Posted on 08/23/2014 9:42:34 PM PDT by ckilmer
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August 23, 2014 | Comments (0)
Russian oil pump. Photo credit: Wikimedia Commons/Acoder
In case you hadn't heard, Russia has an oil problem. The country is heavily dependent on oil tax revenue to fill its coffers, and trouble is brewing given today's low price for Russian crude. Consider these recent headlines from Reuters and The Moscow Times:
"Russian oil prices fall below $100/barrel, straining budget"
"Struggling with Sanctions, Russia Faces Oil Price Crash"
And if you go all the way back to the end of April, BBC News gives us this gem:
"Russia experiencing recession now, says IMF"
Things sound grim, but what exactly is going on? Can the price of oil really bring down a country as big as Russia?
It can, and it has. Let's take a closer look.
Counting on oil to make ends meet
According to Reuters, Russia's budget is based on the assumption of an average oil price of $114 per barrel. It is nowhere near that high right now, however. Sitting below $100 for the first time in over a year, the price of Ural crude has fallen $15 in less than one month.
Keep in mind that 50% of Russia's budget revenue comes from oil. If the price bounces back, there is no story here. If, however, there is a sustained period of low oil prices it would be a major blow to the country's economy.
Fool me once...
An economic collapse caused by falling oil prices? What is this, 1986? Let's do what every major pop star is doing right now and revisit the 1980s. Here's Tyler Priest writing for the Journal of American History in 2012:
Facing falling demand in the early 1980s, OPEC tried to restrict output and hold individual producing nations to production quotas, but cheating and discounting could not be prevented. In the summer of 1985 Saudi Arabia decided it would no longer defend the OPEC price and turned on the taps. Other OPEC exporters followed suit, each striving for market share and ignoring the cartel's quotas. World production surged and prices collapsed, reaching a low of $14 per barrel in 1986.
So we've got the price collapse, but how did that relate to the Soviet Union specifically? Priest again:
The oil price collapse also played a lead role in ending the Cold War. It undermined the economy of the Soviet Union, which had quietly become the world's largest oil producer, dependent on oil export revenues to pay for imported manufactured goods from the West and to support the economies of East European satellites. Plummeting crude prices cost the Soviet Union an alarming $20 billion per year, causing panic in the Politburo.
In other words, Russia's continued dependence on oil to power its economy could make its current troubles just another case of deja vu all over again. Are things really as bad as they were in the 80s? How close is Russia to the edge?
Reuters is reporting that every $1 drop in the price of Russian crude wipes out $1.4 billion in Russian tax revenue. That said, the Russian Finance Ministry has announced it still expects a slight budget surplus, provided the average price for the year comes out to $104 per barrel. And, despite the recent decline, the average price year-to-date is about $110, according to The Moscow Times.
The lesson in all of this
In all likelihood Russia will be fine, but make no mistake: The threat is a legitimate one. The country has a $2 trillion economy that could be decimated if the bottom were to fall out of the oil market, and it is not alone in that regard. Saudi Arabia is a perfect example of how hard some countries are working to diversify their economies away from oil. Though we will never face the exact same circumstances in our world markets as we did in the 1980s, the precedent remains. The price of oil can collapse, even if the world's largest oil producers don't want it to.
Somehow the Europeans are paying $11+ a gallon for gas.
Don’t know how they can’t get a lower price for a gallon.
IMO probably is their own government sucking $8 a gallon out of their peoples with taxes.
25 bucks in 1998. Explain that....
How much will Russian Natural Gas be this winter?
An interesting historical footnote here. But the article doesn’t get the story quite right. from 1981 to 1985 Reagan steered the price of oil from about $105@ barrel in today’s dollars to about $60@barrel in today’s dollars by cutting some taxes instituted by carter. This caused oil production to rise for the first and only time between 1970 and 2005.
What the article does not say is that it was Reagan who in 1985 convinced the Saudis to stop cutting back on production and pump as much as they could to force prices down. Reagan knew that by doing so the old soviet union would be bankrupted because then as now the government there depended on oil revenues to pay their bureaucracy.
The Collapse of the Soviet Union and Ronald Reagan
"Because of the high oil prices of the 1970s the Soviet leadership avoided serious economic reforms, such as those that saved Deng Xiaoping’s China. Instead, it relied on oil revenues as a means of keeping its decrepit economy going . . . 'One of the most effective ways in which [Reagan's] economic policies weakened the Soviet Union was by helping bring about a drastic fall in the price of oil in the 1980s, thereby denying the Soviet Union large inflows of hard currency.'"
Turn our oil loose. The Islamists will be the losers-- if only we did not have a president who seems to favor them.
IMO probably is their own government sucking $8 a gallon out of their peoples with taxes.
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Correct. Its taxes.
How much will Russian Natural Gas be this winter?
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No one knows how that is going to play out.
How much will Russian Natural Gas be this winter?
..................
No one knows how that is going to play out.
25 bucks in 1998. Explain that
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what do you mean?
Turn our oil loose. The Islamists will be the losers— if only we did not have a president who seems to favor them.
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Yeah that’s what’s happening now. US oil production is going straight up because of high oil prices and new technology.
Basically there is a huge unwind of what happened in the 1970’s.
However, what will kill oil prices 10 years from now won’t be huge supply but rather falling demand because of the shift to natural gas houses trains trucks and buses plus electric cars.
I’m hoping oil prices stay high for the next 5 years so the frackers can expand production to the point where the USA is oil independent. That way falling prices have less of a chance of causing the USA to be a net oil importer again.
True, this is retail price including tax.
The price of a barrel of oil.
So why is ISIS a villain for selling millions of barrels of oil per at a prices well below the $100 mark?
Why isn’t Putin BOMBING their camps and convoys?
IMO Putin will engineer some chaos in the ME to keep the price of oil high enough to keep Russia’s economy afloat.
Putin is no angel...make no mistake.
(Obama also is no angel..but of course you knew that)
“China needs to phase out their highly polluting...”
Why? I don’t think China gives a rip about the environment.
The question arises of who would fold up first.
Let’s drop kick these A-holes and frack the world to our abundance.
They don’t care about the environment per se but they do care about extremely angry citizens that can’t breathe.
They are banning coal for home heating and cooking.
And are phasing out the oldest coal fired electricity plants.
And making deals with Russia for natural gas.
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