Blow to the oil-producing countries of the US continent

US, WASHINGTON (ORDO NEWS) — Over the past time this year, oil prices range from $ 20 to $ 25, and global consumption fell by 20% due to coronavirus. Brent crude oil is worth $ 25 a barrel; it has dropped to its lowest level in the last two decades. All this is compounded by a serious imbalance between supply and demand.

In today’s world there are not enough storage facilities to load excess oil there. Problems arose at the beginning of the year, when, due to the coronavirus pandemic, China, the world’s leading importer, sharply reduced consumption; and then a price war broke out between Saudi Arabia and Russia, which is unlikely to end soon, given the sharp decline in demand in Western countries where mass quarantine has been introduced. All this negatively affects the oil industry of the American continent: from Canada and the USA to Mexico and Argentina.

The imbalance in the oil industry occurred in record time: in March, oil quotes fell to the level of October 2008, when Lehman Brothers went bankrupt, and the global economic downturn began; and the first quarter of this year was the worst for Brent crude. The economic downturn dealt a severe blow to Canada, which ranks sixth in the world in production and third in oil reserves.

At current prices, according to research firm Wood McKenzie, Canada has cut production by more than half, causing real losses. In the United States, where oil production for the most part remains profitable, in the current situation, many companies engaged in the production of shale oil may suffer losses.

However, as Daniel Kerner, an employee of Eurasia Consulting, emphasizes, the situation south of Rio Bravo is much worse. “Unlike the financial crisis of 2008, Latin America was in a worse position in the face of an economic blow of this type,” he emphasizes. This is a double blow: due to a sharp reduction in consumption and investment due to quarantine, strict or not very, depending on the specific country, the virus brought down oil prices and other raw materials and dealt a crushing blow to exports, the main source of income.

Russia, and especially Saudi Arabia, which on average spend four and ten dollars on a barrel of oil, respectively, can afford to continue the price war, even due to a significant reduction in income. Latin America cannot do this for two reasons: the cost of production there is higher, and the drop in prices is “even more significant for heavy oil,” adds Alfonso Blanco, head of the Latin American Energy Organization (Olade). It accounts for the bulk of production on the continent.

According to information provided by Olade, the average cost of production on the continent ranges from seven to nineteen dollars per barrel, while the average cost is $ 14 per barrel. “Nevertheless,” Blanco continues, “these figures do not take into account either financial, transport, or indirect costs, as well as taxes on the extraction of minerals, and this fundamentally changes the whole picture.” That is, it turns out that an ever-growing part of the continent is ready to sell losses, as Lisa Vissidi, Director of Energy, Climate Change and Mining at the Inter-American Dialogue Analytical Center, said by telephone.

This action, which runs counter to all economic laws, has only one possible justification: the need for short-term cash flows and the costs that the closure and reduction of production of one oil well will entail. Venezuela was in the most risky position, having the largest explored oil reserves on the planet and the Latin American country most dependent on its exports. With the price of oil at $ 30 per barrel (which is now much lower), Caracas’s revenues from the export of hydrocarbons (in fact, its only source of income) fell by 13%, says employee Mauricio Medinaceli. Venezuela, like no one else, needs revenues from the sale of oil and at the same time it has the highest costs for its production. A very unfortunate combination at low oil prices.

In this regard, four more of the five largest economies of the continent should be mentioned: Brazil, Mexico, Argentina and Colombia. The impact of low prices is very different. “In Argentina, oil production will be profitable at a cost of more than $ 40 per barrel,” Vissidi said. Colombia, although it is in a slightly better position than other countries, will also suffer from low prices: for more than 60% of the oil it produces, the price must be $ 25 or higher in order to be profitable.

Expert Cleveland Jones believes that Brazil, despite the fact that almost a third of its production may be unprofitable due to current prices, is a kind of exception due to deep-sea coastal fields with significant reserves, where, according to his calculations, the cost of oil is from five to twelve dollars, ”concludes Vissidi.

Separate conversation about Mexico. With competent financial support provided by the state oil company Pemex, from which oil is bought for $ 49 (although it is now quoted at 10), the country will perfectly complete 2020. However, support ends this year, and current quotes are seriously puzzling investors who need to keep the oil industry afloat.

According to the consulting company Eurasia, the Mexican budget’s dependence on oil revenues, although it has declined in recent years, still continues to play a significant role: a fifth of government revenues come from the sale of oil. In this indicator, Mexico is significantly ahead of other countries in the region: in Ecuador, it is 12%; in Colombia, it does not even reach 10%, while in Brazil it is about 8%. Based on these calculations,

“In the short term, companies and governments, even incurring losses, are likely to continue production, as they have done in the past, hoping for a surge in prices,” Miges writes in an email. “However, the current oversupply, the reduction in demand and the struggle of global giants for the sales market may require tough measures: if prices do not rebound, then production will inevitably have to be cut.” But unlike the last price war of 2015-2016, the decline in production is unlikely to be restored. ” The year 2020, in which, according to forecasts, no major changes were expected in the global oil market, it became a real nightmare for manufacturers. Latin America is starting to enter a new reality.

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The article is written and prepared by our foreign editors from different countries around the world – material edited and published by Ordo News staff in our US newsroom press.