Emerging market currencies may have received a boost against the dollar last week after the European Central Bank announced its programme of quantitative easing, with those of South Africa, Russia, Turkey and Brazil all strengthened by the news. But the more important stories for investors over the mid term are the effects of cheaper oil and the state of countries’ current accounts.
On the face of it, whether a country exports oil seems to matter more to investors right now than the state of its current account. Read more
There are very few things on which economists overwhelmingly agree: free trade and apple pie are about it. But almost all of them will say that across-the-board subsidies for households and companies to lower the price of fuel are a terrible idea.
While advanced economies in general tax fossil fuels – or the carbon emissions that emanate from its use – emerging markets are still big users of subsidies and price caps. The IMF estimates that consumption of petroleum, electricity, natural gas and coal were subsidised by about 2 per cent of total government revenue in 2011 – and much more if compared to a hypothetical efficient tax system. Hydrocarbon exporters accounted for about two-thirds of the total. The subsidy of fossil fuels by oil producers and particularly within the Middle East and North Africa is extreme. Read more
By Emad Mostaque of Ecstrat
With oil trading at $50 a barrel, the immediate prognosis for Gulf nations looks grim. However, the future may not be as bad as it first appears. There are several changes that could be made to enable these nations to emerge in a stronger, more stable position than before. Read more
You don’t have to look far to see the impact on Mexico of falling oil prices (now close to a five-year low): just take a look at the trade balance of state giant Pemex . It slumped by half in one month, to $656m in October from $1.3bn in September, and that was before the combination of Mexico’s lower production and lower world prices really began to bite.
So now would be a good time to take a cold look at how much damage falling prices could really do to Mexico as it prepares to open up its oil sector to private investment, what Mexico could do about it, what wider impact that could have, and what the US and the International Monetary Fund could do to help. Read more
By Alan Riley of City Law School
Following South Stream’s demise the Danube nations must look again at their energy vulnerability. These low income states, locked into antique energy infrastructure and facing high renewable bills, face a major energy dilemma – a dilemma shared, in a less acute form, with the rest of the European Union. One way forward is to look again at whether a deal on gas between Russia and the EU could be made to work as a means of encouraging economic growth and helping to settle the dispute over Ukraine. Read more
By David Clark of the Russia Foundation
Marcos Sefcovic, the new European Commission vice-president responsible for energy, was in optimistic mood last week when he predicted a winter without any disruption to gas supplies from Russia. In truth, the trilateral agreement on gas signed by Russia, Ukraine and the European Union in Brussels five weeks ago has yet to be tested and the underlying tensions that made the agreement necessary are far from resolved. Ukraine and Russia remain in a state of undeclared war and this week’s manoeuverings over the proposed South Stream pipeline show that Russia’s desire for a controlling influence over the European energy market is undiminished. To imagine that Vladimir Putin will refrain from playing the energy card as demand for Russian gas reaches its annual peak requires a bold leap of faith, especially since he has just cut off coal supplies to Ukraine. Read more
By Timothy Ash of Standard Bank
The drop in the oil price has been long coming but the surprise over the speed and extent extent of the fall reflects how we tend to get cosy with established norms. In the past few years there has been an entrenched idea that with EM growth and the rise of the EM middle class, structural demand for oil and commodities was a long term, one way trend.
This ignores one of the first lessons we should all have learned in Economics 101. Read more
“The Ant and The Grasshopper”, one of Aesop’s darker fables, is a cautionary tale about forward planning. An industrious ant works hard all summer to lay up enough food to survive the winter, while a feckless grasshopper makes merry in the sun. When the cold weather comes, the ant survives and the grasshopper starves.
The chill winter winds of falling crude prices are blowing for the world’s oil exporters, who have seen the price of their product slide by 30 per cent since the summer. Today, the members of OPEC are meeting in Vienna to consider a cut in production. Oil exporters have proved to be a mixture of ants and grasshoppers, with some of the idler insects of previous decades now having learned the virtues of hard work. How well their economies – and asset prices – survive is likely to depend not just on whether they have saved enough of their earnings to smooth domestic demand, but whether their broader economies and political systems are strong enough to take the strain.
Bahrain, Angola, Ecuador and Venezuela rank as the emerging markets (EM) most vulnerable to a downgrade in their sovereign credit ratings if oil prices do not recover in 2015, Fitch Ratings said in a report published on Tuesday.
With benchmark Brent crude prices close to $80 a barrel, down from $115 a barrel in mid-June, the revenues of all oil producers are under pressure. But due to differing levels of fiscal reliance on oil income, the speed of deterioration in domestic budgetary conditions varies sharply among EM producers. Read more
Short of expectations for now but holding out hope for the future. That seems to be the best that can be said of Croatia’s first offshore oil and gas exploration tender, which closed for bidding this month.
Full results of the auctions, including the identity of the bidders, have yet to be made public, although the organisers said 15 of the 29 blocks on offer received bids. One person involved told beyondbrics they came from three bidders: INA, Croatia’s own national oil company; a consortium formed by OMV of Austria and Marathon Oil Corporation of the US; and a consortium of Eni of Italy, MedOil of the UK and a third unidentified company. Read more
Leaders from Kiev and Brussels were busy this weekend warming up their energy ties as Vladimir Putin bailed out early from the G20 summit in sunny Australia where he faced one could shoulder after another from international leaders over his actions in Ukraine.
