Will All OPEC Nations Witness Venezuela Like Crisis By 2030?
The globally dipping demand and soaring supply for oil has made the price of crude oil volatile; this can soon shatter the economy of oil exporting nations
Photo Credit : Reuters
Venezuela, a nation sitting on world’s biggest oil reserves is now under a debt of $7.2 billion, has a growth rate of minus eight per cent, an inflation rate of 481 per cent and an unemployment rate of 17 per cent. This happened due to the country’s heavy dependence on oil exports, the prices of and demand for which are coming down heavily.
So, is Venezuela just the starting point? Will this fire reach the forests of all OPEC nations?
The answer is ‘likely’. The world is witnessing a dip in oil demand and a surge in oil production.
As per organization of petroleum exporting countries (OPEC) report of 2017, “Oil demand in February (2017) fell by approximately 0.5 million barrel/day (mb/d) or 2.4 per cent as compared to the same month last year, due to various factors and in line with the slowing growth in the US economy in the first quarter. The bulk of oil demand losses were attributed to gasoline, whose requirements fell by 0.2 mb/d year on year, mainly as a result of the extremely high baseline registered in the same month last year.”
The dip in the global demand for oil can be attributed to various factors like weak economic activity across the globe as the demand for energy is directly proportional to the economic happenings. Further, there has been an increase in focus on the alternative source of energy throughout the world. Governments of many nations are actively boosting solar, tidal and geothermal projects for energy. France is stepping towards banning petrol and diesel vehicles by 2040; Niti Aayog in India has set an even more ambitious deadline to make the nation switch to electric cars by 2030.
To add to the misery of OPEC nations, the sanctions on Iran (also an OPEC nation) were lifted in 2016 by the then American president Barack Obama. This has led to a surge in the supply of crude oil. Iran’s crude oil production as on March 2017 was 4.544 million barrel per day. This huge production has led to a surplus supply in the global market.
Meanwhile, the oil production in America has also soared up leading to low import by the nation. The Energy Information Administration department of America has forecasted a production of 10 million barrels per day for the next year. Thus, OPEC nations losing one of their big consumers.
To maintain the demand-supply ratio for stabilizing the oil prices, OPEC nations also reached a consensus to limit production to 32.5 mb/d. As oil profits lubricate the Russian economy as well, the country has also agreed to follow OPEC nations’ footsteps. However, the prices still are half the level of what they were a few years ago.
De-facto leader of OPEC, Saudi Arab is the worst hit due to the restrictions on production as it has to cut about 40 percent of the cuts pledged by OPEC. It has reduced output by more than 500,000 barrel per day so its total production now runs slightly below 10 million billion per day. Saudi Arabia's income from oil fell by 23 per cent last year, highly significant in an economy where around 73 per cent of total revenue comes from the industry.
According to the predictions of Royal Bank of Canada Capital Markets, five oil-producing economies (Nigeria, Venezuela, Libya, Iraq, and Algeria) are on the verge of collapse if oil prices do not stabilize soon.
Not just OPEC nations, but other oil exporting nations like Russia might also suffer the agony of falling oil prices globally as about half of Russia's budget revenues currently come from energy exports.
An escape plan for OPEC countries could be to stick to oil production limit (devised by OPEC), tap potential markets and even lessen the dependence of their economy on oil exports. However, at present, no doctor can claim to have the right medicine to save the OPEC nations from the incoming crisis.