Oil Collapse and Covid-19 Create Toxic Geopolitical Stew - Press "Enter" to skip to content

Oil Collapse and Covid-19 Create Toxic Geopolitical Stew

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Iraq cannot afford to pay millions of workers and pensioners. Mexico’s grand plans to develop the country have been thrown into disarray. Ecuador is cutting government salaries, and Venezuela is on life support. Nigeria is seeking a nearly $7 billion emergency loan.

The coronavirus pandemic and the collapse in oil prices it has caused have created a monstrous calamity for countries heavily reliant on oil production for their economic survival, and forced others to change policies that no longer make economic sense.

While Russia, Saudi Arabia and the United States — the biggest oil producers — have large financial cushions, the precipitous drop in demand because billions of people have been forced to stay home has upended everything. It was a possibility even veteran industry experts did not foresee.

“No one imagined a crisis of this scope. This was in no scenario,” said Daniel Yergin, an expert on global energy and vice chairman of IHS Markit, a research firm.

In the United States, where oil prices fell below zero this week for the first time ever — meaning sellers had to pay customers to take unwanted oil — the glut is threatening severe economic pain in what had been a thriving domestic industry. The oversupply also has forced the Trump administration to negotiate with Russia and Saudi Arabia to curtail production.

“The idea that we are energy dominant or independent is a fallacy,” said Jason Bordoff, a professor at Columbia University’s School of International and Public Affairs and founding director of its Center on Global Energy Policy. The global market’s effect on the United States, he said, has “revealed that when oil prices rise, we feel the pain, and when oil prices collapse, we need to call Moscow and Riyadh to do something about it.”

Here is a look at some effects of the oil-coronavirus shock in countries around the world:

Iraq will be harder hit than almost any other oil-dependent state, according to the International Energy Agency. About 90 percent of the government’s revenue comes from oil, and it relies on that money to support a payroll of more than four million workers as well as payments to pensions and welfare for the poor.

The government could just meet its costs when oil was trading at about $61 a barrel, as it was in December, but now it cannot meet the May payroll let alone pay for pensions, subsidies and its other operations.

“The problem starts in May,” said Mudher Mohammed Saleh, an economist and adviser to Iraq’s prime minister. “We’ll have a $4.5 billion gap monthly. What do you do? This is the headache.” ALISSA J. RUBIN, Baghdad

Even before the pandemic and the plunge in oil prices, Mexico’s economic outlook was poor, with some forecasters predicting its economy would remain sluggish, after entering a mild recession in 2019.

The federal budget relies heavily on oil production and exports, which means government income will now be sharply diminished. President Andrés Manuel López Obrador has laid out an ambitious development plan predicated on reviving Pemex, the state oil company, which has been suffering declining output, suffocating debt, corruption and mismanagement.

But in recent weeks, raising money for Pemex in financial markets became much harder as major ratings agencies have downgraded the company’s credit.

Daniel Lansberg-Rodríguez, the Latin America director at Greenmantle, a risk advisory firm, said that Mr. López Obrador has long viewed Pemex as “the silver bullet” that will rescue the economy. “Come hell or high water, the strategy won’t change,” he said. KIRK SEMPLE, Mexico City

The oil market rout has reverberated across South America, but will be felt the most by the region’s weakest economy, Venezuela, which relies on its shrinking crude sales to import food and fuel. Even before the price collapse, the country struggled to find buyers because of tightening American sanctions.

The International Monetary Fund forecasts Venezuela’s economy will shrink 15 percent this year, the biggest decline in the region.

In oil-dependent Ecuador, President Lenin Moreno has called the energy market collapse the country’s “most critical moment in its history.”

As in Venezuela, the price collapse has caught Ecuador in one of the worst economic moments, as the country struggles to contain Latin America’s most aggressive outbreak of coronavirus and deal with a rupture of its two main oil pipelines. ANATOLY KURMANAEV, Caracas

Even before the price collapse, the World Bank predicted that the pandemic would push sub-Saharan Africa into its first recession in 25 years. But in the region’s leading oil-producing nations, Nigeria and Angola, the compounding impact of drastically reduced income could be devastating. Both derive 90 percent of export earnings and more than two-thirds of government revenue from oil sales.

