Oil prices have plummeted lately, bringing economic relief to consumers but leaner revenues to oil-exporting nations such as Russia, Venezuela, and Nigeria. The Organization of the Petroleum Exporting Countries (OPEC) debated cutting production, but leading exporter Saudi Arabia staunchly refuses to lower their production–no matter how low the oil price falls. As low oil prices place strain on economies in countries such as Russia and Venezuela, residents may increasingly convert their wealth to bitcoin to avoid currency crashes.
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OPEC operates as a cartel to maximize profits for all the major oil-producing nations. They collude to increase production when demand is high and decrease it when the oil price falls too low to turn a profit. Saudi Arabia–which is world’s leading oil exporter–usually serves as the swing producer, adjusting their production to balance the oil price in OPEC’s favor.
However, Saudi Arabia has been reluctant to decrease production during the present oil price decline. As Russia Today reports , they remain firm in their desire to maintain their market share–no matter how much it hurts other oil producers’ bottom lines. In fact, Saudi oil minister Ali al-Naimi says that they would not cut production even if the oil price fell to $20 a barrel.
“It is not in the interest of OPEC producers to cut their production, whatever the price is,” Ali al-Naimi told the Middle East Economic Survey, a weekly oil and gas publication. Naimi added, “Whether it goes down to $20, $40, $50, $60, it is irrelevant.”
He added that he expects the oil markets to see marked volatility in the near future. Oil prices have fallen from $115 in June to ~$60 in December.
“We have entered a scary time for the oil market and for the next several years we are going to be dealing with a lot of volatility,” Naimi said. “Just about everything will be touched by this.”
A prolonged oil price decline will wreak havoc on oil-dependent economies with high production costs, such as Russia and Venezuela. Both the Russian ruble and the Venezuelan bolivar experienced significant drops in value in 2014, and inflation accelerated in both countries as well.
In response, many Russians and Venezuelans began turning to bitcoin (among other currencies) as a safer store of value. If the oil price does not rebound from its current mark of ~$60, Russia, Venezuela, and other major oil exporters will feel increasing economic strain. Russia, for instance, cannot balance its budget unless oil prices hit $100.
Currency controls–such as Venezuela’s “Operation Merry Christmas”–can placate citizens temporarily. But as Venezuelan economic consultant Asdrubal Oliveras recently remarked to Reuters, they are just a sham that throws the markets into chaos.
“What we have here is complete disorder,” said Asdrubal Oliveros of Caracas-based consultancy Ecoanalitica. “They’ve provided subsidized currency for things like toys and clothes to create the sensation that they are relieving shortages.”
Eventually, residents will see through the facade, which will only deepen the country’s long-term economic woes. It is quite possible residents of cash-strapped oil producers will increasingly turn to bitcoin in an attempt to secure their present and future economic prospects.
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