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Page added on December 14, 2015
This is what happens when oil-rich nations can’t pay their bills
In the summer of 2014, the price of oil tanked, dropping from over $110 per barrel of Brent Crude to where it sits now near $48 per barrel. Cheap oil is good for the consumer, but it has caused more than a few headaches in oil producing states.
Some countries, such as Norway, have used cash flows from oil exports to stockpile massive amounts of wealth. While others have relied heavily on oil to balance their fiscal budgets.
With the current oil prices, these countries now have a hard time balancing their national budgets. Look at the chart from Deutsche Bank’s strategist Michael Hseuh that shows the break-even price for major oil producing countries.
Mauldin Economics
As you can see, $48 per barrel oil isn’t going to cut it for any of these countries. All but three countries in the chart require prices above $100 per barrel in order to break-even.
Some Countries Have Built In Buffers
Low oil prices can be devastating for some states. Take Venezuela for example, where oil represents 95% of the country’s exports and more than half of its GDP. Venezuela now suffers from crippling inflation and is on the edge of default.
Other states have been more prudent with their money and have buffers in the form of sovereign wealth funds (SWF). (SWFs are state run investment funds that invest in stocks, bonds, real estate, precious metals, and other alternative investments.)
As of March 2015, sovereign wealth funds around the world held $7.1 trillion in assets according to the Sovereign Wealth Fund Institute. Of which about $4.29 trillion is derived from nations dependent on oil and gas revenues. Five of the world’s largest SWFs that depend on energy revenues account for 45% of total global SWF assets.
Mauldin Economics
The only country that is able to balance its budget at today’s oil prices is Norway with a breakeven estimate of about $40 per barrel. At 200% of the country’s annual GDP, Norway’s SWF provides quite a large buffer from oil price fluctuations. And it isn’t afraid to use it.
Norway now plans on dipping into the funds cash for the first time in 2016, at least 20 years ahead of schedule. In addition to tax cuts, the 2016 budget includes plans to spend $25.2 billion from its oil funds, or about 2.8% of the total fund value. This amounts to less than the fund’s 3.8% average annual growth rate. So at the moment, Norway is only spending the interest from its massive SWF.
Others Must Take Drastic Measures
Other major oil states don’t have the same luxury as Norway. Market conditions have forced them to sell barrels of crude at a loss.
One option to help soften the blow is to cut capital expenditure.
Fitch Ratings estimated that the fiscal breakeven point for Saudi Arabia would have been reduced by $31 per barrel if no capex had been spent in 2014. With a break-even point around $106 per barrel, this drastic measure still wouldn’t put Saudi’s budget on track.
Another option is to start dipping into their slush funds.
This may require liquidating some assets. With more than half the $7 trillion managed by SWFs tied directly to energy revenues, this could send shockwaves through global markets.
As state run entities, the details of SWF holdings are murky at best. Some funds are more transparent than others. A quick look at the guidelines for a few of these funds shows how intertwined SWFs are in global markets.
As of September 2015, Norway’s fund was invested 60% in equities (36% US), 37% fixed income and 3% real estate. The United Arab Emirates fund’s target benchmark range for its investments is between 35%–50% North American assets, 20%–35% Europe, 10–20% developed Asia, and 15–25% emerging markets.
Cheap oil is good for the consumer, but if SWFs are forced to start unloading assets as a result, the selling contagion could quickly spread around the world.
16 Comments on "This is what happens when oil-rich nations can’t pay their bills"
penury on Mon, 14th Dec 2015 8:31 am
It appears that there are some people who are not capable of looking at the total costs of fossil fuel to determine true cost.
ghung on Mon, 14th Dec 2015 8:34 am
“…Brent Crude to where it sits now near $48 per barrel.”
Whoops…. I’m showing Brent at around $37, WTI around $35.60, and US natural gas in the $1.80s (yikes). Seems even Norway isn’t breaking even these days.
Question: Why doesn’t the US have a sovereign wealth fund?
paulo1 on Mon, 14th Dec 2015 8:43 am
You’re not kidding.
My son informs me that some Alberta bozos are now posting death threats to Alberta’s new NDP Premier, Rachael Notely, (as if she is the cause of the slow down in the Oil Sands).
Of course if your life’s ambition is to own an F-350 4X4 diesel PU with a couple of sleds in the back, (quads in the summer), and you have no plans to go beyond grade 9, (and still hope to earn $100,000+/yr), well I guess you’re going to be miffed at the price downturn!!!
