The View From 1776

Russia: What Happens When Oil Prices Drop Again?

Liberals think that greedy oil companies control oil and gasoline prices.  Unfortunately for Russia, that’s fiction.

Posted by .(JavaScript must be enabled to view this email address) on 01/29 at 01:16 AM
  1. I am just trying to imagine what The View is trying to tell us with this post. Is it trying to tell us that if or when oil prices fall, Russia will become more economically vulnerable and thus again become a threat to the free world? Are we also to suppose that liberals are responsible for Russia not becoming more economically diverse?

    Nevertheless, it is an interesting subject as to the reason why Soviet Russia collapsed. It was chiefly due to its stunted economic development. And as The View suggests the present Russia may be repeating the same economic mistakes again.
    Posted by .(JavaScript must be enabled to view this email address)  on  01/30  at  01:03 AM
  2. I don't think oil prices will collapse. OPEC and Russia has too much need to keep prices high for their rising economies. Also, they loan billions of that excess money coming to them back to the U.S. to fuel its deficit spending. Thus, the U.S. isn't going to want to limit those loans by seeing oil prices drop too much.

    Currently they are planning on hundreds of billions in spending (not just the "rebate," to stimulate economies. States are demanding massive injections of Federal Funds for infrastructure that is in deep decay. That would create hundreds of thousands of jobs that pay well. Inflation caused by that, will drive oil prices even higher, not lower.

    Also, some believe that the Saudi oil fields are in decline and only adding more wells has kept production up but, even that may soon not be enough since they are also growing their own demand for oil with their rising economies. That is why Dubai has "diversified" out of oil and into other sectors for economic security when oil fields do start to dry up.

    Russia can now, help control prices by simply limiting production as a major producer. They, along with OPEC, not us, are in control of oil prices. Mexico's huge Canterell field we depend on for the 14% of our imports we get is in steep decline dropping over 15% in the last year in production and scheduled to keep dropping like that.

    We have enough oil to last for years if we develop the fields that would replace dropping supplies from Mexico or other sources. I won't replace all the imports but will help keep prices lower by replacing lost supplies as they occur.
    Posted by JanPBurr  on  01/30  at  11:18 AM
  3. Speaking of Dubai, I think we can expect some kind of financial crash there. The place seems to be overbuilt, with the world tallest building and all. Where are all the inhabitants coming from to fill all those buildings? How are all the new structures in Dubia financed? And Dubia has competition from many other place in a quest to diversify. Also, Dubai's political system, based on Islamic law, is not yet adequate or geared to sustain such an economic expansion.

    There is only some much the world economy can sustain.
    Posted by .(JavaScript must be enabled to view this email address)  on  01/30  at  12:32 PM
  4. They are coming from all over the world, including the U.S. Some of the world's financial centers are moving their because of the problems in the U.S. The bulk of the structures are financed by the people building them.

    The Islamic law is not being enforced as tight. Women are in government, in college, in business and there are people of all religions and nationalities working together there. It is the safest port for the U.S. military. Our ship load and repair there and our troops have liberty there.

    Now, can it "crash?" Of course. Though not as likely as the U.S. is to crash it is vulnerable due to speculation on real estate and growth just as we were. Their advantage, of course, is that they still have enough oil to subsidize much of what we do. Just as Canada is subsidizing much of their government with oil, iron, copper, gas, etc. exports, Dubai has oil going for it.

    It, Singapore and other places are booming as wealth, manufacturing and growth leave the U.S. and move to Asia especially, but also to the Middle East due to oil wealth. They are fully aware of that oil being the basis and it is why I believe they will reduce supplies anytime there is a reduction in demand to keep oil at $90. However, that $90 when priced in dollars may go to $150 if we have too much inflation while other nations would convert much less of their currency to dollars to buy oil and thus be paying a much lower price that we would.
    Posted by JanPBurr  on  01/30  at  12:47 PM
  5. Actually, David, there is quite a lot going on in Russia that few are paying attention to, but should. Time Magazine did not declare Putin
    Posted by .(JavaScript must be enabled to view this email address)  on  02/01  at  08:54 PM
  6. (continued from above)

    Consider the following:

    a) Putin is ex-KGB (one is never ex-KGB as recently demonstrated, http://en.wikipedia.org/wiki/Alexander_Litvinenko )

    b) Until Putin took over in 2000 and began re-nationalizing Russia
    Posted by .(JavaScript must be enabled to view this email address)  on  02/01  at  09:02 PM
  7. Did I forget to mention Russia has patched up its relations with China and is now conducting joint military excercises with China? China is hungry for all the oil it can get, but has few oil reserves and and no access to that icy pond that is full of the stuff. If Russia succeeds in getting control of the Arctic basin and then builds a pipeline to China, it will have solved its shortterm economic problem.
    Posted by .(JavaScript must be enabled to view this email address)  on  02/01  at  09:12 PM
  8. Jan,

    You said "Russia can now, help control prices by simply limiting production as a major producer."

