Strong rebound in oil prices unlikely for foreseeable future

Around the world, the falling price of crude oil has governments and markets on edge. Oil prices are now down nearly 70 per cent from a high of US$115 per barrel in 2014, and we must adjust to the reality that a strong rebound is unlikely for the foreseeable future. Brent will probably climb back towards US$45 a barrel this year as lower prices push some North American production offline, but only a bolt from the blue that cuts deeply into supply will boost the price much higher than that.

US production is slowing, but not as quickly or to the degree that many analysts expected, and new technologies ensure US production can be quickly ramped back up to take advantage of any price surge, limiting the lifespan of any major price recovery. In addition, the end of sanctions might well allow Iran to boost oil exports by one million barrels per day (bpd) by the end of this year. Iraq is producing more too. Despite its troubles, Libya will probably add 200,000 to 300,000 bpd in the spring.

Here's the real bottom line: No government has an incentive to slow production in hopes of pushing the price higher. A Saudi cut is more likely to reduce Saudi market share than to boost prices, because others will step in to produce more. Russia, burdened with sanctions and in recession, has no reason to slow production. Iran has been waiting for years to sell more oil, and that's exactly what it'll do, even at the lower price.

Finally, at a moment when the world is chin deep in crude oil, demand growth is likely to slow from about 1.7 million bpd last year to 1.1 million to 1.2 million bpd this year. That's mainly a result of the economic slowdown in China and other emerging market importers.

A worker in an oil field outside Kogalym, Russia. No government has an incentive to slow production in hopes of pushing the oil price higher. PHOTO: REUTERS

Which countries have the most to worry about at these prices? It is not surprising that Russia's troubles will get a lot of media attention. Its government draws half its revenue from energy exports. But President Vladimir Putin's government still has plenty of cash on hand - more than US$350 billion (S$488 billion) in international reserves. Russia also has a low debt-to-GDP ratio that makes it much easier to raise more money, and its flexible exchange rate helps cushion the fiscal blow of lower oil prices. Nor does it hurt that Mr Putin has an 82 per cent approval rating. He can sleep easy for now.

The Saudis have more to worry about. The government still has over US$600 billion in reserves, but that's US$100 billion less than it had a year ago, and unless Saudi royals can fundamentally reform their economy (don't bet on that), they'll one day run out of the cash they need to provide the cradle-to-grave financial support that their citizens have been taught to expect. This comes at a time when rival Iran is on the rise, the United States has become an unreliable ally and there are growing tensions within the family over the next royal succession process.

But if there's one country that could face a real crisis this year, it's Venezuela. President Nicolas Maduro now faces a severe economic meltdown, shortages of all kinds of products, a congress controlled by the increasingly angry opposition, and maybe a recall referendum to push him from power. Venezuela's heavy crude is now trading at about US$24 a barrel, and some form of debt default later this year will be hard to avoid. Mr Maduro may soon be apartment hunting in Havana.

It's not all bad news. Fear of hard times can sometimes persuade leaders to adopt constructive attitudes towards their political challenges. If Libya's competing factions can't work together to build and sustain a unity government, none of them will benefit from revenue produced by restored oil exports. Peace could push exports to 400,000 bpd by the middle of this year. In addition, lower oil prices, and the painful economic adjustments and risk of social unrest they might bring , will probably create a modest political opening in Algeria as long-time President Abdelaziz Bouteflika finally steps down in favour of a successor. Unfortunately, higher hopes in Libya and Algeria will prove cold comfort if lower-for-longer oil prices create serious long-term challenges for more significant emerging economies like Russia, Saudi Arabia, Brazil, Nigeria and others.

  • Ian Bremmer is president of Eurasia Group and author of Superpower: Three Choices For America's Role In The World. Find him on Twitter @ianbremmer.
A version of this article appeared in the print edition of The Straits Times on February 11, 2016, with the headline 'Strong rebound in oil prices unlikely for foreseeable future'. Print Edition | Subscribe