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Crude Economics
Petrostates Hurting More Than Petrofirms

This is not a good time to be in the business of selling oil. Weak demand and a global oversupply have pushed prices well below half of their value just seven short months ago, threatening the bottom lines of oil majors and national budgets of oil-exporting nations. But as the FT reports, the world’s oil majors are having an easier time adjusting to rapidly changing market conditions than are petrostates:

[C]ountries are not companies, for better or worse. Peaceful mergers are rare. Demergers and spin-offs tend to be more common, along with the occasional hostile takeover and Russian bear hug. Unlike shareholders, who tend to be a fairly dispassionate bunch, citizens have emotional ties.

So here is another investment thesis: sell countries, buy companies. To be exact, short fragile oil exporters, particularly those suffering from corruption and the resource curse, and buy the oil majors. They both look painfully vulnerable to falling oil and gas prices (and in urgent need of this week’s bounce) but companies are better at adjusting to a change in circumstances.

Every oil play has a breakeven level—a price floor below which producers can no longer profitably operate. When the going gets tough, firms like BP and Exxon Mobil can respond by slashing capital expenditures, especially in high-cost formations. For petrostates, many of whom can profitably drill even at extremely low prices (Saudi oil, for instance, is some of the cheapest to produce in the world), the problem is bigger.

These countries derive huge portions of their national budgets from oil revenues, so falling prices threaten their ability to balance their books. In the wake of the Arab Spring, many of the Middle East’s petrostates boosted state spending as a way to quell unrest, sending their budgetary breakeven prices soaring. Accommodating today’s bear market is a bigger and more difficult task for them than it is for private companies.

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