Monday, Apr. 14, 1986
Poor Little Energy-Rich Kids
By John Greenwald
As oil prices have taken their steepest plunge ever, energy producers from Mexico City to Moscow have felt the pinch. While some are suffering more than others, no major petroleum exporter has entirely escaped the pain. A look at the economic and political woes that cheap oil is causing once mighty producers around the world:
LATIN AMERICA. Mexico is No. 1 on the list of endangered energy exporters. It earns 70% of its foreign exchange from the sale of oil, and this year's price declines will slash revenues by about $6 billion. That could make it virtually impossible for the cash-strapped country to meet payments on the $97 billion it owes to foreign countries. Some economists now estimate that Mexico stands an 80% chance of defaulting on its mountain of debt. Several experts say that conditions are already more dire than in 1982, when a temporary Mexican default sent ripples of panic through the international financial system.
Mexican government officials have been pressing U.S. banks and other lenders to relax their terms and extend to the country at least an additional $4 billion in new loans. President Miguel de la Madrid Hurtado warned that bankers must share "the responsibility and sacrifice" of solving Mexico's financial ills. So far, though, creditors have been wary of risking new money.
Meanwhile, tens of thousands of Mexicans have demonstrated against austerity measures that De la Madrid has imposed since 1982 in an effort to pay interest on the country's loans. The belt tightening has slashed government spending, shoved the economy into a painful recession, and boosted unemployment to about 15%. "The political system is being pushed into a corner," says Jonathan Heath, senior economist for Ciemex-Wharton, the Mexican division of Philadelphia-based Wharton Econometric. "A lot of people in the government want default, and though they are not the ones with the most clout now, at any given moment they could be heard."
Events are moving swiftly in Venezuela too. No sooner did Caracas refinance nearly two-thirds of its $35 billion foreign debt last February than plummeting oil prices made the agreement obsolete. The free fall is knocking at least $5 billion off the country's petroleum revenues, which account for more than 90% of its foreign exchange, and could force President Jaime Lusinchi to return to bankers to seek better terms. With the country now in the third year of a recession, Lusinchi has little political room to maneuver. He has already promised that a job-creating $5 billion public-works program will not be touched. Venezuelans are counting on their nation's $13.7 billion of foreign-exchange reserves, the largest in Latin America, to see them through the current crunch.
MIDDLE EAST. Although Saudi Arabia remains wealthy by any standard, it is by no means immune to the impact of cheap oil. Government spending, the engine that drives the country's economy, has fallen from a high of $92.7 billion in fiscal 1982 to $54.8 billion in the current year. Even so, the kingdom's budget deficit is swelling by an estimated $1 billion a month. The drop in spending has slowed construction projects across the country, created an exodus of foreign workers, and overwhelmed the Islamic court system with bankruptcy proceedings. Only interest-free government deposits have kept many banks from failing. Says a top Saudi official: "During the boom, the country generated tremendous wealth. Now the cycle is reversed. Every time we cancel a project, the ripple effect washes over the entire economy."
The slowdown comes at a time when such monumental undertakings as the $3.4 billion Riyadh International Airport and the $18 billion industrial city of Jubail are largely complete. Yet those and other ambitious projects will now cost millions to maintain. Perhaps because of that, the suddenly penny- pinching Saudis have been making life miserable for foreign companies accustomed to more opulent treatment. "It's horrible now," says one American contractor in Riyadh. "They don't pay, there's little new business, and they nickel-and-dime you to death with inspections and rules."
Politically, however, Saudi Arabia remains stable. The House of Saud is closely allied with the country's religious leadership and controls the key sectors of the economy. Most observers agree that oil prices could fall much further without affecting the family's rule.
Elsewhere in the gulf, other thinly populated oil producers are suffering assorted woes. Kuwait, which survived a stock-market crash in 1982, faces a $1 billion budget deficit this year. Yet the idea of cutting the country's generous welfare-state outlays remains wildly unpopular. In Oman, declining oil prices will hold the economy's growth well below the whopping 14% gain achieved last year and will force the government to curtail projects in its five-year plan. Omanis are already borrowing abroad and using foreign currency reserves to finance budget shortfalls. The United Arab Emirates, a federation of seven sheikdoms, has been politically weakened by the oil-price collapse. The federal government that binds the state together is virtually broke, and the two leading emirates, Dubai and Abu Dhabi, are reluctant to dip into their own shrunken treasuries to bail it out.
Embattled Iran is staggering from the effects of both cheap oil and the stalemated war with Iraq. Tehran has scaled back imports for heavy industry, triggering a sharp recession and boosting unemployment. While staple foods are inexpensive under the government ration system, they are exorbitant on the black market, to which most Iranians are driven by the skimpy official allotments. War spending remains the top priority of Ayatullah Ruhollah Khomeini, Iran's spiritual leader. Since few countries will openly sell it military equipment, Tehran must use its shrinking energy income to buy weapons on the inflated international black market.
Iraq also needs to provide guns and butter at a time when export revenues are falling fast. Baghdad previously financed both economic development and its military campaign against Iran by drawing on $35 billion in currency reserves and refinancing its estimated $40 billion of foreign debt. Now the reserves are gone, and international creditors are rapidly losing patience. Last week President Saddam Hussein reportedly approved an austerity program calling for drastic cuts in imports. That will come as a shock to most Iraqis, who have managed to live well despite the war.
