2015 Will Not Be Kind to most Petro-states...

First off, Happy New Year! In addition to spending a little time with family over the holidays, I managed to catch up on some overdue reading. The falling price of oil repeatedly caught my attention. In the short run, the falling price is a doubled edged sword. Those who consume a lot of fossil fuels are going to see a short-run dividend. For example, I confess a great deal of satisfaction every time I fill up my car. Firms like FedEx, UPS, Union Pacific, CN Rail, and the airlines are all reaping the benefits of lower fuel costs.

Yet, there are significant danger signs ahead in 2015 if the price of oil continues to fall. On the one hand, the global oil glut is a supply story brought about by technological change; namely the deployment of fracking and directional drilling in so-called "tight oil" plays in the United States. In short, oil firms figured out how to get at previously inaccessible sources. However, the larger concern with falling oil prices for the global economy is a worrisome decline in demand. Sure, some of that decline is due to efficiency gains, primarily in rich countries. That's all great. However, declines in demand also suggest a worrisome slowdown in global economic activity that will be good for none of us in 2015.

However, what jumped out at me over the holidays was the profound pain declining oil prices are causing for the many petro-states who depend on oil revenues to keep the lights on or, more appropriately, subsidise the stability of the state itself. Rather than try capture what others have more articulately written and demonstrated, I offer up the links below for a stark snapshot of the pain 2015 may offer for a number of natural resource economies.

From Deutsche Bank (PDF)
From the Economist Espresso Application, January 2, 2015.
From the Wall Street Journal, December 10, 2014.(Note Norway's advantageous break-even position).
From Slate.com, December 11, 2014. (Note that Canadian production is included in these charts).

If you had a look at my previous post, you might wonder whether I think Canada is a petro-state? There have always been striking similarities between Canada and many resource-dependent developing countries. While the falling price of oil is unambiguously a major policy problem for Canada (and Alberta in particular), Canada is clearly NOT like Venezuela!!!!

That said, the expansion of Canada's oil sands developments in recent years has fuelled debates about the management of natural resource revenues, including apt comparisons with well-governed states like Norway whose sovereign wealth fund has become the envy of many countries. Bruce Campbell of the Canadian Centre for Policy Alternatives wrote an interesting analysis in 2013 explicitly comparing Canada with Norway in the management of oil wealth. One broad conclusion Campbell reaches is that Canadian governments should be more heavily involved in the oil business itself, including the establishment of a state-run-oil company and sovereign wealth fund. It is a recommendation worth wrestling with for lessons that could be applied to Canada, but Norway is a major exception to a broader rule that state-run oil companies are not very good stewards of natural resource wealth. Given Canada's track record of resource management, I'm not sure putting more of it in the hands of the state is the route to sustainability.