Oil production continues to rise: who are the winners and losers?

Crude oil prices are at a seven year low, with barrels selling for less than $40 due to global oversupply. An estimated 31.7m barrels per day were produced in November, far outstripping OPEC’s daily target of 30m. What's more, the glut is likely to worsen in mid-January when oil and banking sanctions against Iran are lifted. So who stands to gain from the oil surplus, and who's losing out?

Winners: end consumers and emerging markets

It's been a year since oil prices began to fall, and savings are now being passed on to consumers. Petrol prices have dropped markedly in large domestic markets such as the UK, and many European customers are hoping for better prices from their home energy suppliers. Asia's emerging economies, notably India and the Philippines, have also benefited – falling crude prices mean lower import costs, reduced concerns over inflation and a boost in household spending.

Losers: oil-dependent economies

As might be expected, good news for importers is often bad news for exporters. Countries like Saudi Arabia, Venezuela and Russia all rely heavily on oil, and the recent slump in crude prices has prompted drastic cuts in government budgets.

Changing commodity prices alter supply-demand relationships and cause de-facto adjustments in foreign exchange rate values. In Saudi Arabia, for instance, oil prices need to be over $100 a barrel for the government to break even on its spending according to the IMF. Russia has also been severely affected: declining oil values have been a key factor in the decline of the ruble and the subsequent devaluation of Russian sovereign bonds to 'junk' status.

Not all currencies are equally exposed to oil price fluctuations, but investors trading on heavily oil-sensitive currencies such as the Canadian dollar should prepare for an uncertain future. While it's true that some experts have suggested prices may stabilise by 2017, other commentators remain pessimistic about the commodity's prospects right up to 2020.

Beyond the state

Plummeting oil prices have equally important knock-on effects at the sub-state level. Businesses that are heavily involved in importing and exporting will bear the brunt of shifting international money exchange rates: predicted profits will change and financial planning could become tricky. The price tag associated with sending expats abroad and enticing international talent will also grow, which could create a host of personnel issues for multinational corporations.

If international money transfer influences your livelihood and you'd like to keep track of the commodities markets, check back to The Money Cloud to stay informed.

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Felicity Liebmann


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