Shale industry hedges, OPEC fiddles and Russia squirms
Oil prices continued to fall on Monday, hitting a five-and-a-half-year low, with everyone seemingly intent on making the overabundance of supply someone else’s problem. Russian oil output in 2014 hit a post-Soviet high, while Iraq is exporting more oil than it has since 1980. Meanwhile, OPEC appears to be playing a waiting game against oil price hedges by the U.S. shale industry, even as some producers take profits from existing hedges and plant new ones, effectively extending the date at which they will feel the real impact of price declines.
A couple of weeks ago, Rabah Arezki and Olivier Blanchard of the IMF blogged their belief that the decline in oil prices should provide a shot in the arm of between 0.3 and 0.7 percent to global GDP in 2015. Of course, that is an aggregate guess, as they explain:
While no two countries will experience the drop in the same way, they share some common traits: oil importers among advanced economies, and even more so emerging markets, stand to benefit from higher household income, lower input costs, and improved external positions. Oil exporters will take in less revenue, and their budgets and external balances will be under pressure.
As this Reuters graphic shows, for both exporters and importers, over the last 12 months, the local price of oil has fallen relative to their currency’s performance against the dollar. Roughly half of Russia’s budget comes from oil and gas, so the fact that oil is tied to the U.S. dollar helps explain Russia’s currency woes. But last year Russia also incurred a spate of sanctions from the U.S. and the EU in response to military action in Ukraine, so inflation was aggressive even before oil’s drop, particularly for food. The good news for Russian President Vladimir Putin is that a pretty bad 2014 came to an end last week; the bad news is that right now 2015 doesn’t look a whole lot brighter–and most of the world isn’t in the bind that he’s in.