Oil Price Plunge Creates New Winners, Losers

Even those investors who aren’t invested in the energy sector have noticed what’s going on with the price of oil, simply by filling up the tank. Prices have fallen 40% since June.

While it’s too soon to be sure whether the downward direction of oil prices is something that will last, that doesn’t mean it isn’t making winners and losers in the market. And investors need to be wary.

Oil producers are on track to see revenue decline by an eye-popping $1.5 trillion for 2014. In November’s OPEC meeting, Saudi Arabia strong-armed other member states into holding firm on current production levels instead of dropping them in response to market pressure. That further depressed the price of crude. And another OPEC meeting is not scheduled till mid-2015.

But while the other oil-producing nations are feeling the pinch of lower prices, Saudi Arabia is not. Its production costs are the lowest among the OPEC nations. It also has the added gratification not just of putting pressure on shale production in the U.S., but of pushing Russia deeper into the red. Low oil prices are taking a bite out of Russia that’s even harder than the sanctions imposed on it after it marched into Crimea earlier this year.

Although Russia had plenty of oil money stockpiled, sanctions were biting—and now, with the fall of crude prices, that money is evaporating as the country tries to shore up its currency. Moscow has gone so far as to start raiding its sovereign wealth funds to bail out not just oil companies, but banks and other companies that have suffered under sanctions.

Rosneft, for one, has gone hat in hand to Moscow asking for $44 billion. Should the government accede, that could lead to worse problems for Russia and Russian investments, since the money would have to come from the Wellbeing Fund, which was supposed to support the pension system in case the price of oil fell. VTB Bank and Gazprombank, among others, have already siphoned off $7 billion from the fund, but want more—and the central bank has held off on more actions supporting the ruble so that the money will be there for the banks.

Should fund money be used to shore up oil companies, the whole purpose of the fund would be defeated—not to mention that the government itself is already planning to tap the fund to cover the shortfall being caused because its 2015 budget was based on oil priced at $100 per barrel. With the price currently in the neighborhood of $70 and looking to fall even lower, that does not bode well for the fund—and by extension, Russian citizens who will depend on that money.

And while Russia is hurting, it’s taking its former associates from the old Soviet Union along with it. The collapse of the ruble is taking down other former Soviet country currencies, which look likely to suffer even more if the price of oil continues to fall. Such countries as Georgia, Armenia and Kazakhstan are seeing their currencies fall so far that they’re considering taking action to devalue them—but there’s only so much they can do, thanks to limited foreign reserves.

All the problems are not centered there. Other countries from Iran to Venezuela are feeling the hit from lower oil prices, with the former sharing with Russia the pain of sanctions and the latter falling deeper into an economic crisis as it struggles to compensate for lower prices while maintaining fuel subsidies and price controls.

While oil companies are taking such a big hit, however temporary it may be, the new enthusiasm over the climate change agreement between the U.S. and China could also spur some pivoting from fossil fuels to renewables. The risks presented by the exposure to fossil fuels in investment portfolios were already highlighted by divestment declarations from such entities as the Rockefeller Foundation in September.