Written by Rodrigo Campos and Libby George
NEW YORK/LONDON (Reuters) – Donald Trump promised to “drill, baby, drill” to cut energy costs in half, a plan that sends shivers through the governments of emerging market oil producers worried about dollar yields and fills poorer importing countries with hope.
In practice, Trump, the next president of the world’s largest oil producer, cannot completely control prices.
The United States has limited influence over the producer group OPEC+, the Organization of the Petroleum Exporting Countries and their allies, and does not have a state oil company that Trump can order to increase production.
But the uncertain economic outlook in the largest oil consuming countries, especially China, and the potential surplus in oil supply, prompted investors to hedge their bets on the impact of Trump’s election promise.
“You will have country-specific issues or challenges with lower oil prices,” said Thomas Hoggard, emerging market debt portfolio manager at Janus Henderson. “But more than half of the emerging market investment world are large oil importers. There will be winners and losers from this type of shock.”
Here’s a look at the countries that stand to gain – or lose – if global oil prices fall to near $40 a barrel, just above half current prices.
Product pain
In theory, the balance sheets of the world’s producers — including OPEC’s largest producer, Saudi Arabia — would take the biggest hit from lower oil prices.
But the kingdom, which has multiple sovereign wealth funds and easy access to global borrowing, is somewhat isolated.
In the wake of the collapse in oil prices in recent years, Saudi Arabia, along with other Gulf states, such as the United Arab Emirates, has sought to diversify its economy and nurture domestic debt markets.
However, JPMorgan has indicated that falling prices may force it to scale back mega projects such as the $500 billion city of the future, NEOM.
For poorer producers, such as Angola, Ecuador and Nigeria, lower prices will be more damaging. Most of them depend on oil for dollars, and need prices close to $100 per barrel to balance budgets.
“They don’t have any savings to fall back on,” said David Rees, chief emerging markets economist at investment firm Schroders, adding that these countries are already suffering from debt and limited access to affordable borrowing.
“If you take a big hit to your core revenues, that kind of big debt hedging gets worse and worse,” he said.
This pressure could prompt investors to ignore positive stories – such as Nigeria’s sweeping fuel subsidies and foreign exchange reforms, or Angola’s rush to pay off its debt.
“When oil prices see this kind of pressure, investors tend to paint all oil-producing countries with the same brush,” said Razia Khan, Standard Chartered’s head of research for Africa and the Middle East.
Big savings?
For importers, lower oil prices could lower inflation and ease demand for foreign exchange. China spends just under $300 billion on importing oil, followed by India with about $200 billion.
Smaller importers, including Indonesia, Kenya, Pakistan, South Africa, Thailand and Turkey, could also benefit.
“If you invest $40 (in oil) and just assume $40 per day, instead of energy inflation averaging around zero over the next year or so, it comes down to roughly 15 below zero,” Schroders’ Rees said.
The boon may be even greater for emerging economies that subsidize fossil fuels: Venezuela and Iran spend more than 20% of their GDP on subsidies.
Note of caution
Low prices alone do not guarantee economic relief, especially if they are accompanied by the trade war that the tariffs threatened by Trump could unleash.
Analysts say this could reduce global economic growth and cause a demand shock, with negative repercussions around the world.
South Africa, an exporter of platinum, coal and iron, would fare poorly if global commodity prices fell more broadly.
In addition, the weaker balance sheets of the world’s wealthier oil producers may have spillover effects.
Egypt, Kenya and Pakistan – heavily indebted importing countries that have relied on foreign financing in recent years – will be hurt if Gulf producers, such as the United Arab Emirates, close their checkbooks while they weather falling prices.
Low oil prices could also delay the transition away from fossil fuels, hurting the long-term prospects of some emerging market energy importers, as well as increasing the costs they face due to climate change.
“Significant price declines can be associated with periods of sluggish global economic activity, which is not good for emerging markets,” said Alejo Chervonko, chief investment officer for emerging markets in the Americas at UBS Global Wealth Management. “So the reasons behind the low prices are important.”
(Reporting by Rodrigo Campos and Libby George; Editing by Karen Strohecker and Barbara Lewis)