tag: Russia



3
days ago

Low oil prices – a threat to the dollar

I’m on an email discussion list that includes a bunch of people in the oil industry. On an average day the ratio of shop-talk to global conspiracy stuff is 10:1… and really, there’s only so many times you can read the same impassioned arguments about the merits of different fluid injection methodologies. But every now and then a discussion about a wider political issue gains traction. By and large these are sober, conservative (small ‘c’) engineers not taken to flights of fancy. So when they start saying things like “there’s only a 60% chance the US dollar will still be a viable currency in 18 months”, it piques my interest.

For the past couple of months there has been an almost complete consensus among these people that the Gulf States are driving down the price of oil in order to destabilise Iran. There’s even a guy who – having spent some time chatting with a staffer in the UAE oil ministry – claims that Saudi Arabia, Kuwait and the UAE are targeting $40 per barrel by the middle of 2015 and they intend to keep it there for a year.

As an aside, I read a message from a guy who said he expects 5 year oil futures to drop below $85 any day now. That there… that’s as close to a sure thing investment as the modern financial industry is capable of. What’s more, given the short-sightedness of the financial industry, I wouldn’t be surprised if you could buy November 2020 oil futures for less than $70 by this time next year. Pretty crazy.

Anyway, there’s no doubt that Iran’s economy is utterly buggered if this continues for much longer. Even if the $40 for a year thing is exaggeration, this is presenting Tehran with very serious problems.

Thing is, Iran isn’t the only place this is hitting hard. The Gulf States can weather this storm, but almost no other major oil exporter can. And while oil importers are quite enjoying this period of temporary price-fixing, places like Venezuela and Nigeria are suffering. The fracking industry in the United States is also in trouble (though this price drop is only one of the reasons for that) but America isn’t too worried about that because they like seeing the squeeze put on Iran, while the damage being done to the Russian economy is being seen – curiously enough – through the lens of Ukraine, the Malaysia Airliner disaster and what’s being viewed as Putin’s increasingly aggressive stance towards the west. So the Americans are offering their explicit support to the Gulf States in order to put Russia under pressure.

Now, let’s be under no illusions here… Putin is a dangerous man. I’ve noticed more and more western liberals buying into the Russia Today narrative and viewing Putin with a kind of grudging, “enemy of my enemy” respect. Which is madness, because this guy should be viewed as at least as big an enemy as western capitalist imperialism. Anyway, it’s simply inconceivable that Russia won’t respond dramatically to this very real threat to their national economy. And what response will that be?

Well, according to the mailing list people, Putin is getting ready to announce a major shift in policy. Early next year he will be switching all of Russia’s petroleum trading to roubles. That’s what they’re saying on the grapevine anyway.

A lot of people – even economically literate ones – don’t fully understand the important link between the US dollar and the global oil trade. The pricing of oil in dollars isn’t just a matter of convenience. All trade in oil actually takes place in dollars. Dollars get exchanged for oil. Not euro, or roubles or yen. This ensures a constant demand for dollars as anyone who wants oil… i.e. everyone… needs to buy dollars before they can buy that oil.

Not sure if you’ve noticed the huge collapse in the value of the rouble in the past week? And the huge Russian interest rate hike? Well, according to some people Russia has deliberately torpedoed their currency in order to buy back roubles, from anyone who has them, at a bargain price. Because if Putin goes through with this and demands roubles in exchange for oil and gas? He will instantly make the rouble into a European reserve currency. Demand will rocket and the dollar flight will begin.

Unlike other countries, the US will not be able to intimidate Russia into backing down on this. Especially given the huge hardship being caused to Russia by this US-supported Gulf strategy. And if it turns out to be a success for Putin (which I think it will do) then there’s really nothing to prevent other countries doing the same.

The Saudis, with the support of the US, are playing a very risky game right now. And one that could result in the end of the dollar as global reserve currency. Sleep tight.

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14
Nov 2014

Oil at 80 dollars

Those who keep an eye on such things will know that something very strange has been happening with the oil price over the past few months. Saudi Arabia, Kuwait, Qatar and the Emirates have been aggressively driving down the price of oil (and have just signalled their intent to continue doing so). This fall has not coincided with an equally precipitous drop in demand, and it is not – except tangentially, in a manner I’ll discuss in the fifth paragraph – related to the “unconventional oil” coming out of America thanks to the fracking boom. That whole fracking thing is smoke and mirrors of the first order by the way.

No, what’s happening with the oil price right now is geopolitical. What’s more, it heralds an era of increased geopolitical tension.. something that’s only starting to filter through into the mainstream. There’s a big wake-up call coming folks.

What do I mean when I say the price drop is geopolitical? Well, it’s important to understand that when it comes to oil, the Saudis (and the other Gulf Kingdoms) are very astute. Right now they possess a large enough share of the oil export market to effectively drag the global price any direction they choose. And this has a massive effect on the global economy. However, it is extremely unlikely they will still possess this influence in 20 years (even 10 years from now there’s no guarantee). Based on depletion profiles that they take very seriously (even if the western media does not), they will never possess as great a global influence as they do today.

Saudi Arabia is taking the lead on this, and is being backed by Kuwait and Qatar (with the United Arab Emirates a more reluctant fellow-traveller… this hurts their economy more than it hurts the others for a bunch of reasons). It’s important to realise that it is not an OPEC thing. In fact… OPEC is bloody furious. And with good reason; a number of OPEC nations are going to end up as collateral damage in all this (Venezuela and Nigeria are both being crucified).

