Sharp Decline in Global Crude Oil Prices Spawns Winners and Losers

Crude oil producers and investors are not exactly thrilled these days given the steep decline in global crude oil prices over the past several weeks. The market for the global benchmark Brent Crude has fallen by more than 40% since summer – now at multi-year lows – and may continue to do so in the coming weeks.

The falling oil prices are hurting multibillion-dollar industries and economies that are highly dependent on the production of crude oil.

Based on data released recently, US oil imports fell to their lowest levels in almost four years due to the growth of local US crude production and slow demand, both of which have contributed to the sagging price.

Economist Andrew Kenningham of Capital Economics noted that in the global market a drop of $10 in crude price is equivalent to roughly $330 billion, or 0.4% of the world’s gross domestic product (GDP).

Kenningham also stated that around 1.2% of the world’s GDP will move from oil producers to oil consumers should crude prices continue to drop until next year.

US Crude Oil Import Cuts

Foreign oil producers that supply to the US have been affected significantly by the lower demand stemming from the US. US oil imports have fallen by as much as 40% since their peak in August 2006; this is in part due to lower demand for gasoline caused by sale of fuel-efficient cars and also increased domestic oil supply.

The effects of these cuts in oil vary from one exporter to another.

Saudi Arabia, the biggest exporter of oil in the world,will be most affected if global crude prices remain at current levels. The country is likely to see a reduction of 2.5% in its GDP from the lower demand for exports to the US alone.

According to the Economist Intelligence Unit, Saudi Arabia has approximately $750 billion of oil reserves. Likewise, its oil-producing neighbors, namely Kuwait and United Arab Emirates (UAE), have roughly $100 billion of oil reserves combined. The balance sheets of these OPEC countries will be hurt significantly should the slow demand from the US oil market continue. Nonetheless, they have indicated that they are willing to endure lower prices to capture market share from non-OPEC producers.

Energy Companies from Producers to Services Cutting Dividends and Capital Expenditures

But Saudi Arabia and other OPEC countries are not the only ones that are taking a hit with the lower global crude prices and reduced oil exports to the US.

Canada, just like Saudi Arabia, UAE and Kuwait, is also affected by the lower demand for crude from the US. A big chunk of US oil imports, after all, comes from Canada; and Canadian oil producers, as well as other energy-related firms, are bleeding from the decline in the price of crude.

For example, Canadian Oil Sands Limited (TSE:COS) has already announced that it would lower quarterly dividends by 43% in order to avert increasing its debt as oil prices continue to drop. Shares of the company have fallen 57% over the last six months, including a 16% decline after the dividend cut announcement.

Canadian Oil Sands Limited justified its move to cut dividends by saying that without the reduction its net debt could balloon to more than $2 billion. The Calgary-based oil firm has a 37% share in the Syncrude mine located north of Fort McMurray. The holding is the firm’s biggest asset.

The Canadian oil producer noted that the cut in dividends is a “prudent step to preserve balance sheet strength and provide flexibility in this lower oil price environment.”

Similarly, on the energy services side, another Calgary-based firm, Precision Drilling Corporation (TSE:PD), stated that it has further reduced its 2014 capital spending to $885 million, which is $23 million less than the last figure. This is the second time during the last few weeks that the company has announced a reduction in capital spending.

The firm’s planned capital spending of $493 million for next year will be significantly lower than this year since the company will delay plans to build new rigs until crude prices pick up and stabilize.

Precision Drilling is the largest oilfield services company in Canada and is a dominant player in the United States. It has been growing internationally by supplying a fleet of rigs as well as other equipment utilized by major oil and gas companies throughout the globe.

Falling Prices and the Canadian Economy

The falling oil prices in the world market will also affect Canada’s economic output.

Crude oil shipments from Canada were valued at about $85 billion for the first three quarters of this year before world oil prices dropped, based on data by the US Census Bureau Trade. Canada is likely to suffer $30 billion in lost revenue from the sale of crude due to the dramatic cut in price.

Canada’s loss in crude oil revenues will cut around 2% of the country’s $1.8 trillion output.

But Canada’s economy can weather such cuts given that other non-energy-related export sectors as well as stable consumer spending are expected to offset the effects of the reduced contribution from crude oil sales.

Economist Randall Bartlett of TD Economics notes that “With momentum in other sectors, Canada’s economy appears well positioned to weather the storm [of lower oil prices].”

Canada’s GDP grew by 2.8% during the third quarter after posting a growth of 3.6% in the second quarter.

Not All are Losers as Emerging Markets Benefit from Cheaper Crude

There are also “winners” due to the sharp cuts in global crude oil prices, particularly the emerging economies.

Take the case of India. Indian consumers are paying roughly 11.3% and 8.3% less for petrol and diesel, respectively. India’s oil consumers may not be enjoying the full extent of the decline in the price of crude that is observed in the global market, but the country’s economy still stands to gain from lower global crude oil prices.

The sharp decline in world crude oil prices will set off a number of India’s economic growth drivers, according to investment bank Nomura.

Based on Nomura’s estimates, a $40 decline in world market oil price is likely to induce growth of 0.4%–6.0% for India’s current financial year. In a report, Nomura stated that “Improvement in macro fundamentals [inflation and the fiscal deficit and the current account balance] will, at the margin, increase the space for macro [monetary and fiscal] policies to boost growth.”