    The problem with that is Russia has more of an incentive to keep pumping oil as fast as it has been and very little to help stabilize us. Lately, Putin and Grazpom have been increasing production. Why? The best reason I can come up with is the Russian economy has risen so fast and is so unstable that any curtailment now will pull th plug. Putin has got to keep the party going or will loose his hold on power. Russia does not have a diverse economy and relies too much on that one commodity.
    Posted by .(JavaScript must be enabled to view this email address)  on  02/01  at  09:22 PM
  9. You are probably right about Russia. They have paid off their debt and have been encouraging citizens to get rid of their dollars for gold. Now, what they are planning and preparing to do is anybody's guess but some are saying they will stop selling oil in dollars, like their ally Iran.

    Restricting production is only worth doing if it is a good economic situation or if you are trying to create a bad one and using it as an economic weapon. However, that can hurt allies as well as enemies. To target the U.S. without hurting other allies, they only have to start selling oil in other currencies. That would also solve their problem of having to lend us money with the excess dollars they have.

    The U.S. is heading for a currency crisis but, who knows when. I believe it will only be when OPEC also moves away from it but, maybe they will go off on their own. If they do, OPEC may be forced to follow as the dollar collapses and causes all nations accepting dollars more problems.

    Regarding increased production, aren't they replacing some of the declines caused by the reduced output in the North Sea fields. This increased production is also giving them more power. We have already seen them threaten Europe with supply reductions where the only major source is Russia. The more Europe comes to depend on Russia, the more power it has over their economy.

    They paid off the cold war debt but still have debt and a ways to go, as you pointed out. This article just came out in Jan. 08
    quote:
    MOSCOW, January 30 (RIA Novosti) - GDP growth will stand at 6.5-7% in Russia in the next three years, Russian Finance Minister Alexei Kudrin told an international economic forum on Wednesday.

    "Russia's GDP growth will reach 6.5-7% in the next three years," he said adding that the country's total state debt accounted for 33% of GDP as of late 2007.

    Kudrin also said that GDP was 7.8% in Russia in 2007, with the country 10th in the world GDP rankings at $1.27 trillion. He also said that Russia ranked seventh place in the world last year for purchasing capacity, ahead of Italy and France.

    The finance minister said this could be a pretext for integrating Russia, as well as Brazil, India and China into the G8, expanding the group of the world's eight most industrialized countries to 13-14 members.

    Kudrin said the Russian economy could become innovative and enter global markets with competitive goods in the next eight years.
    <a hrep="http://en.rian.ru/russia/20080130/98001489.html">Source</a>

    Again, they can't be trusted and will use any economic weapon they can to bring the U.S. down if the time is right and it doesn't hurt them or their allies too much. Since they are working with China on energy supplies too, China's dependence on us for 20% of their exports may keep Russia from moving as quickly.

    I grant you, all I have is speculation based on an intense mistrust of them and their relationship with the U.S.
    Posted by JanPBurr  on  02/02  at  01:34 AM
  10. Jan,

    I
    Posted by .(JavaScript must be enabled to view this email address)  on  02/02  at  08:07 PM
  11. Good points and many which I think we may see coming true one way or the other. Like I said, I think we are being set up for something we won't like regardless of what it is. Their alliance with China, Iran, and Venezuela isn't a good sign.
    Posted by JanPBurr  on  02/02  at  08:35 PM
  12. Concerning the price of oil, Mr. Brewton neglects to account for the late-2005 hurricane damage. We are still in the process of recovering from those losses, and it may be another 2-3 years before Gulf production is fully restored. Secondly, current retail price predicted by EIA is that they will continue to rise or stay flat (not fall) through the remainder of 2008, and won't start to ease until early 2009 (see http://www.eia.doe.gov/emeu/steo/pub/contents.html ), so I am not sure where Brewton got the information the price per barrel of oil is falling. By early 2009, the largest growth in oil production shoul be from the United States, then Russia, Brazil and Azerbaijan (see http://www.eia.doe.gov/emeu/steo/pub/gifs/Fig8.gif ), but for 2008 the order is Brazil, Azerbaijan, Russia and Vietnam. The reason for this, again, is those damaged U.S. offshore wells (see http://www.eia.doe.gov/emeu/steo/pub/gifs/Fig12.gif ). As encouraging as these increases are, they still leave us chasing the consumption growth curve.

    Possibly, he is misreading the drop in retail gasoline prices and futures market as indicators of a producibility trend, but should remember futures trading is more a function investor confidence a commodity will produce a profit, not an indicator of its producibility, and may represent a belief in profitable scarcity as easily as profitable abundance. Spot price has, indeed fallen, but that was because it was artificially pushed too high by speculation, election year hype, and seasonal anxiety. Actual price, in these instances, differs from spot price. To predict longer term actual price (stripped of the artificialities) we must understand producibility, and to know that we must go to the source.
    Posted by .(JavaScript must be enabled to view this email address)  on  02/03  at  01:09 PM
  13. I am not sure either Bob. Some on the major financial news stations are saying this too but, other disagree with them. Of course some believe that Saudi Arabia can't really up production as much as they would like people to think they can.

