Yergin: Oil price drop has winners and losers.

by Tim Ferguson | Forbes

This story appears in the December 2014 issue of Forbes Asia.

The biggest economic news as November ended was a collapse in oil prices and with them the market capitalizations of some of the world’s biggest companies in the energy sector. A month earlier delegates to the Forbes Global CEO Conference in Singapore heard timely remarks from Daniel Yergin, an expert in the sector (author of The Prize and The Quest) as well as the macroeconomy.

I pressed him on how low oil could go (he said the high $70s, but noted, “Markets can overshoot, they’ve done that before”) and who would win and lose.

North America’s new energy fields should continue to enjoy a production boom, Yergin said, while slumping Europe with its heavy subsidizing of green “alternatives” will eat further fiscal losses. Then there’s the Kremlin: “42% of the Russian budget [is] from oil, a much lower amount from natural gas. Ironically, the one thing that’s cushioning Russia is the weakness of its currency, because its budget is in rubles.

“Asia is on balance a winner because energy costs are coming down. That’s very helpful for Japan right now, which has been carrying very high LNG [liquefied natural gas] prices to make up for shutting down its nuclear power.”

Besides Russia, what petro-states are hurting?

“It’s a big problem for Venezuela, which is just balancing on the edge of default. For Nigeria, it’s a huge problem. … If you talk to the finance minister of Nigeria, she will say [that] people get used to those high revenues and it’s easier to give out the money than to take it back. For some of these countries, like Nigeria, it’s going to be a challenge with the other problems they already have.”

How has the equation for so-called renewable sources changed?

“In China you’ve seen a significant growth in renewables, a good part of it because of diversification because of antipollution [policies]. But when we do our own numbers … we say 20 years from now the world will use 30% to 40% more energy. Renewables will have grown enormously from a very small base, but still 75% of energy will come from coal, oil and natural gas.”

So isn’t now the time for a big carbon tax?

“In the past we have seen governments jump in and say this is a great way to raise money by increasing the fuel tax. … There’s more discussion around it. Some business groups have come out in favor of it, but I still find it hard to see, in a competitive, weaker world economy, that that will easily happen.”