How oil exporters reach financial collapse

High oil prices are good for oil exporters while low oil prices are good for oil importers, Tverberg writes. The result is?a price tug of war between oil importers and oil exporters.

By Gail Tverberg,?Guest blogger / April 15, 2013

A pumping unit draws oil from the ground near Greensburg, Kan. Oil exporters with declining oil production face worrisome situations, Tverberg writes.

Charlie Riedel/AP/File

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Recently, I explained how?high oil prices can bring on financial collapse for oil importers. In this post, I?ll discuss the flip side of the situation:?how oil exporters reach financial collapse.

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Gail Tverberg, an actuary with a background in math, analyzes energy and financial matters from a perspective that the world has limited resources. For more of Gail's posts, click?here.

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Unfortunately, we have many examples of countries that were oil exporters, but are dealing with collapse situations. Egypt, Syria, and Yemen all have had political disruptions since 2011. These may not be called financial collapse, but they all took place as the country?s oil exports decreased and as the price of imported food rose. Another example is the Former Soviet Union (FSU). It collapsed in 1991, after a period of low oil prices, in what looks very much like a financial collapse.

There are several dynamics at work in the financial collapse of oil exporters:

1. Oil exporters are often dependent on oil export revenue to fund government programs.
2. The need for government programs grows as population grows and as the price of food ?rises.
3. The amount of oil that can be extracted in a given year often declines over time, as initial stores are depleted.
4. Exports often decline even more rapidly than oil supply, because of rising oil consumption as population grows.

In general, high oil prices are good for oil exporters (except the effect on food prices). At the same time, oil importers strongly prefer low oil prices. ?As a result,?we end up with a price tug of war between oil importers and oil exporters.?

One additional issue is declining?Energy Return on Energy Invested. Countries often have the option of reducing their rate of decline by adding production in areas which are more expensive to drill (say deeper, smaller locations offshore Norway) or by using enhanced oil recovery methods. Such approaches add costs (and energy use), and further add to the price that oil exporters need for their product.

Egypt, Syria, and Yemen

Egypt, Syria, and Yemen are three countries that the press would say are suffering from the continuing impact of the Arab Spring revolutions, which began in 2011, or of civil war. The similarity of the oil production and consumption charts for the three countries (shown below) suggests that declining oil exports likely played a major role as well.?

In all three countries, oil production rose and then began to fall (Figures 1, 2, and 3). At the same time, oil consumption rose. The two lines?production and consumption?come very close to meeting in 2011, indicating that oil exports are at that point dropping to 0.

To make matters worse, the three countries are in an arid part of the world, where a large share of food must be imported. Oil prices and food prices tend to rise at the same time (Figure 4, below). By 2011, both food and oil prices were high. In fact, both prices have tended to stay high. Now, these countries find themselves with the unpleasant problem of paying for the higher cost of imported food (grown and transported with oil), so indirectly they are becoming an oil importer instead of an oil exporter.

Faced with less revenue from oil exports, and higher prices of food imports, these countries find themselves with a permanent mismatch between revenue and expenses. Part of the revenue mismatch relates to subsidies offered to poor residents. With higher food and oil prices, the funding needed for subsidies rises rapidly, even as oil exports drop to close to zero.

One issue that makes the situation worse is the huge rise in ?population that came with increased prosperity. Population has nearly doubled since 1980 in Egypt, and has more than doubled in both Syria and Yemen (Figure 5, below).

Source: http://rss.csmonitor.com/~r/feeds/csm/~3/35WpEhv-vqU/How-oil-exporters-reach-financial-collapse

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