VIENNA/TOKYO -- Oil-producing nations have been struggling for more than five months as falling oil prices send their currencies lower and spur inflation. They received a fresh blow when the Organization of the Petroleum Exporting Countries decided at a recent meeting to maintain production levels, pushing prices to a more than four-year low.
Nigerian Finance Minister Ngozi Okonjo-Iweala said on Nov. 16 that the oil price decline is so serious that all Nigerians must work together to meet the challenge.
In response to plummeting prices for crude oil, which makes up 70% of Nigeria's state revenue, the government has hastily taken austerity measures, including cutting public-sector expenditures and levying higher taxes on luxury goods.
Only six months ago, few people would have expected the Nigerian economy to be in the pinch it is in now. Gross domestic product data revised in April showed that Nigeria had overtaken South Africa as the continent's largest economy. Politicians and business leaders alike had no doubt that the economy would continue to grow.
But once oil prices began to fall, the relatively high costs for oil production -- a main structural problem facing Nigeria -- drew renewed attention, sparking a flight of investment money from the country. A broad sell-off sent the naira, Nigeria's currency, to an all-time low, highlighting how dangerous it can be for an economy to depend on natural resources alone.
Staying the course
OPEC decided in a Nov. 27 meeting to maintain its production target despite falling crude prices, going against expectations and signaling a possible breakdown within the group.
Crude prices have been hit by shrinking demand in emerging countries and an increasing supply of U.S. shale oil. North Sea Brent crude fell below $80 per barrel at one point before the OPEC meeting, down 30% from the peak in June. After the meeting, prices dipped below $70, the lowest point in four and a half years.
Members of OPEC were sharply divided over whether to cut production for the first time in six years. Saudi Arabia, which has relatively stable finances, is more concerned about losing customers to the U.S. amid the shale oil boom, but countries that depend on crude exports to finance their budget cannot hold out much longer.
Nigeria isn't the only country hurting. Iran and Russia are also seeing global oil prices run far below their fiscal break-even oil point, the price laid out in the national budget.
"It is hard to imagine the situation changing for the better," said a government official of a Persian Gulf oil-producing country. The use of supply-side adjustments -- a tool often used to prop up oil prices -- no longer seems to be an option.
The oil price surge and the low-interest environment seen after the start of the 2000s prompted companies to pour massive amounts of money into the energy sector. The U.S. shale gas revolution was one of the major results that came from those investments. Newly developed oil fields and the expanded capacity of existing oil fields are only just beginning to significantly boost production. This means oil supplies are unlikely to decrease even though demand has weakened due to such factors as a slowdown in the Chinese economy.
Selling off and scaling back
Companies, meanwhile, seeing that oil prices are on the way down, are trimming investment, which is having a direct impact on the economies of oil-producing countries. ConocoPhillips, a major U.S. energy company, sold its operations in Nigeria to a local oil company for $1.5 billion in July. In Chad, American oil company Chevron sold its stake in an oil concession to the government for about $1.3 billion.
According to market research company Dealogic, China's three major state-owned oil companies -- CNOOC, China Petroleum & Chemical (Sinopec) and China National Petroleum Corp. (CNPC) -- slashed their combined overseas investment by two-thirds in the period from 2012 to 2014.
A report by London-based banking group Barclays noted that the shrinking pool of investment money could undermine the economic growth of oil-producing nations in Africa and elsewhere, and heighten sovereign risks. The trend might also make it hard for state-affiliated companies to raise needed capital.
The term "oil shock" refers to the impact that soaring oil prices have on oil-consuming nations, while a "reverse oil shock" is the blow that a crash in oil prices has on oil producers' economies.
A reverse oil shock happened in 1986, when oil prices sank below $10 per barrel from the mid-$30 seen only half a year before. At that time, Saudi Arabia, which had always taken the lead in production cuts whenever demand fell, gave up its role in output adjustment. That decision was hugely damaging, and is said to have eventually brought about the downfall of the Soviet Union. Oil-producing countries fear that the current price slump could trigger a similar upheaval.