All parties involved able to weather oil price weakness
Boston — Big American banks, nations that rely on oil revenues to pay foreign debt, and many oil corporations - these are among the important few who don't rejoice when oil prices drop.
On balance, an oil price drop worsens their lot. They are the ones who should be most relieved by the Organization of Petroleum Exporting Countries' (OPEC) agreement in principle Monday to hold the line on prices and cut production.
But most analysts believe that all these parties should pull through.
The first line of concern is less-developed-country (LDC) debt. Five of the 10 biggest debtor nations are net oil exporters (Mexico, Venezuela, Indonesia, Egypt, and Nigeria). The other five big LDCs (Brazil, Argentina, Chile, Peru, and the Philippines) actually benefit when they have to pay less for oil. The first five LDCs export 5 million barrels a day and rely heavily on oil revenue to pay foreign debt. The second five import only 1 million barrels a day among them.
Economist Henry Wojtyla of the Rosenkrantz, Ehrenkrantz, Lyon & Ross brokerage in New York estimates that a $3-a-barrel cut in oil prices increases the total deficit of oil-producing LDCs by $4 billion. He argues that major debtors are covering only half of their interest payments on their loans from their net exports. The rest is rolled over from loan rescheduling to rescheduling.
Among other parties injured when crude prices drop are oil companies and banks with LDC and energy loans in their portfolios. How much these parties are hurt depends on how low prices fall.
Although the Organization of Petroleum Exporting Countries, meeting this week in Geneva, is trying to maintain an official $29-a-barrel benchmark by trimming back production, oil prices are already falling, by some measures. The spot (or free) market price is below $29; moreover, since oil prices are not being adjusted for inflation, they are already declining in ''real'' terms.
Many analysts say that even if the $29 OPEC price is maintained at present, it could be under pressure again by January. An overall 1.5 million-barrel OPEC production cut, as advocated by Saudi Arabian Oil Minister Ahmad Zaki Yamani, would cause further loss of OPEC's market share to non-OPEC oil nations and to OPEC renegades such as Nigeria, which bolted from the cartel recently, slashing its oil price in conjunction with cuts by Norway and Britain. OPEC kingpin Saudi Arabia, moreover, is believed to be structurally unable to a cut much below 3 million barrels a day because of its own internal energy needs.
If OPEC cuts production, that will lessen the impact of falling oil prices on the indebted LDCs, since most of them are outside OPEC and will benefit both from price stability. They will also be able to increase their market share, and that should keep revenues fairly even.
Dr. William Cline, director of the Institute for International Economics in Washington, sees Mexico and Venezuela as the two biggest LDC debtors with heavy reliance on oil revenue. But they are cushioned by healthy trade balances, he says.
Mexico, Dr. Cline says, has a $2 billion payments balance surplus. He estimates that each $1 drop in oil prices costs Mexico $500 million to $600 million a year. Venezuela is in less good standing with the banks, Cline notes, but its foreign reserves are at least as strong as Mexico's, so it should pull through, too. He sees ''no serious jeopardy'' unless the benchmark falls below $ 25 to $26 a barrel.
Nigeria and Ecuador are two LDCS that are ''on a thinner margin,'' he says, and they may experience problems, ''but they are not as important for the health of the (banking) system.''
Even if LDC debt worsens because of an oil price drop, banking analyst Samuel Chase of Chase, Brown & Blaxall in Washington does not see a bank crisis in the making. ''The shoe has essentially moved to the other foot,'' he says, referring to the relative worsening of the problems of oil LDCs and the amelioration of the problems of the nonoil debtors.
At any rate, the International Monetary Fund exists to try to ease the debt-service problems of these LDCs, and the Federal Deposit Insurance Corporation, the Federal Reserve, and the Comptroller of the Currency regulate and backstop the banks.
No such helping hands exist for the oil industry, however, note economist Wojtyla and oil analyst William Hyler who is with the Oppenheimer & Co. brokerage in New York. Declining oil prices caused sharp drops in the profits of most major oil companies in the third quarter of this year.
Nevertheless, in the long run the big integrated oils (led by Exxon, Mobil, Chevron, and Texaco) should be able to cope with falling prices, Mr. Hyler says. Most of these corporations have little debt and good reserve bases, he notes, and falling prices will affect their cash flow but not their solvency. Naturally , those companies with the lowest debt will fare best; those that have financed big acquisitions may face some difficulties.
The main effect of falling prices, Hyler says, will be that oil companies cut capital spending - and that is where oil service companies (drillers, refiners, transporters, pipeline builders, etc.) could get hurt.
''There is a lot of debt in these companies, and unlike oil companies, there is no asset value beneath,'' Hyler says. As oil prices fall, oil companies spend less for oil services, and the revenues of the latter ''get clobbered.''
Banks with loans out to foreign and domestic oil-service firms could face loan problems, too.
''They walk on a more fragile bridge,'' economist Cline says of banks with domestic energy loans. The softening of oil prices in 1980 and '81, he notes, ''has put striking pressure on domestic banks already.''