Safeguarding national interests is no sin. When the oil consuming nations endeavor for lower, and still lower oil prices, use all the power and persuasion in their command toward the cherished goal of oil at cheap prices, no one criticizes. Every buyer is obliged to pursue the best possible price and it is very much his or her right to keep haggling until the last.
And similarly on the other hand, it is the right of the seller and the producer too, to look after their short- and long-term interests too. Indeed no fun criticizing those who strive for ‘fair returns’ from crude sales. It is very much the strategic, national duty of the producer and especially so since their economies are largely dependent on returns from the sales of this natural asset.
A win-win situation needs to be looked for, in this transaction too. The persuasion from the buying side should not enter the realm of arms twisting. It has to be a dialogue between two equals. And market fundamentals should be the driving force behind the equilibrium achieved.
However, energy world is distinctly different. If prices continue to ascend, pressure starts to mount from the top and if required, not one rather two visits, within the short span of a few months, from arguably the most powerful man on the earth, is also not regarded as unjustified. This is politics and not market dynamics.
However, can the energy world afford it for long without negative consequences? Saudi Arabia, the world’s top oil exporter, derives more than 85 percent of its state revenues from oil exports, while crude oil accounts for about half of gross domestic product. Its dependence on the crude market fortunes is immense and Riyadh, like other producers too, definitely has reasons to aggressively defend and safeguard its basic interests.
And the moot point becomes all the more apparent when seen in the background of a recent Standards & Poor (S&P) report, very much underlining the vulnerability of the oil producers to the whims of the crude market — oscillating from $147 a barrel on July 11 last year to the lows late the same year. Defending the crude markets is more a necessity — and not a luxury — for these producers.
The new oil price vulnerability ranking published by Standard & Poor’s Ratings Services states that Bahrain, Saudi Arabia and Azerbaijan are the three rated oil-exporting countries most vulnerable to a fall in oil prices, due to the relative focus of their economies, exports, and revenue streams on hydrocarbons.
The smallest and largest Gulf Arab oil producers are vulnerable to the rapid drop in crude prices since last summer despite substantial surplus revenue cushions they amassed during a six-year rally in oil prices, the ratings agency said.
“We believe these sovereigns’ high index score stems from the relative focus of these countries’ economies, exports, and revenue streams on hydrocarbons, which in the case of Saudi Arabia outweighs ... the impact of a significant fiscal buffer,” S&P said in the report.
Nigeria and Oman rounded off S&P’s top five most-vulnerable states, while Kuwait, the world’s third-biggest oil exporter, ranked sixth, and top global liquefied natural gas exporter Qatar came in eighth.
Abu Dhabi, holder of bulk of United Arab Emirates oil reserves, ranked 13th. Non-oil sectors contribute to more than 60 percent of UAE GDP. Among the oil producers, Cameroon and Norway were reported as the least vulnerable to oil price fluctuations.
Standard & Poor’s new ranking indicates the overall degree of exposure particular countries have to oil prices, taking into account the relationship between oil prices and a country’s economy, public finances, and external accounts.
A heavy concentration of economic activity in the hydrocarbons sector naturally tends to raise a country’s vulnerability to a sharp fall in oil prices. Similarly, a greater concentration in exports of oil or gas products tends to render a country’s external revenues more vulnerable to falls in oil prices. Countries where the state has near total control of the hydrocarbons industry, and therefore benefits most from the hydrocarbons revenues, are also those countries which tend to be most vulnerable to a fall in oil prices.
The S&P report once again underlines the reliance of oil producers on their sole export — the crude. All the glitter that one witnesses today in the oil rich region from Riyadh to Abu Dhabi and Doha to Kuwait is to a large extent dependent on the marketability of black gold. Most of these economies are still single product economies.
But the traffic is definitely not one way. The world too depends upon and looks at them for bailing out the crude driven civilization when required. As crude markets, started touching one peak after the other mid last year, the spotlight was on oil producers to provide crude to the world at reasonable prices.
And the producers, definitely lacking in the political clout as compared to the industrialized world, had to give in. But when the prices start getting to new lows, endangering the very future of the industry, and their respective economies, all the calls for ‘fair pricing’ apparently were seen falling on deaf ears.
Is that fair? Lack of political strength is causing the producers to compromise on their national interests at the altar of the demands of the developed, more powerful world — indeed an issue of might is right.