I have mentioned this before on this site about taking a construction super out fishing two summers ago. When I told him the Canadian oil boom would not last, and that one day soon the only high paying jobs would be plant maintenance, he looked at me like I was effing nuts. Meanwhile, his Province is now broke+10 with diminishing prospects, falling house prices, and offering up deat threats to its Premier.
Kenz300 on Mon, 14th Dec 2015 8:52 am
It is time to speed up the transition away from fossil fuels.
Fossil fuel companies are spending millions to spread doubt about Climate Change……
4 Ways Exxon Stopped Action on Climate Change
http://ecowatch.com/2015/11/27/exxon-stopped-climate-action/?utm_source=EcoWatch+List&utm_campaign=1d016dacb9-Top_News_11_28_2015&utm_medium=email&utm_term=0_49c7d43dc9-1d016dacb9-86023917
shortonoil on Mon, 14th Dec 2015 9:10 am
“Whoops…. I’m showing Brent at around $37, WTI around $35.60, and US natural gas in the $1.80s (yikes). Seems even Norway isn’t breaking even these days.
Question: Why doesn’t the US have a sovereign wealth fund?”
These estimates are probably based on EBITDA, they do not include the cost of replacing reserves that are being extracted. An oil company that is not replacing its reserves is an oil company that is going out of business. By definition!
When looking at the value of sovereign wealth funds it is necessary to look at where that money is parked. Just because the sovereign has squirreled away some money doesn’t mean that they will be able to collect it when they need it. Ask any squirrel that goes looking for its store house of treasures in the winter. If these funds are in other sovereign bonds, like US Treasuries, how exactly are they going to get redeemed. The US doesn’t have any money, just one big printing press. If even a small percentage of the bonds outstanding where to be suddenly redeemed it would be good bye US FED note, and hello copper, nickle, silver and gold. What these funds are going to get back is what they are trying to get rid of – debt.
Davy on Mon, 14th Dec 2015 9:38 am
Do some of you remember a year ago when the NOo was trumpeting LNG and all the terminals that we’re going to be built. It appears there is some pain going on in the LNG markets that makes a huge build out of terminals less likely for at least a few years if ever.
http://www.zerohedge.com/news/2015-12-14/natgas-bloodbath-accelerates-amid-lng-glut-worse-oil
shortonoil on Mon, 14th Dec 2015 10:03 am
The IEA, and everyone and their brother is projecting that the market will stabilize next year. Inventories will decline, and demand will pick up. Well, its not going to happen:
http://www.thehillsgroup.org/depletion2_022.htm
When production falls, and it will at $35, so also will demand. This is not a barrel problem it is an energy problem. At the rate that they are putting 2 + 2 together it will be minus 10 by the time they figure it out. They probably just don’t want to admit that there is nothing that anyone can do about it. We hate to inform these folks but the fairy god mother is now on permanent vacation.
Smalls on Mon, 14th Dec 2015 10:57 am
@shortonoil “are they going to get redeemed. The US doesn’t have any money, just one big printing press. If even a small percentage of the bonds outstanding where to be suddenly redeemed it would be good bye US FED note, and hello….”
…keeping in mind one of the largest holders of U.S. debt is the Chinese….and the yuan just got the nod from the IMF to become a reserve currency. One of the biggest lenders to the U.S. pulls the plug on the U.S. debt financing then copper, nickel, silver and gold may be a decent store of value. Oil is in USD…do we watch for OPEC to decouple from the USD and move to the yuan? (May not matter if we see swift moves towards fusion that causes energy source upheaval.) For centuries China was the leading economy with the US only getting in on the game the last couple. This debtor nation likely headed to long term stagnation problems much like Japan has been swamped under the last couple decades. The U.S. needs BIG inflation to get out of the debt pile…. A lot of questions of what the new world order is planning. Hold on tight. The USD may be strong now but I think it is overpriced.
Davy on Mon, 14th Dec 2015 11:56 am
“Beware Energy’s Junk Debt Army”
http://www.bloomberg.com/gadfly/articles/2015-12-14/junk-bond-market-dominated-by-tiny-commodities-issuers-gadfly
“Two of the scariest words in financial markets these days are “commodities” and “debt.” Saying them in the same breath is virtually a profanity. Looking at the high-yield bond market, though, the first word on your lips may well be NSFW.”