    If there is a spread of fear of declining Saudi fields it would start a panic in oil prices. So, some who are trying to say that is occurring may have the "facts," or they may be spreading "rumors" to make a profit.

    There is a lot of stuff going on that only in hindsight will we be able to say, "oh, so that's what caused the prices to rise or fall," and some things may never be known as it was just speculation on "non-events" caused by rumors. We do know that more and more oil reserves are being rationed so they last longer by the "state owned" companies that control the reserves. I can't blame them for wanting to make them last and keep the economies based on energy strong as long as possible.
    Posted by JanPBurr  on  02/03  at  01:38 PM
  14. Jan,

    The Saudis do have some reserve pumping capacity and could increase production. The reality is they have good reasons not to, nor should we be pushing them to just to hold down short-term prices. What happens when this encourages over-consumption? Suddenly, you are without any reserve capacity. Having sufficient 'float' (reserve) is what keeps price reasonable while meeting demand. Once you are operating at capacity, there will be a scramble to lock in supply at the consumer end; resulting in a bidding war. I guess you know what happens to price then.

    In the past, there was really only one big consumer (USA) and a bunch of smaller markets. Then, we'd get preferential treatment and the little guys would have to 'suck it up'. Now, we are somewhat less dependent on OPEC, and Asia is successfully competing against us for oil. Internally, we have little reserve well capacity and the Strategic Petroleum Reserve is unsuitable as a price control (only have a 30 day supply; after that we'll be begging OPEC to sell us some). Even if that weren't the case, all you'd accomplished is to make the price spike wildly. The upshot of this is: just because you have reserve capacity does not mean you want to use it. It is far more important that it is just 'there'. Reserve capacity in your well functions as a cushion absorbing the shocks, and the Strategic Reserve only has value in the highly unlikely event most of our foreign sources dry up or commit economic suicide. That's why it's called a 'strategic' and not a 'vapid consumer bail-out' reserve. Similarly, the notion we can be 'energy independent' is silly because you'd no sooner achieve it when your well runs dry and you have to go get it somewhere else anyway. The real trick is to have diverse sources, not keeping them in a lock-box.

    Ditto for the rationing, at least until new sources can be developed. Guys like Chavez may think they are hurting us by withholding, but the reality is they have little control over the flow of oil once it is in the pipe. By cutting back production, he does stretch the life and usefulness of Venezuelan oil wells, and the slightly higher cost at our end does make for better husbandry at a level we can manage. Since Chavez isn't really sharing the oil wealth with his people, he gets rich somewhat slower leaving some oil in the ground for others when they get fed up and depose the crook. So, politics aside, one tin-pot dictator squeezing the pipeline can work to everyone's benefit (except maybe the dictator).

    Oil is a complex subject, so don't get too worked up trying to predict it or its economic fall out. It is far more important we meet and moderate our demand than the price. Those who do so will manage well enough economically. Understand the broad outlines and extremes, as they are enough to give you confidence oil is not about to vanish suddenly, yet at the same time prepare you for the gradual changes sure to come.

    Old chinese proverb say: "May you live in interesting times."
    Posted by .(JavaScript must be enabled to view this email address)  on  02/04  at  08:01 PM
  15. How true about the interesting times. I am enjoying the debates and the constant flow of new information, millions rising out of poverty, a major power shift seldom seen in the world, etc.

    You may enjoy this article
    quote:
    The G7, and to a lesser extent emerging world, currencies are about to undergo PERMANENT generational repricing of purchasing power DOWNWARD! They will never buy more in the future then they have in the past, and we are entering the era of the
    Posted by JanPBurr  on  02/04  at  09:01 PM
  16. This just came out and I found it interesting
    quote:
    U.S. sees Russia, China, OPEC financial threat

    By Randall Mikkelsen
    snip---------------------------
    The United States should be worried that Russia, China and OPEC oil-producing countries could use their growing financial clout to advance political goals, the top U.S. spy chief told Congress on Tuesday.
    snip---------------------------
    Discussing U.S. financial vulnerabilities, McConnell voiced "concerns about the financial capabilities of Russia, China and OPEC countries and the potential use of their market access to exert financial leverage to political ends."

    Russia was positioning itself to control an energy supply and transportation network from Europe to East Asia. China's global engagement was driven by a need to access markets and resources, McConnell said.

    A weak U.S. dollar had prompted some oil suppliers to ask to be paid in other currencies, or to delink their currencies from the dollar.

    "Continued concerns about dollar depreciation could tempt other producers to follow suit," McConnell said.
    Yahoo News

    This is what I have been reading more and more as becoming a concern by those in economics and investments and in government.

    Now, whether he is early with his fear or over-reacting, I don't know but, I do believe that if not now, in about 3-5 years they will make some major move to destroy the dollar and end its world currency use for oil and other thigns.
    Posted by JanPBurr  on  02/05  at  07:37 PM
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