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.
It is somehow ignorant idea.
At first it ignores a fundamental difference between USSR and Russia.
True, energy exports are the largest exports for Russia and it contributes the most to the government revenues but government is not everything these days.
In USSR it was the opposite as far as there was a command economy and every single thing was a government-run.
Despite being the biggest earner for the government, energy sector is not higher than a fifth of total Russian economy.
Even if this sector would be hurt really bad, all they need is to cut some spending or increase taxation for other sectors.
“Why? I don’t think China gives a rip about the environment.”
Pollution has become so severe on so many levels that the Chinese government simply can not ignore the problem(s) any longer. Their affluent and most educated are leaving the country in droves. Those who can’t leave are starting to make noise about it. China’s air, water, soil, food, you name it, has become so polluted it’s simply a health hazard to live there. In fact, many western expats have relocated their families to nearby countries and commute to China to do their business.
Our best weapon to hurt Putin is domestic oil and Nat gas production. The President is locked within the left wing paradigm that oil and Nat gas is bad, so unfortunately our best épée apron to hurt Russia is not used.
I remember reading an article in The Stars and Stripes when I was stationed in Germany stating that it costs pretty much the same to deliver a gallon of gas in Europe as it does in the US. The difference was tax. Europeans pay enormous taxes on their gas.
Ukraine will force MORE taxes on their people for oil and gas because the EU and IMF makes the rules. Joining the EU isn’t all it’s cracked up to be.
Our best weapon to hurt Putin is domestic oil and Nat gas production. The President is locked within the left wing paradigm that oil and Nat gas is bad, so unfortunately our best épée apron to hurt Russia is not used.
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Its going to happen anyway in about 10-15 years. But it will happen because of the strategic genius of the American people—from both sides of the political spectrum. not the feds.
If we can get oil down to $80 per barrel they are toast.
Ummember when it was 35? We ruled the world without qualms or exception. Life was good.
I remember when I was outraged that I was paying 41 cents per gallon for high test to go in my sports car. LOL!
If we can get oil down to $80 per barrel they are toast.
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That would take the bloom off Russian ambitions. Every dollar oil goes down is about 1.5 billion out of the russian government operating budget. or about 25 to 30 billion out of the russian government budget. they wouldn’t have spare cash for adventures.
On the other hand $80 @ barrel would cap the expansion of US oil production. We would top out about 10 million barrels @ day and remain a net oil importer.
I’m hoping that that oil will not decline to the 80 dollar A barrel range for another 4-5 years because in that time US oil production will have grown to about 13-14 million barrels @ day if oil prices remain high.
that may be wishful thinking.
In any case 5-6 years from now natural gas house trains truck and buses plus electric cars will start to drain demand for oil and force its long term decline.
Oil in 15-20 years won’t be $80 @ barrel. Rather oil will be $35 @ barrel.
There will be no fracking revolution outside of the the USA.
Even if this sector would be hurt really bad, all they need is to cut some spending or increase taxation for other sectors.
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Yeah I’ve seen the data that Russia’s other sectors outside of oil are enjoying a Renaissance—though they’re not world class industries. I’ve seen too that the Russian oil sector like Mexico funds the Russian government.
I’m hoping that the price of oil will stay high for about 5 years because USA oil production in that time will likely increase another 5 million barrels @day & make the USA oil independent...but only if the PRICE of oil stays high.
A fall of the price of oil to 80@ barrel would likely cap US oil production at about 10 million barrels @ day. and leave the USA net oil importers.
10 years from now however the world will be very different. The rising change over to natural gas building trains trucks and buses plus electric cars is going to eventually erode significantly demand for oil so oil prices will collapse.
imho they’ll wind up at about the $35@ barrel range in current dollars.
imho there will never be a fracking revolution of size outside of the USA.
The Russians can not just stop and start production as you might in Texas, Saudi Arabia, or the North Sea. These wells MUST continue to produce just to keep the system functional for future production. If they stop there is a risk of systemic failure when the oil congeals in the pipelines. It is possible to clean out the congealed oil but it takes time and considerable expense.
Therefore, some currently unprofitable wells are kept in service just so they will be available when the price eventually rises.
"Ceterum censeo 0bama esse delendam."
Garde la Foi, mes amis! Nous nous sommes les sauveurs de la République! Maintenant et Toujours!
(Keep the Faith, my friends! We are the saviors of the Republic! Now and Forever!)
LonePalm, le Républicain du verre cassé (The Broken Glass Republican)
Therefore, some currently unprofitable wells are kept in service just so they will be available when the price eventually rises.
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I think we’re currently at peak oil prices. I think the eventual—as in 15 years— price of oil is $35@barrel not $175@barrel.
Ummember when it was 35?
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It will return to $35 but not for another 15-20 years.
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