U.S. competitors hurting as oil prices drop

It’s not that U.S. producers are sitting pretty as Brent crude closed at $72.87 a barrel on Monday and hit a five-year low over the weekend. They are feeling the strain. And, if prices were to hover in the $70 per barrel range for a while, some drillers in the shale plays that have driven the nation’s energy boom might halt pricier projects. Analysts and banks have warned of a downturn in capital expenditures that could restrain job growth and slow new projects. A future round of price volatility also may come.

But the U.S. is in much better shape than more energy-dependent economies.

Unlike other oil-producing nations, the U.S. consumes about twice as much as it produces. If prices remain low for only the short term, as many analysts expect, the U.S. economy could benefit through cheaper gasoline prices that would spur more spending elsewhere. A 50-cent-per-gallon drop in gasoline prices would amount to a $65 billion stimulus over a year, noted Kevin Book, managing director with energy consulting firm ClearView Energy Partners LLC.

On top of that, major competitors, especially those with state-run oil companies that finance a bulk of national budgets — such as Saudi Arabia, Russia and Venezuela, as well as smaller producers such as Iraq and Nigeria — might have bigger financial problems.

“You look at those countries, their central government revenues is often times overwhelmingly derived from oil exports,” Sam Ori, executive vice president with energy security group Securing America’s Future Energy, told the Washington Examiner. “When you have a drop in oil prices like that it totally forces them to reconfigure their budgets.”

Iraq is a case in point. The nation, with other members of the Organization of Petroleum Exporting Countries, tried forcing Saudi Arabia to cut the spigot at the oil cartel’s meeting Thursday. They wanted oil prices to rise to fill government coffers. But Saudi Arabia, with a buffer of billions tied up in foreign exchanges and the predominant producer in OPEC, which pumps about 40 percent of the world’s oil, was more concerned about preserving market share.

On Sunday, Iraq scrapped its budget for next year, with Prime Minister Haidar al-Abadi citing plummeting oil prices.

“Two days ago, the price of a barrel fell to $64,” Abadi said, according to Reuters. “It may be a small difference, but the budget was originally very tight. With this fall, the budget was not possible in this form.”

The timeline for a price recovery largely depends on whether Saudi Arabia’s goal is to drop prices low enough to slow U.S. production or to find a floor, Book said. The floor might be lower than Saudi Arabia expects. While shale wells in plays such as the Bakken formation in Montana and North Dakota are more expensive than conventional wells, U.S. producers have cut operating costs in recent years through technological advances.

“It depends on whether the Saudis are in fact-finding mode or price war mode,” he told the Examiner. If “we’re in price war mode, we may see another year of price war mode.”

It’s not clear, however, whether the weaker prices weighing down Russia’s budget will affect how Russian President Vladimir Putin handles foreign policy.

Surely, falling oil prices have hit Moscow, which derives half its revenue from oil and gas. The U.S. and European Union have already imposed sanctions on Russia for its aggression in Ukraine, but the sanctions have done little to restrain Putin. On Monday, the Ukrainian military said Russian special forces attacked an airport in Donetsk in eastern Ukraine, the latest in an escalating episode of fighting there despite a Sept. 5 ceasefire agreement.

“It seems like his political motivations and the fact that he’s trying to maintain his popularity is overriding the impact of declining oil production,” said Margo Thorning, senior vice president and chief economist with the American Council for Capital Formation. “If Russia goes into recession, as many are predicting could happen, it’s not clear to me that that’s enough to change how he approaches Ukraine.”

Falling energy prices also might affect America’s neighbors.

Lucrative, but expensive, deepwater drilling projects could be stalled in Mexico. President Enrique Pena Nieto pushed through reforms to open the country’s oil and gas sector to private investment earlier this year for the first time since 1938. His hope was to draw foreign money and expertise that the state-owned company Pemex lacked, but current prices could deter those endeavors.

New oil sands projects in Canada are also unlikely at current prices. They were among the first to get shelved during the last slump in oil prices in 2008. That’s bad news for Prime Minister Stephen Harper’s government, which is relying on exporting the carbon-dense crude to spur economic growth.

“[I]f these trends continue, there’s reason to expect that new investment decisions on the projects that were expected to lead to further production growth later this decade may be delayed, and that could have a significant impact on pipeline discussions as well as on activity in support industries for oil sands,” wrote Andrew Leach, a prominent oil sands expert and Enbridge Professor of Energy Policy University of Alberta.

Another complication comes from nuclear talks with Iran. Booming U.S. production has given it and its allies more leverage to impose sanctions that, until 2012, would have been unthinkable because markets gobbled up all of the 2.5 million barrels Iran produced.

Iran, however, is in a bit of a predicament.

Falling prices have slashed its revenues from production, which sanctions have cut in half. But agreeing to concessions on its nuclear program to ease export restrictions could force prices down even further when Iranian supplies come onto the market. Saudi Arabia might refuse to cut production, viewing the lower price as a blow to its arch enemy.

Ori said price drops could erase any potential financial gain for Iran, saying, “They’re in a terrible a Catch-22.”