TORONTO (miningweekly.com) – The end months of 2014 were grim ones for major oil-producing States everywhere, especially those in the Middle East. As the region continued grappling with the aftershocks of the Arab Spring and the threat of the Islamic State, they also watched the price of oil swoon.

All eyes have turned to Saudi Arabia, a leading oil producer and dominant member of the Organisation of the Petroleum Exporting Companies (OPEC). It pumps around 9.5-million barrels a day, exporting seven-million barrels, and has capacity to spare.

Brent Crude moved higher at the end of last week, standing at just over $49/bl on Friday, although it slipped to just below $49/bl by mid-afternoon Eastern Standard Time on Saturday.

The initial higher move was primarily tied to the peaceful succession of Crown Prince Salman to the Saudi throne after the death of King Abdullah.

However, Salman, 79, was reportedly not in the best of health. He had already announced his half-brother Muqrin as heir apparent and his nephew Mohammed bin Nayef as deputy crown prince. Salman had announced a commitment to maintain Abdullah’s policies.

But the smooth transition belied several pressing concerns for the House of Saud, the ruling family of Saudi Arabia. Externally, this included conflict in Yemen to the south and the danger of the Islamic State to the north. 

Also worrying, from Saudi Arabia’s perspective, was a possible thaw in relations between the US/European Union (EU) and Iran. If a nuclear agreement could be reached with Tehran, then sanctions on Iranian oil could be lifted, potentially leading to a sea change in the Middle East’s supply dynamics.

The big question now was whether Saudi Arabia would cut output to put a floor under the oil price, or whether it would continue to accept the current levels in what several commentators believed was a gambit to pressure many US shale producers out of the market.

“There’s a healthy debate among Control Risk analysts about the sustainability of the Saudi position, which is the key logistical question when considering how long these prices will stay low,” Control Risks MD global risk analysis Michael Moran told an audience attending the company’s New World Disorder presentation this month.

Control Risks believed oil prices would stay low in the short term, rising within a year or 18 months to reach $65/bl or above.

FEELING THE PINCH
Other oil-producing governments in the region, such as Qatar and Kuwait, were also coming to terms with the new price paradigm. They would have to rework their fiscal projections and budgets, Moran said.

Elsewhere in the Middle East and North Africa, including Algeria and Libya, both major oil producers, the turbulence unleashed across the region by the Arab Spring continued to compound matters.

Sub-Saharan African oil producers had found themselves similarly challenged by the price drop. “But leading African producers [make] light crude and there’s a double whammy here; their output has been displaced in the US by shale production, which is light crude,” Moran noted.

“Last year, for the first time in decades, the US didn’t import a gallon of oil from Nigeria, which is a stunning thing,” he added, noting that countries with light crude production that were dependent on the US market to any extent, particularly African nations, were now in a difficult position.

Nigeria also had problems with Islamist insurgents in the north of the country, which, while distant from the major oil-producing regions, was another strain the government could ill afford.

In Latin America, oil-dependent Venezuela had been hit hard by the price fall; it would even prove to be the undoing of the country’s far-left government. Other major producing nations like Brazil, Ecuador and Mexico had also been affected.

In Russia, the pressure was made more complicated by US/EU sanctions that were imposed after President Vladimir Putin’s annexation of Crimea and because of the ongoing proxy war in eastern Ukraine.

“The sanctions put in place owing to Ukraine were specific prohibitions on oil and gas companies, which led to specific retaliations against European food exports,” Moran explained. “They’re not economic sanctions so much as political ones, but we don’t see the Ukraine problem being solved this year to anyone’s satisfaction.”

Operators in the shale and tar sands regions of North America were feeling the pinch too, with Moran noting that many investment plans were now being overhauled.  About 1% of the US workforce was employed in the oil sector and some would undoubtedly face tough times in the coming months.

ON THE OTHER HAND
But for the overwhelming majority of the US population the fall in oil prices was a welcome boon as the price at the petrol pump remained subdued.

“And the money saved by the motorist is also going to the right place: to the pockets of the middle class who haven’t particularly benefited from the nature of the recovery since 2008,” Moran pointed out. “This money will act as a stimulant for the economy as it will be spent on other consumables and goods.”

It was an effect being replicated in other developed world nations.

Meanwhile, for developing nations heavily dependent on oil imports, such as Indonesia or India, the situation had provided a golden opportunity to cut oil subsidies and discounts that, in many cases, had been in place for decades.

Prior to the price fall, governments that tried to make these subsidy cuts ran the risk of provoking unrest and even riots, Moran noted, citing the civil disturbances in Nigeria in 2012 as an example.

Today, the oil price had fallen to such an extent that these governments could make the same cuts without fear of provoking public anger.

“Really this a great moment for well-run and prudent emerging markets to adjust their economy and get rid of some of those expensive distortions that, in some cases, took up 30% to 40% of government spending,” Moran said. “This could prove to be a really important moment for these countries.”