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Friday 27 February 2015

FOUR WINNERS AND FOUR LOSERS FROM THE OIL PRICE DROP

Oil pump jacks are seen next to a strawberry field in Oxnard, California February 24, 2015.
The recent dramatic fall in oil prices is clearly positive news for the global economy. But like all market shifts, it creates winners and losers. Here are four in each category.
The losers
  1. Oil- and gas-exporting countries. The effects have been lessened by the dollar’s appreciation against the currencies of most major exporters. Still, countries that rely mainly on oil and gas revenue – and have not saved for a rainy day – face a struggle, and will need to rethink their modus operandi and differentiate their economy. Prolonged lower prices increase the risk of failing states, with unpredictable consequences.
  1. Oil and gas companies with debt to service. The oil service sector will also likely face a phase of transition, given the reduced amount of capital expenditure invested by oil and gas companies.
  1. Electric vehicle manufacturers. While the medium-term trend towards the electrification of road transport should continue, cheaper fuel for motorists is likely to slow down the uptake of electric vehicles in the short term. The same applies to alternative fuels such as biofuel.
  1. Coal. In Europe and Asia the price of gas is indexed to oil through long-term contracts, so the oil price drop is also making gas cheaper. This may or may not have some negative effect on the renewables sector, but the main impact will hopefully be a move away from coal-fired electricity generation, as is happening in the United States. In the ongoing debate about how best to reform energy systems to balance decarbonizing with securing access and supporting economic growth, the role of gas – as a cleaner fuel than coal, and cheaper than renewables – is widely considered to be key.
The winners
  1. Oil- and gas-importing countries. Lower oil prices will boost growth in China and India – home to almost half the world’s population and major engines of the global economy – and will give the flagging economies of the Eurozone a much-needed shot in the arm. Most analysts also expect the US economy to benefit, despite the negative effects on its burgeoning shale sector. The key question is how long the price stays around $60 – believed to be the level at which about half of its shale remains profitable.
  1. Chemicals, aviation and shipping. The benefits of lower oil prices will be felt in many sectors, but these three will benefit from cheaper feedstock and fuel.
  1. Oil and gas companies with strong balance sheets. With many of their competitors struggling, there are likely to be opportunities for mergers and acquisitions.
  1. Energy reformers. Falling oil and gas prices present a unique opportunity for economies that have been subsidizing fossil fuels to reduce or eliminate these subsidies. This is already happening in countries that had committed to energy-sector reform before the price drop, including Indonesia, Mexico and Thailand.
There is, of course, always the possibility that prices will go back up again, which would create pressure to backtrack on such reforms. Reformers need to plan for this eventuality by investing the money saved from subsidies in social and economic reforms to benefit their populations. In this way, the oil price drop may herald a more balanced energy mix.
Author: Roberto Bocca is the Head of Energy Industries at the World Economic Forum

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