By Rodrigo Campos and Libby George
NEW YORK/LONDON (Reuters) – Donald Trump has pledged to “drill, baby, drill” to halve energy costs, a plan that is sending shivers through the governments of emerging market oil producers worried about dollar revenues and poorer importing countries with hope.
In practical terms, Trump, the new president of the world’s largest oil producer, cannot fully control prices.
The United States has limited influence over the OPEC+ producer group, the Organization of the Petroleum Exporting Countries and allies, and does not have a state oil company that Trump can order to increase production.
But uncertain economic prospects in the biggest oil-consuming countries, especially China, and a potential oversupply of oil have prompted investors to hedge their bets on the impact of Trump’s election promise.
“You’re going to have very country-specific issues or challenges as oil prices fall,” said Thomas Haugaard, emerging markets bond portfolio manager at Janus Henderson. “But more than half of the emerging markets investment universe is made up of big oil importers. There will be winners and losers from those kinds of shocks.”
Here’s a look at the countries that could gain – or lose – if global oil prices fell to roughly $40 a barrel, just above half of current prices.
PRODUCER PAIN
The balance sheets of the world’s producers – including OPEC’s largest producer, Saudi Arabia – would in theory take the biggest hit from lower oil prices.
But the kingdom, with multiple sovereign wealth funds and easy access to global loans, is to some extent isolated.
Following oil price crashes in recent years, Saudi Arabia, along with other Gulf states such as the United Arab Emirates, has sought to diversify its economy and feed local debt markets.
However, JPMorgan noted that a price drop could force the country to further scale back megaprojects such as the $500 billion city of the future, NEOM.
For poorer producers, such as Angola, Ecuador and Nigeria, lower prices would be more damaging. Most depend on oil for dollars, and need prices around $100 a barrel to balance budgets.
“They have no savings to fall back on,” said David Rees, senior emerging markets economist at investment firm Schroders, adding that these countries were already in debt and had limited access to affordable loans.
“If your key revenues are hit hard, these types of large debt coverages are just going to get worse and worse and worse,” he said.
That pressure can also lead investors to ignore positive stories – such as Nigeria’s sweeping fuel subsidies and currency reforms, or Angola’s rush to pay off its debt.
“When oil prices see this kind of pressure, investors tend to tar all oil-producing countries with the same brush,” said Razia Khan, head of research at Standard Chartered, Africa and the Middle East.
BIG SAVINGS?
For importers, lower oil prices could reduce inflation and ease demand for foreign exchange. China spends just under $300 billion on oil imports, followed by India with almost $200 billion.
Smaller importers including Indonesia, Kenya, Pakistan, South Africa, Thailand and Turkey could also benefit.
“If you put $40 (oil) in and just assume $40 a day, instead of energy inflation being on average around zero for the next year, then inflation goes down to minus 15,” Schroders’ Rees said.
The boon could be greater for emerging economies that subsidize fossil fuels: Venezuela and Iran spend more than 20% of their GDP on subsidies.
NOTE OF CAUTION
Lower prices alone do not guarantee economic relief, especially if they are accompanied by the trade war that Trump’s threatened tariffs could unleash.
Analysts say this could slow global economic growth and cause a demand shock, with negative consequences worldwide.
South Africa, an exporter of platinum, coal and iron, would fare poorly if global commodity prices fall further.
Moreover, weaker balance sheets could have a knock-on effect for the world’s richer oil producers.
Egypt, Kenya and Pakistan – debt-laden importers that have relied on foreign financing in recent years – would take a hit if Gulf producers such as the UAE close their checkbooks while enduring a price slump.
Lower oil prices could also delay the transition away from fossil fuels, harming the long-term prospects of some emerging market energy importers and further increasing the costs they face from climate change.
“Significantly lower prices may be associated with periods of depressed global economic activity, which is not good for emerging markets,” said Alejo Czerwonko, chief investment officer for emerging markets Americas at UBS Global Wealth Management. “So the reasons why prices are lower matter.”
(Reporting by Rodrigo Campos and Libby George, editing by Karin Strohecker and Barbara Lewis)