Ukrainian president Petro Poroshenko spent Saturday and Sunday receiving a warm welcome from Visegard state leaders meeting in Slovakia (he is pictured above with his Czech, Polish, Slovakian and Hungarian couterparts). He also received guarantees from Bratislava that his country – still at odds with Moscow over fair natural gas prices – would be guaranteed what officials said could amount to 21bn cubic metres of annual reverse flow inflows, enough to meet a majority of the country’s import needs. Read more
Brazil and Mexico, Latin America’s two biggest economies, are engulfed in high-profile scandals that have involved their presidents and also touched on investor interests. So far, Dilma Rousseff has made a better fist of handling the fallout in Brazil than Enrique Peña Nieto has in Mexico – although that could easily change. Read more
Ukraine’s international reserves are drying out rapidly. According to the central bank, in October they plunged by 23.2 per cent to $12.6bn, the lowest level since 2005. Even greater decline is expected by the end of the year. Kiev must pay a $3.1bn gas bill to Russia’s Gazprom alone. The situation could get even worse, should the central bank find itself forced to sell foreign currency to support the hryvnia, and with further hefty gas payments likely over the forthcoming winter.
Emergency funding from international donors, primarily the IMF, could provide a lifeline. But experts believe any such measures would depend on the authorities in Kiev showing a real commitment to fast and effective economic reform. Yet three weeks have passed since snap parliamentary elections last month, and the indication is that the pro-western camp in Kiev is far from taking such steps. Read more
Never mind that Mexico last week stripped a Chinese-led consortium of a $3.6bn bullet train tender, prompting the China Railway Construction Corporation to announce that it was “extremely shocked” and could sue, according to official news agency Xinhua.
No, business confidence between the two nations – a key Mexican foreign policy goal – is growing, President Enrique Peña Nieto told a forum in Shanghai.
For proof look no further than Pemex, Mexico’s state oil company, which signed a “first” $10bn credit line with ICBC bank (more on them in a moment) for it and its service companies’ upstream projects and the acquisition of offshore equipment. Read more
A story told in the Bank of England goes like this. Shortly after the fall of the Berlin Wall, a group of Russian central bankers with solid grounding in Marxist economics came to London for a training course at the BoE. They patiently absorbed the theoretical run-down of supply and demand curves and how prices were determined, and then asked “But who sets the price?” A world without a state official with a clipboard announcing the cost of everything was unthinkable. Eventually the exasperated BoE economists took them on a trip to Smithfield meat market in the City of London to see the magic in action.
After the Wall came down in 1989 – triggered by a single unguarded remark by an East German Politburo member in a press conference – the speed and size of changes in the economies of central and east European (CEE) and the former Soviet Union (FSU) were unprecedented since the Second World War. Twenty-five years later, with currency crises wracking Ukraine and Russia, and FSU economies like Belarus and Moldova struggling to emerge from the Soviet era, the dispersion of performance has been dramatic. Read more
Even inside the labyrinthine central circle of Algeria’s governing regime, the magnitude of last month’s failure to auction off shares in the country’s energy reserves has not been lost.
While the officials that head the Agence Nationale pour la Valorisation des Ressources en Hydrocarbures (Alnaft) frantically try to determine why just four of the 31 oil and natural gas concessions the country offered to international energy companies this year were taken, former state energy executives are openly expressing their dismay. Read more
Argentina’s energy sector is a constant headache for the government – the fact that there are tankers charging hefty daily fees as they queue up offshore to unload liquefied natural gas because there is nowhere to store it is just the most recent example.
But YPF, Argentina’s biggest energy company, has been a beacon of light in the gloom, with the country’s energy deficit being the single biggest reason why it is running out of dollars.
YPF has notched up a string of achievements since the state took back a majority stake in 2012, most recently announcing on Wednesday a $170m deal with Ecuador’s Petroamazonas to optimise production in the mature Yuralpa oilfield. Read more
On Valentine’s Day 2011, a court in Ecuador ordered Chevron, the US oil major, to pay $19bn to indigenous peoples and villagers to compensate for pollution caused between 1964 and 1990 by Texaco, which Chevron had bought in 2001. It was the biggest award ever against a corporation outside the US and was hailed by environmental and other campaigners worldwide as a landmark victory for usually voiceless and defenceless peoples over the usually all-powerful Big Oil.
But Chevron felt it had been treated unfairly and counter-sued in the US. On March 4 this year, Judge Lewis Kaplan of the US District Court in New York found Steven Donziger, the US lawyer who represented the Ecuadorian plaintiffs, liable for leading a multifaceted racketeering conspiracy. Read more
Poor forward planning and political manipulation of energy prices look likely to leave Turkey facing gas shortages this winter, even before the prospect of regional gas cuts due to the on-going hostilities in Ukraine.
Turkey last week experienced an unexplained drop in pressure in its western import line, through which it receives 14bn cubic metres (bcm) of gas from Russia, or about 30 per cent of Turkish demand. That sparked fears of further cuts during the peak mid winter demand period should a working ceasefire not be concluded.
But Turkey’s gas woes are not confined to one import line through Ukraine. Read more
Ever pragmatic, the boss of Pemex, Mexico’s revamping state oil company, knows the first barrels of oil extracted from the enticing deepwater prospects in the Gulf of Mexico under the country’s historic energy reform will probably be processed and shipped through existing US infrastructure.
But don’t be tempted to think that Pemex is taking its eye off Asia. Read more