A barrel of oil at $ 20 … What are the consequences for Saudi Arabia, Russia and America?
The French newspaper “La Tribune” said that the drop in the price of a barrel of oil to below $ 20 will not pass without consequences, and attributed this rapid deterioration since last January to a bilateral shock: a demand shock that was aggravated by the impact of the Corona pandemic on the economy, and a supply shock because of the conflict between Saudi Arabia and Russia.
The newspaper pointed out that the most prominent results of the decline in crude oil prices appear in the price of fuel at the pump. I set an example of the drop of a liter of diesel in France to about 20 centimeters (0.2 euros) since the beginning of the year, to reach its lowest level since 2017, while this decrease is more limited for gasoline, which reached about 13 centimeters.
The newspaper warned that this decline is still not clear to the consumer for two reasons: first, that an important part of the bill is for taxes, and second, that the price adjustment at the pump takes time before it follows the price level of the barrel, so it continues to decline.
Saudi Arabia and Russia
After Moscow refused to cut its oil production, Riyadh’s response was to lower the selling prices of its oil and increase its production sharply.
Although Saudi Arabia does not lose money if it sold oil at $ 20 a barrel because its production costs only $ 2.80, its government needs a price of more than $ 80 a barrel to balance its budget and implement its ambitious plans to diversify the economy, according to the French newspaper report.
As for Russia, where production costs are much higher than $ 20, it can balance the budget at a price between $ 40 and $ 50 a barrel.
American shale oil
After years of prosperity, here is the US shale oil going through a difficult period – as the newspaper says – because the collapse of prices can be fatal to many companies in this sector, knowing that it needs on average a barrel price of about $ 50 to achieve profits.
Although efforts to reduce costs – such as that made in 2014 – could contribute to lowering this threshold, the sector is heavily indebted, according to the newspaper, and has to repay $ 86 billion in loans over the next four years, according to Moody’s accounts.
In addition, these companies must constantly dig to maintain their production, which means continued investment, and based on this the US government is studying a plan to help the most vulnerable to maintain American energy independence, according to the newspaper report.
The rest of the producers
Away from the three giants in the market (Saudi Arabia, Russia, the United States), lower prices can have far more dire consequences for other producing countries, especially for emerging countries whose budget depends heavily on oil-related revenue.
And countries in Africa, such as Algeria, Nigeria and Angola, can fall victim to the Coronavirus and the conflict between Riyadh and Moscow, and countries like Iraq, Iran, Libya and even Venezuela, the newspaper says.
And if prices do not rise quickly according to the newspaper – then all these countries will have to take severe austerity measures, which may lead to social crisis, or even political crises.
The newspaper believes that the first result for Western oil companies is a sharp decline in the stock market, as its shares have declined since the beginning of the year to between 50 and 60%.
Keeping the price of a barrel at $ 20 now threatens its profitability, and it may translate into a sharp drop in investment spending in the short term, pending the recovery of prices, as the newspaper sees.
And if prices do not rise, it will appear difficult to pay the generous profits to the shareholders, and they will narrow the room for maneuver to prevent further decline in the stock market. However, the most catastrophic impact will be on oil service groups that will suffer from low investment.
Source: La Tribune