VIDEO: New Geo-Political ‘Weapon’ of Choice – Oil – Wreaks Economic Havoc
as of August 2014
Good news and bad news.
Good news:the price of oil has dropped precipitously in the past six months –
from over $107 per barrel or oil to under $60 per barrel to a five-year
low of $58.50 per barrel last week.
the personal level, you don’t buy barrels of oil, but it costs less to
fill up your car at the gas station and it may cost less to heat your
home this winter.
These energy savings should free up capital for other interests and enable a Merrier Christmas for many.
Why the drop in price and how can oil be posited as a ‘weapon?’
OPEC
The Organization of Oil Producing Countries (OPEC), especially Saudi
Arabia among them, have maintained production levels of recent years.
Saudi Arabia, the largest and lowest cost producer in the group and the
producer with the largest reserves, can withstand prices at this level
for a few years at these levels.
They’re
motivated to allow the lower prices for the present to squeeze out the
higher cost producers, which would afford the Saudis a stronger market
position when prices eventually turn upward in the future.
The
Sunni Muslim Saudis regional adversary is Shia Muslim dominated Iran,
which the Saudi’s has been at odds with because of Iran’s support of
Syria’s President Assad. Iran is hurt by internal corruption and western
sanctions needs higher oil prices to maintain its economy. Saudi Arabia
has no desire to ease Iran’s difficulties, which it would if it were to
decrease its oil production levels.
United States
Across the Atlantic, the U.S. has adopted new technologies and has
surpassed Saudi Arabia as the world’s largest oil producer, implementing
fracking – pumping water and sand at high pressure into oil and gas
bearing shale rock – in Oklahoma and South Dakota.
So where’s the economic havoc?
Countries
with economies based on a higher price of oil have suffered for months
and some are bordering on collapse. Most notable among them is Russia.
The
Russian ruble has fallen through the floor. Russians notoriously have
saved little money. What they have they’re spending while it has any
purchasing power.
Russian inflation was up 8.3% in October and 9.1% in November.
The
increase is expected to continue, although macroeconomic analyst Timur
Nigmatullin predicts inflation should top at 15% since most Russians
don’t have extra money to buy expensive goods, “But here, there aren’t
many savings and not money to pay high prices.”
Russian
President Putin attempts to re-assure Russians to rally support for the
government’s economic policies. He admitted the government’s response
could have been faster, but that oil prices would rise, perhaps within
two years, to lift the country out of recession.
Meanwhile,
it’s currency and bonds are losing more value every day despite
Russia’s central bank raising their interest rate to 17%. The defraying
of the Russian economy provides a disconcerting and time consuming
diversion for President Putin, which is welcomed by the U.S. and
European nations.
Domestically
Here
in the United States, those states with a more oil-centric economy are
also feeling the pinch, as detailed here. Many draw contingency budgets
based on oil priced within certain ranges to be prepared for market
fluctuations. But few drew budgets allotting for a nearly 50% drop in
the price per barrel. This has caused many states to consider additional
tax measures to make up for the revenue shortfall as nearly every state
derives some form of tax revenue from oil and gas consumption. Overall
economic activity will be closely monitored to determine if revenue
growth in other sectors can offset the shortfall stemming from oil price
decreases.
