Coronavirus and a price war battered oil markets. But the real victims will be far from Wall Street

March 11, 2020, 3:22 PM UTC

Fatih Birol, executive director of the International Energy Agency, has tracked global oil and gas markets ever since he joined the Paris-based organization 25 years ago. At 61, he has seen plenty of wild rides along the way.

Nothing, however, compares to this week. The collision of a massive oil glut—with Saudi Arabia’s decision to boost output to a record 12.3 million barrels a day from April—and the sharp drop in oil demand during the coronavirus crisis, has left the Turkish economist hunting for precedents.

“In recent history we have never witnessed such a time,” he told Fortune, describing the situation as having “no equal in oil market history.”

It’s clear that the twin supply and demand shocks will have deep and painful effects on countries around the globe. To gauge just how bad they might be, Birol suggests turning away from major stock indices and instead looking at the real-world fallout thousands of miles from Wall Street and the City of London.

Oil dependency

Oil industry CEOs will recover in the end, Birol points out, and rich countries like Saudi Arabia—whose oil-price war with Russia sent crude prices into a tailspin—can tap into its mammoth sovereign wealth fund for some time to come.

But in oil-producing countries whose governments depend almost completely on oil and gas exports, market gyrations have critical impact on people’s lives, with potential for true chaos. Birol warns that in some countries, moves like the Saudi-Russian price war could lead to economic disasters with political consequences.

In Nigeria, Algeria, Iraq, and Libya, to name four, this week’s turmoil could translate into a struggle to pay essential workers, like teachers, doctors and nurses. “At current prices their revenues will go down to historic lows,” Birol says. “It’ll be impossible in the case of Iraq, or also in Algeria, or Angola, to finance essential areas such as health, public sector employment or education.”

Demonstrators gather at Al-Khulani Square for an anti-government protest in Baghdad, Iraq on March 06, 2020. Chronic electricity shortages and daily blackouts have been the main grievance of the hundreds of thousands of protesters who stormed the streets in recent months.
Demonstrators gather at Al-Khulani Square for an anti-government protest in Baghdad, Iraq on March 06, 2020. Chronic electricity shortages and daily blackouts have been the main grievance of the hundreds of thousands of protesters who stormed the streets in recent months.
Murtadha Al-Sudani—Anadolu Agency via Getty Images

Take Iraq. This week’s market crash is likely to deepen turmoil in a country already experiencing plenty of it. Months of violent political protests forced the government to resign last November. Four months on, its leaders are still trying to form a new one. That’s leaving aside the risk that the coronavirus might be spreading in Iraq, perhaps brought by some of the millions of Shia pilgrims who cross into the country from neighboring Iran to visit the holy cities of Najaf and Karbala. 

As OPEC’s second-biggest producer after Saudi Arabia, Iraq sold an average 3.887 million barrels a day in February, up about 200,000 barrels a day from January, according to the newsletter Iraq Oil Report. Yet despite increased sales, the money it earned from oil dropped, with average barrel prices plummeting from $60 to $51 during the same period, according to government statistics.

Then came this week’s crash. At current prices for crude oil, Iraq is earning about half the $6.5 billion it needs every month to pay its civil servants—and crucially, to keep its power plants running. It’s not hard to imagine the impact of a prolonged price rout: Chronic electricity shortages and daily blackouts, which have lasted since the start of the Iraq War in 2003, were the main grievance of the hundreds of thousands of protesters who stormed the streets in recent months.

The problems extend well beyond Iraq, to others countries that depend almost completely on oil and gas revenues.

Take Nigeria—Africa’s biggest economy, with its biggest population by far—where energy exports bring in about 85% of foreign exchange reserves and allow the government to function.

There, the government drafted the country’s 2020 budget based on a crude price of about $57 a barrel—but that oil price, and the revenues it would generate, now look like a pipe dream. After the coronavirus hit China in January and cut its demand for energy, Nigeria—like Angola, another big West African oil producer—has struggled to sell its oil. “About 70 percent of April-loading cargoes from Angola and Nigeria have yet to find buyers,” the Nigerian Tribune newspaper wrote last Saturday—even before this week’s market plunge.

This week’s turmoil has only deepened the crisis. On Tuesday, the Lagos Chamber of Commerce and Industry said in a statement that the country could be headed for economic disaster. “A drastic reduction in the revenue of government could become inevitable in the near time,” it said. “The outlook for oil dependent economies looks rather gloomy.”

Repeated mistakes

Birol sees two underlying problems—ones that will come back repeatedly to plague oil-dependent countries, even after this current crisis is over.

First is the failure of countries to broaden their economic activities, by investing in non-energy sectors as a way of protecting themselves against oil shocks.

“I have been repeatedly calling for these oil producing countries to diversify,” Birol says. That message has largely been ignored as governments decide that even low oil prices are a safer bet than the complex, expensive process of overhauling their economies.

This choice will likely come to haunt these countries this year and beyond. The IEA on Monday announced that oil demand in 2020 would fall by nearly 90,000 barrels a day, in the industry’s first contraction since the 2009 financial crisis. And as the world transitions to renewables, demand is unlikely to see the spectacular growth of the last century.

There is a second major problem, too. Most oil-dependent countries base their economic decisions on market oil prices that they ideally need—so-called fiscal breakeven prices. Yet as 2020 has proved, those prices are not controlled by oil producers, especially since the U.S. shale boom has rewritten the old rules.

These days, the prices most oil-dependent governments near to balance their budgets—or even to break even on production—look nearly fantastical. Iran’s ideal oil price, in order for the country to balance its fiscal budget, is an extraordinary $194 a barrel—a figure that’s never reached, and is almost sure never to be. Iraq’s breakeven price is $60.30 a barrel, and Algeria’s is $109 a barrel, according to the International Monetary Fund. Even Saudi Arabia theoretically needs $83.60 a barrel for fiscal health.

Ultimately, says Birol, the global economy will recover. “Energy markets will see better times than we have now,” he told Fortune. The big question is how much dysfunction and disaster will unfold in the meantime.

More must-read stories from Fortune:

—Here are two of the biggest losers from the Saudi Arabia oil price war
—The oil industry is finally talking climate, but don’t expect quick changes
Oil demand was set to rise in 2020, then the coronavirus outbreak hit
Can Germany phase out nuclear energy and coal?
—Coronavirus may be the straw that breaks the back of oil fracking

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