“Oil Producing Countries Should Diversify Their Production Framework”

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After the IMF warned about the structural reasons behind the emerging economies’ slowdown, José Luis Herrera, Spanish analyst at CMC Markets, talks about possibles solutions for commodities’ producers.


Question: The IMF is once again concerned about the crisis in the emerging countries. Lagarde talks about structural problems. Which ones should they resolve now?


Answer: There is a general overcapacity in oil production; when an industry experiences an upward cycle, it’s typical for new players to appear on the scene. But if the costs of extraction/production are not compensated for companies finally have to leave. This is what is happening with the mining firms and other specific commodities’ producers who are suffering the effect of low prices. The worst thing is that people think about structural problems when things go wrong, instead of in periods of economic boom.


Q: Other non-emerging countries, but also oil producers, such as Norway and Saudi Arabia are also having problems. What are their options now?


A: Most of these countries are countering the situation with monetary policy, generally by cutting interest rates to maintain their competitiveness at least via the exchange rate. Ideally it would be good if there were some sort of transfer from commodities to equities. This is partly what has happened in the U.S. in the last few years, and is the reason why some believe Europe may be entering an upward cycle since history shows there is an inverse correlation between commodities and equities. But the real concern this time round is that the drop in commodities’ prices is the result of the fall in global demand due to lower growth, which is ringing alarm bells. So these countries are obliged to diversify their production framework and create more value. This is no easy task because some of these countries are politically unstable and have poor quality infrastructure which make any changes to the production model difficult.





About the Author

Julia Pastor
Julia Pastor has broad experience in business writing for Consejeros Media Group at Consejeros, Consenso del Mercado and The Corner. Previously, she worked for the financial news agency GBA and contributed to El País Business. She holds a Master's in Financial Journalism and a degree in English from the Complutense University in Madrid.