For decades Nigeria, which has requested $6.9 billion in emergency funding from international lenders, spent billions of dollars to keep the price of gasoline in the country artificially low. This policy was scrapped in early April.

Successive Nigerian governments have pledged but failed to end the country’s reliance on oil.

“My country is a classic poster country for poor governance of natural resources,” said Oby Ezekwesili, a former World Bank vice president, who also served as Nigeria’s education minister. “Oil prices rise and our expectations blow up, and then they fall and our expectations collapse.”

Nigeria has only just recovered from its last recession and is dealing with multiple crises, most notably the battle against Boko Haram militants. It has cracked down on minority uprisings, like Shiite protesters and activists who want a Biafran state, but it would take much more to suppress the millions of its citizens affected by the coronavirus lockdowns. RUTH MACLEAN, Dakar, Senegal

Four years ago this week, Crown Prince Mohammed bin Salman of Saudi Arabia said that by this year, the kingdom would be able to survive without oil. That prediction was woefully optimistic.

Saudi Arabia, the world’s largest crude oil exporter, is as dependent on oil as ever.

During his rise to become Saudi Arabia’s de facto ruler, Prince Mohammed began a range of initiatives, from diversifying the economy by expanding tourism and entertainment, to vanquishing foes in Yemen, to confronting Iran and other enemies.

Now, the price crash has jeopardized the finances needed for those projects — meaning that instead of investing in a new solar-powered city on the Red Sea, Prince Mohammed’s immediate focus will be balancing the kingdom’s budget.

The Saudi government was struggling to do so before the kingdom started an oil-price war with Russia last month, which only compounded the price drop caused by the pandemic. To balance its budget, the kingdom needs $80 a barrel oil, four times the current price.

Steffen Hertog, a professor of comparative politics at the London School of Economics, said the kingdom has about $500 billion in foreign currency reserves, which could help cover a budget shortfall for about two years. But he said that if they have to tap those assets, “the kitty is going to be much smaller.”

In recent weeks, the kingdom has tried, unsuccessfully, to reach a cease-fire in Yemen, where it has spent tens of billions of dollars since 2015 trying to defeat the Houthis, a rebel group aligned with Iran.

“The war in Yemen has been expensive and that has been one motivation for ramping it down now,” Dr. Hertog said. BEN HUBBARD, Beirut

Russia has in many ways shrugged off the price tumble. Despite the drama on oil markets, the national currency, the ruble, dropped just 2 percent on Tuesday.

The historically high oil prices of the past two decades had lifted the country economically and powered President Vladimir V. Putin’s ambitions. But Russia entered the crisis well prepared, with hard currency reserves and a tight budget put in place as protection against the Western sanctions of the past six years.

How long Russia can hold out, however, is unclear. Renaissance Capital, a Moscow investment bank, has estimated Russian reserves can support current spending at oil prices of $35 per barrel for six years.

Signs have emerged that Mr. Putin is nervous. Cushioning the price collapse is not the only demand on Russia’s reserves: The country has not announced major bailouts for businesses harmed by coronavirus lockdowns, but they are likely.

This month, Mr. Putin negotiated oil production cuts with other producers after walking away from talks with Saudi Arabia weeks ago.

Low energy prices also have defanged Russia’s oil and gas policies in Europe, which were partly intended to sow political divisions by giving favorable terms to Germany, Italy, Hungary and others. Now Russia has no leverage.

Still, Cliff Kupchan, chairman of the Eurasia Group, a political risk consultancy, said he did not foresee a significant weakening of Russia despite the price collapse.

“All boats will sink because of low oil and the coronavirus crisis,” said Mr. Kupchan. “Russia’s won’t sink more than others and may not sink as much.” ANDREW E. KRAMER, Moscow


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