Friday, 19 February 2016

How the minor oil players are reacting to the slump in price

OPEC's freeze on production may not bring the desired price surge many producers were looking for but it does signal a shift in sentiment away from expansionary production which does provide somewhat of a relief for many producers. However the bigger players have only taken decisive action when their own economical state has been threatened with cries of help from smaller players falling on deaf ears.

What response have these small producer taken to shield their economies from the damaging blow?

Norway

The Scandinavian nation is the largest producer of crude oil in Western Europe and has resorted to drawing funds from its $810 billion sovereign wealth fund to soften the blow from the loss of revenue in government's budget. Although a fund with that amount of money would take some time to drain off , the point is the state is unable to rely on the revenues produced from oil to fund its policies which is problematic.

Analysts suggest that a figure as high as $10 billion might be needed to be drawn to inject cash flow into government coffers but this figure wouldn't put too much of a dent in the overall figure as the fund could raise this from the dividends and income it receives annually.  

Furthermore the trend of aging and stagnating economies within the Scandinavian region places Norway at risk that the grips of this epidemic may worsen the crisis and lead the government to become excessively reliant on these savings to abate fears of its reign throughout the economy.

Nigeria

It was always known that Nigeria's cost of production in terms of oil stood at the higher end of the cost curve so any declines in the price of oil would yield pleas of reduction in output but being an insignificant player these calls for help have never penetrated the soul of OPEC as much as the likes of the Middle Eastern nation members would.

However no one would've thought the drop in oil prices would descend at such a rapid pace causing calamity around every corner with the weakest receiving the biggest blows. Nigeria was no exception to this and with the transcendency of a new government, threats from Boko Haram and ascending to the position of Africa's largest economy there were a lot of eyes watching closely to how new president Muhammadu Buhari would juggle these priorities.

A nation who heavily relies on oil for revenues, Buhari couldn't stand by and watch the depletion of foreign reserves at an alarming rate slipping away fast which pressure him to impose currency controls to stop the rout. Problem being this has made the situation even worse than it was to start off with.

Foreign businesses are struggling to expatriate profits to their home countries potentially damaging the reputational on investor confidence that had gradually lifted capital inflows. The resultant outcome is the emergence of a black market for dollars that continues to skew the price by diverging further apart from the official rate set by the Nigerian Central Bank.

Buhari's long term strategy of making the nation less reliant on oil isn't winning over many critics of his policies and one wonders how much longer will ordinary Nigerian be willing to tolerate an ailing economy coupled with perceived empty promises before a breaking point can be reached.


 
Venezuela

Hyperinflation isn't something new to Venezuela whose had its fair share of political instability in its history marred with economic mismanagement that's left scars. The current sketch of things in the oil rich nation is a troubled one where government is no longer able to provide its citizens with fuel subsidies that boast the cheapest gasoline in the world.

President Nicolas Maduro made sweeping changes that saw its currency being reset at a much lower devalued rate and a hike on gasoline prices, the first price increase in almost 20 years.

Much the same as its counterparts in Nigeria the country relies on oil revenue to feed its economy, a situation that hasn't played out very well. Due to the drop Venezuelans have seen prices of imported goods, items classified as essentials like foods and medicines, skyrocket as shortages plunge quantities in stock.

Suggestions that such dramatic measures would stir disruptions and create unrest amongst citizens is far off from what we could see, these are frequent occurrences.
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