Russia is also feeling the pinch. And the fracking boom in America is being hit very hard. That entire industry is a pipe-dream. It can only exist thanks to massive government subsidy in tandem with a very high oil price. Both of which can be arranged, it’s true, but more importantly… there just isn’t as much of it as has been suggested. Nowhere near as much. And ramping up production to cover the drop in conventional crude production simply isn’t going to happen.

Now, it’s unlikely the Saudis are willing to take such a large economic hit themselves simply to undermine the US fracking industry. That Financial Times article suggests that the low price could put a strain on US / Saudi relations, but as an overall economy the United States benefits from a low oil price. So I don’t see that being the case. Besides which, the US and Saudi Arabia are firm allies and they share a common enemy… Iran.

The real reason the global oil price is low* right now is because Saudi Arabia is waging economic warfare on Iran.

When a country gains a large proportion of its income from oil exports, it is possible to calculate a “breakeven oil price” for that country. That is, the price at which they must sell oil to cover government spending. Different economists tend to come up with different numbers (no surprise there) but if you see them as a guideline rather than an absolute value then they can be illuminating. CitiGroup say Saudi Arabia’s breakeven number is $89. The IMF says it’s $80. Deutsche Bank say $78. So you can see that having oil down below $80 per barrel is going to hurt the Saudis, but it’s something they can live with – this is not a nation that finds credit hard to come by. Qatar’s down in the mid-70s. While Kuwait’s breakeven is between $54 and $75 depending on who you listen to.

Not so Iran. According to CitiGroup they have a breakeven price of $130. The IMF suggests it could be as high as $140. And if you hear an analyst on the news try to explain the current fall in oil prices in terms other than an outright economic assault by Saudi Arabia against Iran, they simply do not know what they’re talking about. Because this is shattering the Iranian economy. It’s also giving a proper kicking to a bunch of other oil exporters. Nigeria and Russia both have notional breakevens above $110 and Venezuela is right up there with Iran when it comes to exposure to low oil prices. As for Iraq… if the country is to have any chance of surviving as a united entity it needs a reliable income stream, and with a breakeven price around the $100 mark, it doesn’t have that right now.

The effect on Russia is particularly concerning, especially if you’re a European like me who has just witnessed Putin sign a contract to sell a whole bunch of gas to the Chinese and can see the spectre of European gas shortages should this looming Cold War escalate (when the normally taciturn Finns start complaining about something, it’s a good idea to listen). The notion that “they need our money as much as we need their gas” has simply never been true (the Russian capacity for belt-tightening far surpasses the capacity of European governments to survive power-cuts and cold winters… so European governments will always cave first). And it’s especially not true now when the Asian economies can provide an alternate source of income. Falling oil prices puts additional pressure on Russia and is likely to drive Putin towards a more aggressive foreign policy (in my view).

But Iran is the target, and while nobody outside Gulf aristocracy knows how long they plan to keep up this assault, it is likely to only be the first in a series of oil price manipulations over the next few years. And as a result, we’re likely to see the kind of geopolitical brinkmanship that has the potential to end very very badly indeed.

* Incidentally, describing $80 as a “low” price for oil would have been dystopian madness just a decade ago.

1 comment  |  Posted in: Opinion


15
Feb 2011

On This Deity: 15th February 1989

Check out my new piece over at On This Deity

15th February 1989: The Soviet Withdrawal from Afghanistan.

Empires fall. It’s what they do. It’s inevitable.

Sometimes the collapse is due to the depletion of essential resources. Sometimes it’s a result of being overwhelmed by external aggressors. Sometimes it’s plague or a natural disaster that does it. And if all else fails, invading Afghanistan will do the trick.

read the rest …

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24
Apr 2008

Just testing

Hey y’all, I’ve just upgraded this place to WordPress 2.5. It was a pretty painless process, and it appears to have gone quite smoothly. If you find any broken bits, though, please let me know.

While I’ve got your attention, let me point you towards a couple of interesting things. Firstly, if you’re in Dublin (or will be before the end of June) I recommend visiting Cut-Outs and Cut-Ups: Hans Christian Andersen and William Seward Burroughs at the Irish Museum of Modern Art (IMMA). It’s not a huge exhibition, but it is a fascinating one and I suspect I’ll revisit it at some point. And yes, you heard that right, William S. Burroughs and Hans Christian Andersen. Initially I thought the link between them was pretty contrived, but there’s a couple of pieces by the venerable Danish storyteller that illustrate some truly uncanny points of contact between the two.

I was also very pleased to walk into a room containing one of Brion Gysin’s original dream-machines, and finally fulfilled an ambition to see an example of Burroughs’ “shotgun art” up close and personal. It doesn’t take very long to see the entire collection, but it’s well worth checking out.

And finally… my favourite line to appear in a news report for some time can be found right at the end of this article. Obviously read the thing before checking out the punchline.

Leave a comment  |  Posted in: Opinion


28
Jun 2007

None more Ironic

Mr Priamikov said the area was one of breathtaking natural beauty. It was much drier, colder and quieter than the western Arctic, he added. “I’ve been there many times. It’s an oasis for marine life,” he said. Asked whether it would be feasible to drill for oil, he said: “Yes”.

The shelf was 200 metres deep and oil and gas would be easy to extract, especially with ice melting because of global warming, he said.

1 comment  |  Posted in: Opinion