Oil prices reaching $100 a barrel will be most detrimental to certain countries

In the wake of last week's surprise cut in production by OPEC and its allies, oil prices rallied, and analysts say major oil importers like India, Japan, and South Korea will be the ones to suffer the most if oil prices reach $100 per barrel, as has been predicted.

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A production cut of 1.16 million barrels per day was announced by OPEC+ on Sunday, a move that was not expected by the oil market.

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“As a matter of fact, it's a tax that every country that imports oil is paying,” said Pavel Molchanov, managing director of Raymond James, a private investment bank.

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As Molchanov put it, “It would be the countries that do not have their own domestic petroleum resources that would suffer the most from $100 oil: Japan, India, Germany, France — just to name a few examples.”

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There are expected to be voluntary cuts by countries that make up the oil cartel starting in May and lasting until the end of 2023. A total of 500,000 barrels a day will be slashed from Saudi Arabia's and Russia's oil productions between now and the end of the year, along with further reductions in outputs by Kuwait, Oman, Iraq, Algeria, and Kazakhstan members of the OPEC.

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The Brent crude futures were last traded at $85.41 per barrel, which was 0.57% higher than the U.S. West Texas Intermediate futures, which stood about $0.50 per barrel higher at $81.11 per barrel.

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Import-dependent countries

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“Oil supply cuts and the spike in crude oil prices are worst hitting those regions which are more reliant on imports and have a high proportion of fossil fuels in their primary energy systems, according to Henning Gloystein, the director of Eurasia Group. 

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“If the oil price keeps rising, even the discounted Russian crude will begin to hurt India's growth.” Henning Gloystein, Director, Eurasia Group.

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"Therefore, the most vulnerable are the import-dependent emerging market industries, especially the ones in South and Southeast Asia, as well as the super-export-dependent heavy industries in Japan and South Korea that are highly dependent on imports."

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India

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Due to the sanctions, the European Union imposed on Russia in response to its invasion of Ukraine, India has been purchasing Russian oil at a steep discount since the sanctions were imposed on the country.

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Data from the government shows that India's crude oil imports grew by 8.5% in February compared with the same period a year ago, according to government figures. 

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“Even though they are still benefiting from discounted Russian gas, they are already being impacted by the high coal and gas prices,” Gloystein added.

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"Indian growth will start to suffer if oil goes up any further, even the discounted Russian crude will have a negative effect."

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Japan

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A little over 40% of Japan's total energy supply comes from oil, making it one of the biggest energy sources in the country.

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“With Japan not having any notable domestic production, the country is heavily dependent on crude oil imports, with between 80% and 90% of crude oil coming from the Middle East region," according to statistics released by the International Energy Agency.

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South Korea

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In the same way, according to independent energy research company Enerdata, the bulk of South Korea's energy needs are met by oil. This is also the case for North Korea.

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“The oil demand of South Korea and Italy is over 75% dependent on imported oil,” Molchanov noted. 

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In addition to the United States, Gloystein said that Europe and China are also "highly exposed."

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He did state, however, that China's exposure was slightly less due to the fact that the country is a producer of oil at home, whereas Europe as a whole relies more heavily on nuclear energy, coal energy, and natural gas as their primary energy source versus fossil fuels.

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Economic impact on emerging markets

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The $100 price tag will have a negative impact on some emerging markets, according to Molchanov, because they do not have the foreign currency capability to support these fuel imports. Among the economies that may be hit by the crisis are Argentina, Turkey, South Africa, and Pakistan.

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Among the countries that are vulnerable to a harder hit is Sri Lanka, which is a country that produces no oil domestically and is 100% dependent on imports for its oil needs.

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“Those countries that are importers and don't have a lot of foreign currencies will suffer the most because oil prices are set by the U.S. dollar,” said Amrita Sen, founder of Energy Aspects, who mentioned that the costs of imports would rise even further if the dollar appreciated.

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$100 per barrel won’t be permanent

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As Molchanov pointed out, although it seems likely that $100 per barrel will be within reach in the near future, it is possible that the higher price point may not last for long, as it will not be the permanent high price point.

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“I think that in the long run, the prices could be more in line with where we are today” — around $80 to $90 or so, he said, which is about right, or maybe even a bit higher.

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“Once the oil hits a price of $100 a barrel and stays there for a while, that incentivizes producers to boost production again,” said Gloystein.