Commodities | Mar 22 2016
By John Kicklighter, chief currency strategist, and James Joseph, FXCM
- The largest oil producers in the world are Saudi Arabia, the US and Russia
- OPEC is a conglomerate of large energy producers that can set production goals
- With a rise in new oil producers recently, supply-demand imbalances have arisen
From its highs in 2014, US crude oil prices have dropped as much as 75 percent. One of the main reasons for the tumble is the persistent oversupply of the commodity. Amidst a slowing global economy, demand has dropped significantly. And yet, despite demand clearly falling well below the level of supply – roughly 1.6-2 million barrels per day according to the EIA (US Energy Information Administration) – oil producers have not made a concerted effort to cut back on the output. One reason for this reticence is the fight for market share by the major OPEC producers.
OPEC is not as big as it once was. Despite still accounting for 34% of global production (OPEC), there are other countries which are moving up the ranks for output. Currently the top 5 oil producers are Saudi Arabia, USA, Russia, Iraq, and Iran in descending order (Jodi Data). That means 3 of the top 5 producers are OPEC members, showing that OPEC still holds a major influence in the oil market.
Although OPEC still holds considerable influence over the energy market, they no doubt realize they are facing a more saturated market for oil and the market seems to appreciate this. OPEC was once the dominant force in the global oil market. Although they still are the biggest aggregate player now, the margin is not as wide as it used to be. In addition, coordination between member countries has grown contentious further changing the dynamics in the oil markets. As prices continue to flounder at multi-year lows amid the vast supply-demand imbalance, the interplay between OPEC efforts and the group’s largest counterparts become even more important.
Below is a brief description of the energy impact on each of the 13 OPEC members along with a comparison to their largest non-OPEC counterparts. Use this guide as a reference for tracking the fundamental implications for supply and demand in the energy market going forward.
OPEC Members
Saudi Arabia:
Daily Production: 10.1 million barrels
Percentage of GDP from oil: 45%
State of the Economy: Currently the largest producer of oil in the world, Saudi Arabia’s economy is highly dependent on oil. Saudi Arabia’s oil fields are located at very shallow levels, enabling them to pump oil at lower costs. Despite the competitive advantage in oil production, the recent slump in oil prices has caused the government to operate at a deficit. In addition, conflicts with surrounding countries are requiring the government to increase its defense spending, further building the deficit. Conditions seem to be severe enough that the government is considering selling state-owned Aramco to public interests. Also, forex reserves have fallen as a side effect of the energy revenue pinch.
Iraq:
Daily Production: 4.1 million barrels
Percentage of GDP from oil: 60% (estimated)
State of the Economy: Iraq is perhaps the most dependent on oil revenue for GDP of all the OPEC members. It has been estimated that at least 60% of its GDP comes from oil – though there are not official statistics to confirm this. Political and national security issues are adding another layer of trouble for Iraq as the government is also having troubles with ISIS and conflicts with neighboring states. Thus, it seems Iraq is currently very unstable.
Iran:
Daily Production: 3.4 million barrels
Percentage of GDP from oil: (data not available)
State of the Economy: Iran is in a unique position as some sanctions against the country has been lifted. Oil revenues represent a distinct buoy to national coffers even in the recent slump in global market prices and Iran is eager to regain some of its lost market share. That has made the country reticent to agree to production deals with other OPEC members. Nevertheless, Iran’s oil industry is also one of its main sources of GDP. With some political unrest and a still-strained relationship with the west, Iran is an unsure player in the world energy markets
Kuwait:
Daily Production: 2.9 million barrels
Percentage of GDP from oil: 45%
State of the Economy: Kuwait is seen as one of the more stable member country amongst OPEC Members. However, its dependence on oil has caused Kuwait to operate at a deficit. Even though the deficit can be troublesome, Kuwait looks promising as government is seriously pursuing economic reforms in an attempt to diversify the economy. Moreover, Kuwait has a very stable banking system, lending itself to drawing foreign investment during strong global conditions. With these factors in mind Kuwait is better positioned to weather the pain from low oil prices.
UAE:
Daily Production: 2.8 million barrels
Percentage of GDP from oil: 21%
State of the Economy: The UAE is still very reliant on oil despite a rather diverse economy. The recent slump in oil prices have hit government balance sheets and as a result led rating agency Moody’s to warn the country that it may lower its ratings depending on how well the government further diversifies the economy. As a political risk, the UAE are considered very stable with a developed economy, which should reduce its threat of forcing OPEC-wide changes.
Venezuela:
Daily Production: 2.6 million barrels
Percentage of GDP from oil: 24%
State of the Economy: Low oil prices have significantly impacted the Venezuelan government’s ability to spend on the economy. Venezuela’s primary export is oil which has hit the economy’s coffers. Fiscal deficits are growing and the economy has grown dangerously unstable. Under intense pressure, the government was forced to hike gasoline prices for the first time in nearly two decades. Among OPEC members, Venezuela is likely to be among the most motivated to seek production agreements to help lift energy prices.
Nigeria:
Daily Production: 2.1 million barrels
Percentage of GDP from oil: 15%
State of the Economy: Nigeria is a middle income economy with a rather diverse economy. Unlike the other OPEC members, Nigeria is not solely dependent on oil, although it is a sizable portion of their GDP. However, the government has acknowledged the need for reform in its oil sector. Instances of corruption and other illegal activity associated with oil production have made the news.
