Financial WWIII

How to Destroy a Great Empire

Off the keyboard of Ugo Bardi

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Published on Resource Crisis on October 6, 2014

The Pythoness of the Oracle of Delphi told to King Croesus that if he were to attack Persia “a great empire will be destroyed.” Croesus did just that, but the great empire which fell was not the Persian one, but his own.

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Unleashing the oil weapon against Russia: how to destroy a great empire

Do you remember the old Soviet Union? Dubbed as “The Evil Empire” by Ronald Reagan in 1983, it disappeared in a puff of smoke in 1991, crushed under a mountain of debts. The origins of the financial collapse of the Soviet Union are rather well known: it was related to the fall of the oil prices which, in 1985, went down from the equivalent of more than 100 (today’s) dollars per barrel in 1980 to about 30 (today’s) dollars and stayed low for more than a decade. The Soviet Union was relying on oil exports for its economy and, in addition, it was burdened with huge military expenses. It just couldn’t take a drop of more than a factor of three in its oil revenues.
There exists a persistent legend that says that the downfall of the Soviet Union was engineered by a secret agreement of the Western Powers with the Saudi government who agreed to open the spigots of their oil fields in order to bring down oil prices. This is, indeed, nothing more than a legend. Not only we have no proof that such a secret agreement ever existed, but it is not even true that the Saudis played the role attributed to them. In the 1980s, Saudi Arabia, actually, tried hard to avoid the downfall in oil prices by reducing (rather than increasing) its oil output; without much success. (Image on the right from Wikipedia)It is true, however, that after the first great oil crisis of the 1970s, the world’s oil production restarted its growth around 1985.  The reasons for the recovery can’t be attributed to the work of a group of conspirators sitting in a smoke filled room. Rather, it was the result of a number of new oil fields starting their production phase, mainly in Alaska and in the North Sea. This was the origin of the drop in oil prices and, indirectly, of the fall of the Soviet Union. (Image on the left from Wikipedia)
Today, Russia’s oil production has recovered from the downfall of Soviet times and the Russian economy is highly dependent on oil exports, much like the old USSR was. So, a drop in oil prices could do a lot of damage to Russia. Given the political situation with the Ukraine crisis, there are speculations that the West is trying to bring down Russia by repeating the same trick that seemed to be so successful in bringing down the old “Evil Empire”. Indeed, we are seeing oil prices dropping below $90 per barrel after years of stability around $100. Is it a fluctuation or a trend? Hard to say, but it is being interpreted as the unleashing of the “oil weapon” against Russia on the part of Saudi Arabia.
However, the world of today is not the world of the 1980s. One problem is that Saudi Arabia has shown several times to be able to throttle production down, but never to raise it significantly higher than the present levels; one could even question whether they will be able to maintain them in the future. Then, there is nothing today which could play the role that Alaska and the North Sea fields played in the 1980s. It had been said many times that we would need a “new Saudi Arabia” (or more than one) to offset the decline of the world’s oil fields, but we never found it.

Yet, there are good reasons to think that we could see a drop in oil prices in the near future. One factor is the downturn of several of the world’s major economies (e.g. Italy). That could lead to a fall of the demand for oil and, consequently, to lower prices (something similar took place with the financial crisis of 2008). Another factor could be the rapidly growing production unconventional oil (largely in the form of “shale oil”) is the U.S. This oil is not being exported in large amounts, but it has reduced the US demand of oil in the world’s market. Coupling these two factors, we might well see a considerable drop in oil prices in the near future, although hardly a sustained one. So, would that be the “oil weapon” that will bring Russia to its knees? Maybe, but, as with all weapons, there are side effects to consider.
As we said, unconventional oil is playing a major role in maintaining the world’s production. The problem is that unconventional oil is often an expensive resource. Then, in the case of shale oil, the decline rate of wells is very fast: the lifetime of a well is of just a few years. So, the shale oil industry needs a continuous influx of new investments to keep producing and it is very sensitive to oil prices. Its recent rise was the result of high prices; low prices might cause its demise. In contrast, conventional oil fields have a lifetime of decades and are relatively immune to short term variations of oil prices. If we see the situation in these terms, we might legitimately ask against whom the oil weapon is aimed. The US unconventional oil industry might well be its first victim.
History, as we all know, never repeats itself, but it does rhyme. King Croesus, at his times, believed the Delphic Oracle when he was told that he could bring down a great empire if he would attack Persia. He didn’t realize that he was going to destroy his own empire. Something similar may be in store for us in the coming years: a drop in oil prices might well bring down a great empire. Which one, however, is all to be seen.

Petrodollar Politics

Off the keyboard of John Ward

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Published on The Slog on October 2, 2014



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Why the oil price drop and the Dollar’s rise look more like manipulation than coincidence odd things appear to be happening in tandem at the moment: the $US is rising, and the price of oil is falling.

I say odd, but there are plenty of available explanations for these parallel events. Forbes, for example, says there is a growing feeling among US monetarists that a cheapened Dollar increases the likelihood of its decline in power as both a reserve and oil-based transaction (‘petrodollar’) currency. MBN suggests that investors’ expectations that the Fed will raise interest rates are driving the desire to be early on the bandwagon. They also add that ‘wobbly growth data coming out of China, Japanese consumer demand that has dried up since its sales tax hike in April, and a Eurozone GDP standstill’ are other key factors in its rising value. The FT (as the Pinkun would) says it’s all down to US growth, and the coming recovery there. And one or two pundits think the Hong Kong democracy riots have caused a move out of the Yuan.

