The Oil Floor

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With oil now below $45 a barrel, and Merrill Lynch projecting that it’ll drop to $25 in the next year, I think it’s worth glancing around at those economies that’ll be ravaged if these trend lines continue.
Early in the recent oil spike, the World Bank lauded producer states for taking wiser steps with profits than they had amidst past booms. Namely, using profits to bolster basic macro-economic tenets, like reducing debt and growing other spheres of the economy.
But Russia’s budget for 2009 requires oil to sell at $95 a barrel to break even, Venezuela at $60, Iran between $55 and $60. Many producer states, it seems, have fallen into an old trap, expecting booms to last longer than they actually will. Let it be granted that those forecasts seem modest given the $147 high witnessed last summer.
The most common refrain I’ve heard from energy folks is that an OPEC cut will bring oil up to $60, but not for long. Back down somewhere toward $30 is what most forecast for the early months of 2009.
With US demand down 6.2 percent on the year, and unlikely to rebound, it’s difficult to foresee cartel states balancing books this year.
The most pedestrian conclusion is to believe that struggling domestic spheres will lead to more reckless acts in the international sphere. That Iran and Russia, attempting to turn inner angst against an outer foe, will become all the more boisterous and rogue. But it’s difficult to imagine these states taking more aggressive tacks then those that which they’re already on. I wonder if we might, ironically, see the opposite: domestic aggression combined with a softening toward the international society.
Mahmoud Ahmadinejad, facing elections in June, is in a very tight spot, grappling with 27 percent inflation in addition to the fallout in the oil market. He’s already sacked two major economic officials, and plans to unveil a new economic plan in coming days.
Steps toward a softening with the US would significantly bolster his position, and could yield lifting of some of the restrictions that have crippled the economy.
The New York Times had an interesting piece yesterday on Uralkali, a Russian mining company that’s fighting to avoid hostile takeover by the state. The case looks to be an example of the Kremlin — in concert with Vladamir Putin’s view that the nation was remiss to privatize natural resources in the 1990’s — searching for new sources of state revenue.
Like with Iran, building a new security status quo with the Obama administration — one that respects Russia’s strengths and eases Russian nervousness over a missile shield — could provide serious domestic capital for Medvedev.
So, might we see something quite counterintuitive? Downturn accompanied by softening? Time will tell.
— Brian Till

Comments

15 comments on “The Oil Floor

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  7. SqueakyRat says:

    US gasoline consumption ticked UP in November, undoubtedly in
    response to lower prices.

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  8. JohnH says:

    Oil at $25/barrel. Demand for Chinese products sinking. With foreign trade surpluses disappearing, who will fund the US stimulus package? Certainly not the oil producers, who will have to starting drawing on their dollar denominated reserves to balance their budgets.
    So, Till’s observation could apply equally to the US: “The most pedestrian conclusion is to believe that struggling domestic spheres will lead to more reckless acts in the international sphere.”
    Will we see something counter-intuitive indeed: a US downturn accompanied by a softening of foreign recklessness?
    It would be nice if the US, Russia, and Iran all decided that it was in their mutual self interest to work collaboratively instead of demonizing each other for domestic political gain.
    Now that Bush is going, one major hurdle has been cleared.

    Reply

  9. Zathras says:

    China’s influence on oil markets is a factor of expectations about that country’s future demand for oil, not just what it is using now. If its economy is booming, expectations will be that China’s oil consumption will continue to increase rapidly, putting upward pressure on prices. So much of China’s economic growth at the moment, though, is driven by exports sold to countries (like the United States) whose own economies are entering deep recession. Their economic troubles slow China’s growth, and reduce in turn the expected growth in Chinese oil consumption.
    All this is temporary — in other words, the conventional wisdom is not wrong. Once the world economy recovers, and the Chinese government invests some of its own surplus in development projects within China, Chinese economic growth will recover and upward pressure on world oil prices resulting from that growth will resume. The same applies, in a different way, to India and other developing states. This is why the time to reduce the damage to the American economy of another oil price spike is now, when world oil prices are relatively low.

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  10. Bartolo says:

    What happened to the conventional wisdom that has China’s demand for oil keeping the price high, even during a serious downturn?

    Reply

  11. Yashua says:

    Note to Mr. Till:
    I think you meant to write: Macroeconomic Tenets, not Macroeconomic Tenants!
    English is a beautiful language.
    Best of luck.

    Reply

  12. Zathras says:

    We will need to borrow most of the money for infrastucture spending and job creation, but we shouldn’t borrow all of it.
    We know the vulnerability of the American economy to a spike in energy prices, and we know that another such spike will occur sooner or later. We also know that using less energy is both a more effective and a more timely way to address carbon emissions as well as dependency on foreign oil sources than all the “green” energy technologies put together. To encourage reduced and more efficient energy use, the price of energy must be increased through taxation.
    The key to energy efficiency is price. It has always been price. It will never be anything but price. Increase the price of energy through taxation, and Americans will find all sorts of ways to use less of it; fail to adopt this course, and they will find those ways later, when market forces or political developments overseas force energy prices higher. By all means, spend the extra revenue generated by energy taxes: spend it, spend it, spend it. But spend it here in this country, on projects and programs for Americans. Wait for the market to produce another energy price spike, and see all the money that could have been spent here transferred to petrostates like Nigeria and Venezuela.

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  13. ed says:

    The WaPo had it right with its lead editorial today: Now would be a good time for a nice gas tax to reflect the total social cost of gas consumption and index it to inflation to boot. A real leader would make that happen. Pronto.

    Reply

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