When the price of oil was above $100, many of the less developed oil exporting OPEC members decided to capitalize on the high price and cash out by taking loans using the precious liquid as collateral very much the same way corporate CEOs use their inflated stock (thanks to buybacks they authorize) to issue loans against said stock. And why not: even if the price of oil were to drop, they could just pump more until the principal is repaid. However, few oil exporters anticipated such an acute oil plunge in such as short time span, which resulted in the value of the collateral tumbling by 70%, and now find themselves have to repay the original loan by remitting as much as three times more oil!
According to Reuters, this is precisely what happened in the years preceding the great 2014-2015 oil bust: “poorer oil-producing countries which took out loans to be repaid in oil when the price was higher are having to send three times as much to respect repayment schedules now prices have fallen.”
As a result, the finances of countries such as Angola, Venezuela, Nigeria and Iraq have been crippled, in the process creating further division within the Organization of the Petroleum Exporting Countries.
Take Angola for example: Africa’s largest oil producer has borrowed as much as $25 billion from China since 2010, including about $5 billion last December, which according to Reuters forced its state oil firm to channel almost its entire oil output toward debt repayments this year.
Or Venezuela: ever since 2007, China, which has become Venezuela’s top financier via an oil-for-loans program, has funneled an amazing $50 billion into the Chavez first and then Maduro regimes, in exchange for repayment in crude and fuel, including a $5 billion deal last September. While details of the loans have not been made public, analysts from Barclays estimate Caracas owes $7 billion to Beijing this year and needs nearly 800,000 bpd to meet payments, up from 230,000 bpd when oil traded at $100 per barrel.
This is terrible news for all the indebted exporters because not only do they now have to pump three times as much just to repay the same loan, they have little if anything left over to fund critical budget needs and certainly nothing left over to invest.
“All of those oil nations – Angola, Nigeria, Venezuela – have taken money for survival but haven’t got any money left for investments. That is very damaging to their long-term growth prospects,” said Amrita Sen from Energy Aspects think-tank. “People tend to look at current production volumes but if you have committed your entire production to China or other buyers under loans – then you cannot invest to keep growing and won’t benefit from higher prices in the future.”
I suspect there might have been some moral hazard at play here: the people who arranged the loans most likely took a cut for themselves and are now living well, while their fellow nationals are sinking deeper into economic decline. Moral hazard plus myopia – a recipe for doomsday, if ever one existed.
For the contestants: if it’s any consolation, Esau understands your pain.
UPDATE: a follow up on the moral hazard angle:
But the multi-billion dollar loans he signed with China last month have angered Angolans who say they have been left behind as politicians and China share the spoils and Africa’s second-largest oil producer becomes ever more reliant on Beijing …
“I think the president humiliates Angolans,” 35-year-old cook Marisa told Reuters as she bartered with a street trader over peanuts and bananas in the capital. “The agreements with China are a benefit for them and the president and not for us.”
Those wascally politicians! Who’da thunk it??
Further on the nasty, serious consequences of signing one’s birthright away here.