Angola:
Daily Production: 1.7 million barrels
Percentage of GDP from oil: 35%
State of the Economy: Angola’s GDP has fallen sharply because of low oil prices. The low oil prices have also pushed the government to operate at a fiscal deficit. Capital expenditure has suffered due to the loss of financial liquidity. However, Angola’s government is relatively stable, with a keen interest in austerity measures in order to boost its economic conditions.
Algeria:
Daily Production: 1.2 million barrels
Percentage of GDP from oil: 20%
State of the Economy: Algeria has less political instability compared to some of the OPEC members, but nevertheless remains a concern. The government has very strict and complex regulations that make it difficult for foreign investment, which in turn slow growth. Through the oil price tumble of 2014 and 2015, the country’s deficit has risen considerably. The rising deficit is mainly due to low oil prices as oil is a big part of their economy.
Indonesia:
Daily Production: 0.8 million barrels
Percentage of GDP from oil: 2%
State of the Economy: As the 4th most populated country in the world, Indonesia’s economy seems to be heading in the right direction. Oil counts for a modest 2% of the economy’s GDP, reducing the pain of stymied energy revenues. However, Indonesia’s energy and agriculture industries are heavily dependent on government subsidies. With the current president (Joko Widodo) campaigning against corruption, some of those industries that operate with the aid of the government may be affected. President Widodo has emphasized his interest in opening up the economy and make Indonesia a more stable economy.
Qatar:
Daily Production: 0.6 million barrels
Percentage of GDP from oil: 23%
State of the Economy: Like some other Middle Eastern peers, Qatar is an OPEC member that is more heavily dependent on oil revenue. In fact, most of the nation’s export income comes from oil. Despite the slide in oil prices, credit rating agency Standard & Poor’s expects the country’s economy to remain resilient. Considering the country enjoys the highest GDP per capita in the world, Qatar is seen weathering the energy slump better than many.
Libya:
Daily Production: 0.5 million barrels
Percentage of GDP from oil: over 50%
State of the Economy: Libya is a country heavily dependent on oil for revenue. However, the political state of the country is troubled. The country is still trying to find its footing after former dictator Gaddafi was deposed after 40 years of rule. In addition certain regions within the country are fighting over oil revenues. This puts Libya in a very uncertain situation, as both conflict and inexperienced government try to manage their most profitable commodity.
Ecuador:
Daily Production: 0.5 million barrels
Percentage of GDP from oil: 15%
State of the Economy: Ecuador is not as heavily dependent on oil compared to some other OPEC members. Therefore, low oil prices haven’t had such a severe impact on the economy. Despite its perhaps reduced exposure to oil revenues, the economy has steadily sunk back into recession. Encouragingly though, the government has committed to investment in improving the energy sector, infrastructure, and education.
Key Non-OPEC Producers
Russia:
Daily Production: 10 million barrels
Percentage of GDP from oil: 14%
State of the Economy: As the second largest oil producer in the world, low oil prices are forcing Russia to reduce government spending in various sector. Economic pressures are also at all-time highs. Middle class incomes have been weighed, standards of living fallen, and the general economy faces recession. Alongside these issues are the international trade conflicts arising from Russia’s support of Syria. There have been rumors to let some state owned corporations be sold to private parties, however, Russia still maintains considerable central power over the economy, business and the energy sector.
United States:
Daily Production: 9.2 million barrels
Percentage of GDP from oil: 1%
State of the Economy: As the largest economy in the world, the US has a well-diversified economy where the majority of its output comes from the services sector. The US also exports a very small amount of its production of oil, consuming most of the oil it pumps. All in all Moody’s gave the US government AAA further emphasizing the stability of the government. However, low oil prices are beginning to take a toll on US producers unable to compete with the more cost effective Saudis. As with the rest of the world, debt tied up to the quickly growing energy sector poses a financial risk.
Canada:
Daily Production: 2.9 million barrels
Percentage of GDP from oil: 4%
State of the Economy: Canada has a large economy that is mainly service based with a few important industries, one of which is oil. Canada exports much of its oil to the US, and has a strong economic and political relationship with the US. However, recent economic data shown an increase in unemployment and pressure in other areas. Canada has also taken a stronger stance against carbon emissions which may affect the oil industry going forward.
Brazil:
Daily Production: 2.4 million barrels
Percentage of GDP from oil: 2.3%
State of the Economy: Currently the 8th largest economy in the world (when the Eurozone is considered), 76% of Brazil’s GDP comes from services. Despite being the face of emerging markets the past few years, Brazil has recently fallen into economic crisis. GDP in 2015 dropped a painful 3.8% and is seen heading for its worst recession in over a century while political instability grows. Headlines of corruption connected to important energy firm Petrobras have connected oil, growth and politics. These issues make Brazil a risky international player and a likely advocate for joint efforts to bolster oil prices.
Mexico:
Daily Production: 2.3 million barrels
Percentage of GDP from oil: 6.1%
State of the Economy: Mexico has one of the more stable governments and economies compared its neighbors to the south. Industrial and service industries are on the rise and consumer spending has proven resilient. Mexico is generally an export-oriented economy, and is currently showing measured growth despite the pressure of low oil prices and slower global trends.
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