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Debtor Nations: Pumping Out a Deal
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10047 |
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CURRENT ISSUES
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4 / 1986 |
1,319 Words |
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Dan Mitchell
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The glut of oil that has recently caused the bottom to fall out of oil prices will prevent any immediate OPEC rebounds. It would be guesswork at best to predict how far oil prices will fall or at what level they will fall or at what level they will stabilize, but the days are gone when suppliers had the market power needed to dictate price.
The precipitous decline in world oil prices, while generally welcomed worldwide, is not without losers. Although they do not attract a great deal of sympathy, OPEC nations certainly have been harmed by lower prices. Other oil-exporting nations have also been adversely affected by lower prices. Domestic oil producers have been dealt a fairly serious blow. Selling prices have been almost halved in a period of six months.
Major oil-producing states like Texas, Louisiana, Oklahoma, and Alaska have been thrown into sectoral recessions. Banks in those states are threatened with failure because of the large volume of loans made to oil-related businesses.
Preexisting conditions
Perhaps the most haunting specter associated with the drop in oil prices is the possibility that major oil-producing nations may default on their large foreign debts. With their revenues plummeting as prices fall lower, some countries may find themselves unable to meet payment schedules. Considering that some of the nations were in trouble before oil prices began to fall, recent events have magnified the problem.
The most glaring example is Mexico. With a foreign debt approaching $100 billion, Mexico depends on oil exports for a significant percentage of its foreign exchange earnings, its prospects do not appear very promising. Furthermore, the Mexican economy, heavily burdened by government control and intervention, is stagnant. It is not likely that domestic production could make up for falling oil revenues.
Mexico is not alone in its crisis. While Mexico may be in the most imminent danger, several other indebted oil-producing nations are poised on the edge of default. Among the most prominent nations in this category are Nigeria ($12.7 billion), Venezuela ($22.5 billion), Indonesia ($22.9 billion), Columbia ($12.6 billion), and Egypt ($16.4 billion).
Insufficient funds: a domino effect
The possibility of default sends tremors through the international financial community. Several major banks in the United States have lent billions of dollars to the countries in trouble. Should a major debtor nation like Mexico default, it could bankrupt one or more money-center banks. Various scenarios have been suggested which predict a rippling effect. The interlocking nature of financial concerns could cause a domino-like series of failures. Obviously, in the worst case, this could paralyze the economy.
What caused this problem? In retrospect, the decision to lend so heavily, not only to oil producers, but to other developing nations, seems very risky. Part of the problem probably involved the perceived safety of lending to governments. Faced with choices of borrowers, bankers probably decided that the credit status of a nation seemed safer, at
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