The Consequences of Cheap Oil

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As the global price of oil drops, several experts are getting worried about the impacts.

As expected the first country into crisis is Venezuela: Which is running to China to get a larger advance of cash. Some countries were taking advances through sovereign debt and repaying it in oil. With oil worth less, it will take twice as much oil to pay off the debt as before and get less cash for the oil they have.

Per CNBC:

Venezuela needs cash, but there's no easy way to get it

Days after OPEC decided not to give into Venezuela's pleas to cut oil production, President Nicolas Maduro has begun talking up several moves to raise money, including plans to slash 20 percent of "unproductive" spending and an attempt at "perfecting" the country's foreign exchange system.

"Clearly the government is trying to send signs to the market that they are working on necessary adjustments that the economy needs in order to honor international commitments and keep up with social policies, which are essential for political stability," said Diego Moya-Ocampos, a senior political risk analyst at IHS. "However, these policy adjustments are not enough. This reflects simply that the government is desperately looking for funds to compensate for the lost revenues from declining oil prices."

The sharp decline in oil prices—Brent crude is at a five-year low—is making Venezuela's autocratic government act swiftly. The commodity accounts for 95 percent of the country's export earnings.

Barclays predicts that the economy will contract 6.2 percent and inflation will surpass 120 percent in 2015. The IMF projects Venezuela's economy to decline by a more modest 1 percent.

Last week, Venezuelan Finance Minister Rodolfo Marco went hat in hand to China in a search for loans. He's expected to visit Iran and Russia next.

"We are thus skeptical that the economic team's plan to tap international lenders, including China, over coming weeks will yield any tangible results," Bank of America economist Francisco Rodriguez said in a recent note.

China has already loaned tens of billions of dollars to Venezuela—which Caracas repays in oil shipments. About half of the oil that Venezuela ships to China goes to paying down existing debt.

But political instability could prompt China to cut back on what has been a critical source of revenue, analysts say.

"If that lifeline is cut, Venezuela doesn't have a whole lot of options," said Eric Farnsworth, vice president at Council of the Americas and Americas Society.

Bakken oil pipeline project slammed shut

Enterprise Products Partners is shelving a proposed pipeline that would have transported crude from North Dakota to Oklahoma, the company announced on Friday.

The news came in the midst of a brutal slide in global oil prices that have raised concerns about whether U.S. companies will continue to build on the expansion of oil production. Middle East oil producers have yet to announce a cut in production to offset the drop in crude, in what some analysts say is a slow-bleed strategy designed to make pumping crude as uneconomic as possible for the world's fastest growing non-OPEC oil producer.

Enterprise Products—a publicly traded partnership designed to provide financing on oil and gas infrastructure projects — said in a terse statement that investors had "decided not to move forward with development of its proposed Bakken to Cushing crude oil pipeline."

Commitments from potential partners "were not sufficient to support the project," Enterprise Products added. The company did not immediately respond to an inquiry from CNBC on whether the project's closure was related to the drop in oil prices and other factors.

"Enterprise Products Partners management has been consistent in communicating this was a low probability project," said Adam Karpf, a portfolio manager for Atlantic Trust's master limited partnership strategies.

Karpf said that the firm appeared to lose a competitive battle with a different partnership, Energy Transfer Partners, which was also bidding for contracts on a Bakken pipeline. Those commitments left Enterprise the odd man out, he added. Atlantic Trust owns shares of Enterprise in its investment portfolio.

However, oversupply of crude has led to fears that oil's sharp decline could claim U.S. shale production as a victim, as smaller operators may be forced to scale back expansion plans. In recent weeks, oil prices have been in free fall, with U.S. crude settling at its lowest level since May 2009 under $58 per barrel.

North Dakota's Bakken region and Oklahoma's Cushing are two of the most prolific oil hubs in the U.S. energy revolution. Pipeline construction projects have taken on increasing prominence as the crude boom picks up speed, sending domestic oil production skyrocketing to more than 9 million barrels per day.