AFRICA. The sharp downturn in oil prices threatens Egypt's fragile economy and the regime of President Hosni Mubarak. Petroleum is the country's largest export, bringing in some $2.1 billion in the most recent fiscal year. The latest tumble will cut those earnings nearly in half if prices remain at their present level. "It is a devastating blow to the Egyptian economy," says a Western diplomat in Cairo. With foreign debts of $30 billion, Egypt could find it extremely difficult to halt subsidies to consumers on everything from fuel to foodstuffs and make other moves sought by U.S. creditors and the International Monetary Fund.
Libya's economic problems are less acute than Egypt's, but Colonel Muammar Gaddafi's government is also being squeezed. Libya earned $22 billion in oil revenue just four years ago, enabling Gaddafi to support, in addition to terrorism, numerous political causes around the world and to embark on major projects and welfare programs at home. This year Libya could earn as little as $5 billion from oil production, and Westerners in Tripoli say the country faces a growing cash crisis. Imports have been sharply cut, and long lines regularly form for basic consumer goods. Such hardships, though, are unlikely to limit Gaddafi's ability to export terrorism. "He may not be able to stand up to the U.S. Sixth Fleet in the Gulf of Sidra," said one Western observer, "but he can set off a lot of bombs for very little money using all the resources available to him."
Nigeria appears, next to Mexico, to be the oil producer closest to defaulting on its foreign loans. The West African nation gets fully 97% of its export earnings from the sale of oil, and thus has no other way to pay its $12 billion in medium- and long-term debt. Major General Ibrahim Babangida, who became President last August in a military coup, has said that Nigeria will devote no more than 30% of its income from abroad to meeting the $4.4 billion in principal and interest due this year. Fears of default swept Nigeria's bankers this month when Babangida declared a 90-day moratorium on commercial- loan payments. He may now have to impose new austerity measures on top of already painful spending cuts.
NORTH SEA. Despite the oil-price collapse, Britain has steadfastly maintained production at about 2.6 million bbl. a day. London insists that the advantages of cheap oil far outweigh the damage that it causes. "We are still basically an industrialized country," says David Kern, chief economist for National Westminster Bank PLC, "and we will be better off if the whole world economy tends to grow faster." Still, petroleum companies are chopping their exploration budgets, and the government itself has been caught in a cash squeeze. With oil at $10 per bbl., tax receipts from North Sea production will shrink to about $4.4 billion in 1986, vs. $16.9 billion a year ago. The decline has forced Nigel Lawson, Chancellor of the Exchequer, to pare back proposals for a tax cut from $4.4 billion to $1.5 billion.
Norway, which gets 20% of its national income from the oil wells beneath its continental shelf, is heading for trouble. "Only the very few have realized the grave misfortune that is about to strike us," says Finance Minister Rolf Presthus. The oil-price drop has forced the Norwegians to consider suspending | development of major new petroleum fields. The price decline will also probably cause Norway to suffer a balance of payments deficit for the first time since 1977. That prospect has led the government to take a hard line against wage demands, thus stirring labor unrest.
OTHER MAJOR PRODUCERS. Canada counts oil only fourth among its exports, but declining prices are causing serious distress in the western province of Alberta, the country's main energy source. Bill Richards, an Alberta-based oil-well owner, calls the recent price plunge the industry's "worst setback in modern history." Almost all of the 3,000 jobs that Canadian oilworkers have lost since January were in Alberta. Dale Tufts, president of the Petroleum Services Association, says the group's 300 companies may have to lay off half their 30,000 workers nationwide.
Falling oil prices have forced Calgary-based Dome Petroleum to ask creditors to forgo up to $1 billion in 1986 principal and interest. To ease the burden on Dome and other ailing producers, Alberta Premier Donald Getty wants Ottawa to grant new tax breaks to the oil firms. But the federal government, whose revenue projections are based on a petroleum price of $22 per bbl., can hardly afford financial favors.
The Soviet Union, the world's largest oil producer (12 million bbl. a day), depends heavily on petroleum exports to pay for imports needed to stimulate its stagnating economy. General Secretary Mikhail Gorbachev hopes that increased imports from the West will enable his country to double its national income by the year 2000. But a drop in oil prices to $10 per bbl. could crimp those ambitious plans. Notes a Western expert based in Moscow: "When their oil earnings fall, the Soviets have less money to spend. We have no doubt that the decline in prices has made them rework their Five-Year Plan and has slowed down their modernization drive, at least in the short term."
The Soviets have several options for keeping the drive alive. They are likely to seek additional credit from Western banks, on top of the estimated $30 billion they already owe, to finance the purchase of high-tech goods. Moscow could also bring in additional foreign currency by selling some of its gold hoard on the open market. Whatever the Soviets decide to do, they are unlikely to let falling oil prices endanger their mighty military machine, which has long had first call on the country's financial resources.
With reporting by Andrea Dabrowski/Mexico City and Barry Hillenbrand/Bahrain, with other bureaus