Apneaman on Mon, 14th Dec 2015 1:18 pm
Never mind $35 a barrel, Canada’s oil is selling for closer to $20
http://business.financialpost.com/news/energy/never-mind-35-canadas-oil-is-selling-for-closer-to-20
Apneaman on Mon, 14th Dec 2015 1:59 pm
I’m originally from Alberta (Calgary) and I have family and know many people in the oil biz. Up to a year or so ago there was much bragging, swagger and a consumer orgy. Now it’s pain time. My good friends brother killed himself and it tore up his family, so no one wishes that on anyone, but what the fuck were these people thinking was going to happen? Alberta is like Texas with the booms and busts of oil. Now we learn from paulo that the premier, who was only elected months ago, is being scapegoated and getting death threats. I have been around long enough to have seen a number of economic downturns and I have to say that the reactions are different this time. I’ve seen the anger before, but not to this degree and the violent rhetoric is new, especially in Canada. Yes the elite have fucked the little guy over at an ever increasing pace the last 40 years, but personal responsibility still matters. Hard to take care of one’s family after you have killed yourself. We have a society of teenagers. Want their independence, freedoms and parties, but without the responsibility. This is cultural collapse.
Red Deer food bank demand more than doubles
Executive director says in his 18 years he has never seen it this bad
http://www.cbc.ca/news/canada/calgary/red-deer-food-bank-sees-disturbing-demand-increase-1.3364216?cmp=rss
Suicide rate in Alberta climbs 30% in wake of mass oilpatch layoffs
‘It says something really about the horrible human impact of what’s happening in the economy,’ counsellor says
http://www.cbc.ca/news/canada/calgary/suicide-rate-alberta-increase-layoffs-1.3353662
Police likely to investigate death threats against Rachel Notley, security expert says
‘They are being assessed as to the likelihood that they’ll carry out an attack,’ says former RCMP officer
http://www.cbc.ca/news/canada/edmonton/police-likely-to-investigate-death-threats-against-rachel-notley-security-expert-says-1.3362620
kanute on Mon, 14th Dec 2015 4:31 pm
We don’t need a SWF, we can print as much money as we want….oh wait.
Harquebus on Mon, 14th Dec 2015 6:14 pm
All currencies are fiat and fiat currencies are intrinsically worthless.
The Norwegians have traded precious fossil fuels for worthless fiat crap.
Davy on Mon, 14th Dec 2015 6:31 pm
Harqu, the “intrinsics” of currencies of any kind is based solely on confidence. It does not matter if they are gold or paper. It is the underlying confidence of trust that counts. Our system today is a menagerie of confidence and trust. It is caged and controlled but like any wild animal it is known that a herd can spook for the slightest of reasons. No control or any cage can prevent a stampede of a desperate herd.
makati1 on Mon, 14th Dec 2015 7:42 pm
I have paper IOUs in my safe from maybe a dozen countries. Their purchasing value has bounced all over the place in the last 10 years. Mostly down. I keep them as souvenirs of past times and places, not their cash value. My ‘cash’ is not in paper.
There are no ‘rich’ nations. There are some who are managing and will manage no matter what happens, but most, no, ALL of the 1st world nations are beggars at the gate if you look close. 3rd world nations are mostly in debt to the 1st world due to past colonial connections, but that will vanish when the 1st world goes down.
~60& of the world lives day to day and will not notice. another ~20% will notice but adjust after some pain. The top 20% will suffer the most and probably have the highest death rates due to their soft lifestyles and bad habits. All through history, it was the wealthy that had the worst heath and died the youngest because of those two factors: soft lifestyles/bad habits. This time is not different.
rockman on Mon, 14th Dec 2015 10:11 pm
Apeman – “I’ve seen the anger before, but not to this degree and the violent rhetoric is new”. Maybe I’m not hanging out with the right crowd of Texicans. Maybe I should cultivate a younger crowd. LOL. But I hear no anger. In fact I really don’t hear hardly anyone in the Houston oil patch expressing much surprise at the down turn.
Maybe it’s because the over 50 crowd has gone thru it before. I interact with mucho folks every month and a lot of them in the service industry which has been hit much harder then the operators…so far. I honestly haven’t heard one really pissed of person. Not even bitching about President Obama with regards to energy. Other policies: Hell yes! This is Texas after all. LOL.
Of the dozens of service company reps I know that have been let go I can think of only one actively looking for a job. We’ve actually had a term for this dynamic for decades: “He’s gone to the house”. We know exactly what it means: he’s out of the game. If my assumption that the oil/NG lower prices are going to persists for a good long while there will be many tens of thousands of gray hairs going to the house in the next few years.