Where does an oil crisis hit first? Not where you might expect.

Angus Mordant/Reuters/File
A long exposure image shows the movement of a crude oil pump jack in the Permian Basin in Loving County, Texas, November 23, 2019. As efforts to contain the coronavirus crimp economic activity, demand for oil has plunged and nations have been running out of places to store excess supplies.

When world oil prices crashed this week (briefly falling into negative territory in the United States), it served as a wake-up call for nations. The coronavirus pandemic has rapidly dried up demand for everything from gasoline to jet fuel. Now a key question is when and how strongly the global economy will rebound. Oil may offer some early clues. Oil-producing nations face a squeeze that could turn out to be a short recession, or something deeper and more prolonged.

In some previous bouts of low prices, “you could increase taxes and cut expenses,” says Niels de Hoog, an economist with Atradius, a trade-credit insurance company based in the Netherlands. But now these so-called petrostates “need to spend more on households and businesses.” 

One way to measure the stress is to look at government budgets. The more nations rely on oil revenues to fund government operations, the bigger their fiscal deficit will be. To balance their budgets, Saudi Arabia and Russia require a higher oil price than the actual drilling price. But they have huge financial reserves to cushion the blow. Surprisingly, struggling Iran may be sheltered a bit, too, because it no longer exports much oil and it has some reserves.

Why We Wrote This

Here’s a look at the nations most vulnerable to the plunge in oil prices. Hint: It’s not the big names, like the U.S., Russia, or Saudi Arabia. It’s smaller countries already struggling economically.

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Many smaller oil producers look much more vulnerable. Ecuador announced two weeks ago an emergency economic plan that will dun wage earners and big companies alike to straighten out its finances while dealing with a big outbreak of the coronavirus. Oman is also struggling with soaring debt, and Nigeria last week applied to the International Monetary Fund and others for emergency funds. 

Low oil prices also threaten politically fragile governments. Iraq, on its third prime minister-designate in as many months, faces a halving of oil revenues in recent weeks. In Venezuela, the price decline is just one more blow for a population already struggling with severe shortages and hyperinflation.

The silver lining in all this, of course, is that low oil prices will help both consumers who fill up their tanks, and big energy importers such as China and Japan.

SOURCE: Chart 1: BP Statistical Review for 2019 (data for 1861 to 2018), U.S. Energy Information Administration (2019 monthly average), Intercontinental Exchange (April 23, 2020 price); Chart 2: Council on Foreign Relations, Energy Intelligence, CEIC, Nasdaq; Chart 3: Atradius N.V., Oxford Economics Global Economic Model; Chart 4: Rystad Energy
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Jacob Turcotte and Karen Norris/Staff

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