are already dealing with a recession. This would involve cutting spending and raising taxes, measures that have already sparked some strikes by protesting truck drivers.
Another
tack would be to dip into the country’s “rainy day” funds, two sovereign wealth
funds that contain some $130 billion. Those accounts have already been depleted
by $50 billion since 2014. According to an analyst quoted by Reuters, resorting
to using those funds to plug the budget gap would drain them dry in a little
over a year, if oil stays low that long.
By
contrast, Norway is in a much better situation. It is not in a recession and
has no deficit. Yet. In 2014, it still enjoyed a budget surplus of 9% even after a
downward trend over the last few years.
Still,
the oil glut has certainly hit the Norwegian economy, and there are reports the
country may be forced, for the first time ever, to withdraw from its own “rainy
day” fund. I find it somewhat amazing, that this fund contains a whopping $856
billion, more than five-times that of Russia’s.
Little
Norway, it seems, has done a comparatively much better job managing its oil
wealth. Norway is also not under the kind sanctions that are hampering Russia’s
economy, though losing the Russian market for its third biggest export, salmon
and other seafood, due to a retaliatory ban imposed by Russia in reaction to those
sanctions has no doubt been problematic for Norway.
In
short, it seems that the depressed oil market isn’t a likely to trigger in
Norway the same kind of economic turmoil – and potential political instability
– that Russia might be facing.
There’s
been much talk about how Vladimir Putin’s reelection in 2018 depends on
maintaining an economy healthy enough to keep the Russian people happy.
Presumably, keeping the electorate happy in Norway, often rated as one of the
happiest countries on Earth, is a much easier task.
In
all seriousness, though, I don’t think anyone would think the geopolitical effects
of the oil glut on Norway, a small, stable, prosperous country, are anywhere as
worrisome as what the bottom falling out of the oil market could mean for a large, somewhat hard-pressed nation like
Russia.
Interestingly
enough, Finnish TV has recently started broadcasting a miniseries from Norway
called Okkupert (“Occupied”).
The
premise of this political thriller is that Norway, having developed the
technology to harness an unlimited amount of power from a fictional element
called Torium (named after Thor!), intends to unilaterally shut down its North Sea oil
rigs and share the new technology with the world, all in the name of a
future free of fossil fuels. This doesn’t sit well, however, with the powers that be
within the EU, which shockingly enlists Russia to do the dirty work of invading and occupying
Norway in order to keep the crude flowing.
It's farfetched, as thrillers often are. Only the second episode has aired so far, so
we don’t yet know whether the forces of green energy or black energy will prevail in the
end.
Meanwhile, it’s safe to say that the oil glut crisis in the real world, though harsh enough on some economies, will not likely lead to high drama worthy of a thriller. Well, not in Norway anyway.
Meanwhile, it’s safe to say that the oil glut crisis in the real world, though harsh enough on some economies, will not likely lead to high drama worthy of a thriller. Well, not in Norway anyway.
It's hard to say where this will end up. A moot point, perhaps, considering what fossil fuels have done to Mother Earth.
ReplyDeleteI talk to people who know far more than I about oil prices. Some say it will soon regain most of the ground it has lost. Others have pointed out that many consumerist economies are moving swiftly away from hydrocarbons and into renewable energy.
We'll see.
I think T. Boone Pickens was predicting the other day that oil will be back to a 100 dollars before the end of the year. And Warren Buffet is said to be heavily buying oil stocks. So, maybe it will rebound after all. Who can say.
DeleteLet's hope it doesn't. Cheap oil isn't a good thing, but although cheap energy blocks investment into reneables, etc. it also makes the production of fossil fuels less profitable and stops new production and we know they would invariably be dirtier and more hazardous than the current ones. It could also give some political room for dropping subsidies and thus somewhat paradoxically increase investment for other sources of energy.
DeleteNorway is basically doing the right thing with it's oil profits and simply saving most of them. If you let it dominate your public budget, not only do you have a very nasty dependency all the time and end up crowding out your other sources of income, but you're in deep trouble when the oil starts running out, market dries up, etc.
ReplyDeleteThorium is actually far from fictional and has a great promise for nuclear fission, which would help the world get rid of fossil fuels. You really should read up on it. Along with breeder reactors it'd be a game-changer (and certain so-called environmentalists stopped opposing it). Not a revolution, mind you, but still worth doing to get rid of fossil fules. The rest is bunk, though, and to think that restarting oilwells would put the thorium genie back in the bottle... yeah, right.
I just can't be bothered with a ridiculous premise like that. I'm grateful I read Dan Simmons' sorry Flashback so I have the good sense to be more discriminating in the future. That book has idiotic and preachy stance on things and, more importantly, it presents such a ridiculous history, with impossible dynamics and basic lack of clue in terms of economy, environment and physics, as a premise, that it gave a great inoculation against that sort of thing. The ending was incredibly naïve as well. Now that I know how misguided he is, I don't think I'll be reading any more books from the author. An author's lack of basic facts doesn't necessarily hinder a book, but after that experience, I no longer have the confidence he has the sense to steer clear of parading it.