The decline in oil prices is proving to be the worst since the collapse of the financial system in 2008 and threatening to have the same global impact of falling prices three decades ago that led to the Mexican debt crisis and the end of the Soviet Union.
Russia, the world’s largest producer, can no longer rely on the same oil revenues to rescue an economy suffering from European and U.S. sanctions. Iran, also reeling from similar sanctions, will need to reduce subsidies that have partly insulated its growing population. Nigeria, fighting an Islamic insurgency, and Venezuela, crippled by failing political and economic policies, also rank among the biggest losers from the decision by the Organization of Petroleum Exporting Countries last week to let the force of the market determine what some experts say will be the first free-fall in decades.
“This is a big shock in Caracas, it’s a shock in Tehran, it’s a shock in Abuja,” said Daniel Yergin, vice chairman of Englewood, Colorado-based consultant IHS Inc. and author of a Pulitzer Prize-winning history of oil. “There’s a change in psychology. There’s going to be a higher degree of uncertainty.”
Drop at the pump
In the U.S., the price of a barrel of oil has dropped from more than $100 to about $70 in just a matter of months and gas is now cheaper than it has been in years. But a recent report conducted for the American Petroleum Institute claimed oil would cost twice as much as it does now if it weren't for America's fracking boom, which wrings oil and natural gas out of shale miles underground.
The shale boom is on a par with the dot-com boom," Russian oil baron Leonid Fedun of OAO Lukoil told Bloomberg. "The strong players will remain, the weak ones will vanish.”
The OPEC decision to maintain a production target of 30 million barrels a day was seen as a reflection of its members view that the short term pain was necessary to pressure rival producers in the U.S., who need moderate oil prices to break even. Saudi Arabia, the leader of OPEC, appears to be hoping to drive prices below the level at which shale oil production is economical. Experts say shale oil production turns too costly at the $60 a barrel level.
“This reduction in petroleum product prices have saved U.S. consumers an estimated $63 to $248 billion in 2013 and estimated cumulative savings of between $165 and $624 billion from 2008 to 2013,” stated the report.