I’m unconvinced. First, monetarist academics never moved a single currency market in the entire history of such things. Second, the US debt is growing, and its deficit is far from under control. Third, there are events lying ahead in the not-too-distant future (the petrorouble for one) that do not inspire confidence in the Buck’s long-term viability. Third, wobbly or not, the Chinese growth rate remains at around 7%….and following its energy deal with Moscow, in a near-to-pole position. Fourth, the euro has been a basket case for four years, but it didn’t push the Dollar up before. Fifth, US ‘growth’ is a mirage that includes QE, drugs, hookers, and very probably State bankruptcies as evidence of ‘growth’….along with payroll data that, for those with half a brain, has been discredited for some considerable time. Sixth, there has never, ever been a US recovery without firm data supporting a rising property market: for once, S&P, the Economist and Business Week are all firmly of the view that recent climbs in US house values have fizzled out and gone into reverse.

As for the price of oil, here too at first sight the two reasons being offered look sound. We are in a global slump, and so demand has fallen off. Second, there’s a glut of the stuff: although the Saudi production cuts to stop price falls went through, more oil from Iran, Iraq, and Nigeria has come onstream plus record increases in U.S. oil production via the shale boom.

But once again I’m unconvinced. The smart money knows that, in real terms – and minus neoliberal spin-bollocks – we’ve been in a global depression for at least two years…and heading for one during the preceding three years. But the oil price collapse is a very recent phenomenon: crude prices have declined almost $21 (18%) from the 2014 peak of $115/barrel on June 19.

What’s more, than are many examples of volatile oil dips and highs unrelated to supply. Here’s one:

crudepriceObviously, the plunge of 2008/9 is directly linked to Bank Bailout on Wall Street. But from 2008-10 it zooms back up again, and blips down again in 2012. Production remains remarkable steady throughout the saga.

And as for the ‘shale boom’….well, oilcos are backing away from shale in the US: diminishing returns per well are forcing them to.

Let’s go back to earlier this year, and events either side of the month of June.

On 27th February, pro-Kremlin armed men seized government buildings in the Crimean province of Ukraine. Five days later, a convoy of Russian troops made for the regional capital of Crimea. By March 6th, Crimea’s parliament voted unanimously in favour of joining Russia – and the city council of Sevastopol in Crimea announced it was to become Russian immediately. On March 18th, President Putin signed a treaty absorbing Crimea into Russia – the first expansion by the Kremlin since World War II.

On May 21st, US Vice President Joe Biden ominously remarked that the US “must be resolute in imposing costs on Russia for its actions in Ukraine.

Then, on June 16, the Kremlin halted all gas deliveries to the Ukraine. And on June 19th, NATO claimed to have evidence of a renewed Russian military build up along the border with Ukraine.

Also on June 19th, the oil-price begins its tumble. Eleven days later, the euro starts its rapid decline versus the $US:

dollardropAt the same moment, the Ruble goes into an even steeper decline against the $US, suggesting perhaps a concerted attack:

rubledroptWhy does this make life tough for the Russians? Well before we start, think on this: Oil and gas produce about a half of Russia’s federal government revenues.

1. In any deal involving oil anywhere in the World, the recipients must pay in Dollars under the ‘petrodollar’ system. If the Dollar is gaining value rapidly, then that makes oil more expensive….less attractive to the punter – but with no additional margin for the Kremlin.

2. However, if the oil price drops like a stone, then the real value of the Kremlin’s profit falls and that reduces Russian GDP.

Do both together, and you have a fist closing around Putin’s balls. Further,

3. One thing Vladimir Putin has done consistently to maintain his populist power is import massively as and when things screw up…grain harvests, vegetable blights and so forth. A rising oil price made funding this relatively easy. After the Ukraine situation blew up, he retaliated against US/EU/UK sanctions by banning food imports. Now he finds himself with falling oil revenue, and falling oil margins….and thus popularity ‘bought’ by importing, as and when it resumes, will be horrendously expensive.

It looks to me like the US is doing to Russia what it did to Iran: using its reserve currency and petrodollar status to exert pressure. Russia’s central bank has not been slow to spot this: only yesterday, Reuters noted that:

‘…Russia’s central bank said [today] it is working on measures to support the economy should oil prices fall by as much as a third or more, showing growing concern as the ruble slides….’ 

I would also contend, in closing, that the IMF is an obvious creature of the US. It too is applying pressure by implying strongly that Russia’s economic outlook is not stable: the Fund halved its Russian growth forecast for 2015 to just 0.5% a few days ago.

That strikes me as an unintelligent forecast given the increasing likelihood of the petroruble’s creation…which in and of itself is, of course, a weapon designed to dilute American power.

One final point, slightly off-topic. Given the likelihood of oil’s drop continuing (manipulated or otherwise market-influenced) why on earth does Britain need fracking to produce affordable oil? Surely, buying both spot and futures now would obviate the investment, chaos, and water-threat required to commence this ecologically idiotic – and dead-end – form of getting at oil?

Connected at The Slog: Which is better, fracking…or moving past oil?

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