Infrastructure partnerships such as Enterprise Products' have raised billions in private capital, in expectation that the U.S.' growing energy independence would create more opportunities to transport domestically produced oil and gas. With Enterprise's actions, that assumption appears in some doubt.

"It's a clear indication that the lowering of oil prices and the dialing down of crude demand for 2015 is taking its toll," said Vincent DeVito, partner at the law firm of Bowditch & Dewey.

IEA cuts 2015 demand growth forecasts, warns on social unrest

Weak demand and oversupply in oil markets raise the risk of global social instability and the potential for financial defaults, the International Energy Agency (IEA) warned on Friday, as it cut its forecasts for global oil demand growth in 2015.

The report came as oil prices slid to new multi-year lows, with Brent crude hitting a 5-½ -year low of $63.33 a barrel on Friday.

"Continued price declines would for some countries and companies make an already difficult situation even worse," the IEA said in its new monthly report.

Global oil inventories are projected to build by around 300 million barrels in the first half of 2015 in the absence of any disruption, the group said. It estimated that stocks in major global economies could start to "bump" against storage capacity limits.

"The resulting downward price pressure would raise the risk of social instability or financial difficulties if producers found it difficult to pay back debt," it said.

Singling out Russia and Venezuela, the Paris-based energy think tank said that further price drops would heighten the financial risks to "highly leveraged" producers, and countries that are heavily dependent on oil revenues.

It warned on the threat to international financial stability should the situation in Russia deteriorate to the point of a default. Bond yields and the cost of insuring Russia against a default have risen in recent weeks amid fears over falling oil prices and intensifying sanctions from the West. Oil – the country's biggest export - is crucial for its economy, and influence in the world.

"Lower oil prices significantly dent potential export revenues in net oil‐exporting countries, slashing their income streams and in turn denting demand," it said.

"In particularly cash‐strapped economies, such as Venezuela and Russia, this impact is likely to be magnified as the risk of default escalates," it said, adding that Venezuela's capital Caracas was currently struggling to make bond payments, fund social programs and pay debts to oil partners.

Venezuela needs to fill a capital shortfall of around $29 billion next year, according to Bradford Jones, a portfolio manager at an emerging markets focused hedge fund called Sagil Capital. He told CNBC Friday that the country was facing a number of very tough decisions and believed a currency devaluation would not do much to alleviate the pain.

"This is a country really facing a perfect storm," he said.

Brent crude's losses for the week now stand at more than 8 percent and it has seen a 45 percent fall since peaking near $115 a barrel in mid-June. U.S. crude fell below $60 a barrel on Thursday for the first time in five years, and WTI futures for January traded at $59.23 a barrel at 8:00 a.m. GMT Friday morning.

Weak demand, a strong dollar and booming U.S. oil production have been cited as the main reasons behind the dramatic fall in oil prices, and the IEA has previously called it a "new chapter" in the history of oil markets.

OPEC (Organization of Petroleum-Exporting Countries), a group of 12 major oil producers, decided not to cut production at its meeting in November, further fueling sliding prices, which have shaken stock markets and raised volatility.

The IEA on Friday also cut its 2015 forecasts for global oil demand growth, with an estimate of 93.3 million b/d (barrels a day) for next year, down from November's prediction of 93.6 million b/d.

It now expects "more modest" demand growth next year, and said its Russian forecasts had been particularly hard hit by the selloff. Its 2015 estimate for the country has been revised down by 195,000 b/d, to 3.4 million b/d, on Russia's "darker macroeconomic outlook."

Moscow acknowledged for the first time earlier this month that the country could fall into a recession next year and analysts have told CNBC that Russia could be ripe for another credit downgrade from one the ratings agencies.

The energy watchdog also said that it may take some time for supply and demand to respond to the price rout. Producers that are cutting back on spending will have little impact on short-term supplies, it said, and lower prices generally give little benefit for a country's economy.

Even if Russia does decide to trim its production next year, the IEA said that upward revisions to North American projections meant this would largely offset the changes.