The horizon is not so far as we can see, but as far as we can imagine

Collapse of oil prices and the Russian Ruble

These are the same thing.  Russia sells oil to the world, and their currency is based on the price of oil.  (It is for this same reason that the Canadian dollar has been sliding.)

Putin has been a competent leader for Russia in many ways, but the failure to diversify the economy from oil is his primary failure.  You might say “corruption”, but resource economies are almost always corrupt.  The only way to (somewhat) avoid it is to put the money away in a sovereign fund or the equivalent.

It is also important to not allow the currency to become a resource currency, because that crushes all other export businesses.

Why did the price of oil drop?  There are a lot of theories, from screw-ups in the futures market, to increased supply and reduced demand, to intent to destroy Russia.

What is interesting is that OPEC (meaning, in this case, Saudi Arabia) has refused to do anything to stabilize oil prices and prevent the collapse.

Saudi Arabia needs higher oil prices, they have no economy other than oil of significance, but they also have more ability to handle oil price collapses.  Saudi crude is cheap to produce, under $10/barrel.  The profit may be less, but they are making a profit.  A lot of Russian, American, Canadian and other oil is not profitable at low prices.  Letting oil prices be low for a year or two will probably help Saudia Arabia more in the long run.  Certainly it hurts their competitors more than it hurts them.

Many also believe that the US and Saudi Arabia are doing this deliberately to hurt Russia.

Of more fundamental interest is that China has been buying less and less commodities (not just oil, but metals like copper).  China is the most important economy in the world now for hard commodity prices.

The Ruble collapse is going to hurt a lot of people, most especially the Europeans.  Europe sells a lot of goods and services to Russia, and Russia is no longer going to be able to afford them.

For now, low oil prices will be good for the US, but the general commodity price drops are hammering many other countries, and that will lead to reduced demand globally.  This isn’t a good thing, however much many Americans are enjoying Russia (and Putin”s woes.)

I will note also that Russians seem to be blaming the West for the collapse of the Ruble.  That’s a good thing if they decide going supine will help them.

It’s not a good thing if they get angry about it and decide the West (meaning the US) is deliberately trying to destroy them.

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23 Comments

  1. Dan Lynch

    The Sauds have set oil prices since their 1976 Doha agreement with Henry Kissinger. They control enough of the market to make them the price setter, if they choose to do so. As for why they chose to drop oil prices, and whether the US government was in on the decision, is anyone’s guess.

    Putin has enough support in Russia to ride this out. But Maduro in Venezuela may be in trouble.

    IMHO this illustrates how vulnerable extraction economies can be. As Ian has mentioned previously, Dutch Disease can bite.

  2. V. Arnold

    Kerry had a meeting with the Saudi’s at the beginning of the fall in prices.
    I think it’s pretty clear the U.S. is in a, no hold’s barred, war with Russia.
    The U.S. toppled the government in Ukraine and is now supplying lethal military aide.
    The U.S is in a futile bid to isolate Russia and at the very least topple Putin from power. There is an active fifth column movement in Russia, supported by the U.S.
    Two excellent sites for non-western (propaganda) information about what’s going on, on the ground.

    http://vineyardsaker.blogspot.com/2014/03/today-every-free-person-in-world-has-won.html

    http://cluborlov.blogspot.ca/

    I suggest listening to Putin’s talks at Valdai, APEC, and numerous other gatherings. He’s a straight shooter and, IMO, one of the few genuine “leaders” in the world today.
    Talk about depravity, just listen to Cameron, Obama, or the fucking moron Abbott.
    We humans here on the tiny blue dot are in grave danger because all sanity and reason has escaped from leadership with very few exceptions; Putin being one of the exceptions.
    Please don’t waste my time pointing out Putin’s faults as I know he is no saint.
    Given the sanctions against Russia (tantamount to a declaration of war) Putin’s actions have been those of a rational being.
    As an aside; Putin is not ex-KGB (as widely believed), but rather an ex-inteligence official. There is a difference…

  3. V. Arnold

    Oh, and I forgot RT;

    http://rt.com/news/

    Very informative; I suggest listening to Peter Lavelle’s Cross Talk program.

  4. kj1313

    The other prevailing theory is that Saudi Arabia is deliberately pushing the oil prices low to disrupt Shale production since the extraction cost is between $40-70. Also there is talk that Keystone is now too expensive compared with the new price point of oil.

  5. “Russia sells oil to the world, and their currency is based on the price of oil.”

    Is there any chance they will leave the “oil standard” and adopt a floating currency?

  6. V. Arnold

    @ TK421
    December 17, 2014
    “Russia sells oil to the world, and their currency is based on the price of oil.”
    Is there any chance they will leave the “oil standard” and adopt a floating currency?
    ~~~~~~~~~~~~~~~~
    They’ve already floated the ruble.

  7. Ian Welsh

    It’s not officially linked to the price of oil, it is effectively linked to the price of oil because so much of their exports are oil and other hydrocarbons.

  8. hvd

    I don’t really see U.S. involvement unless we want to assume that U.S. always does dumb shit.

    Given the impact on the fracking industry, “energy independence” and Citibank which apparently has enormous downside exposure on fracking that could threaten the bank, and U.S. banking, it is hard to see how this is a smart move on the part of the U.S. On the other hand it makes perfect sense as a purely Saudi move as they certainly don’t mind sticking it to both Russia and the U.S. And if one really wants to apply cui bono analysis the Chinese must be smiling very broadly indeed – lower short term energy prices for them, better bargaining with Russians, attack on U.S. banking, likely short term bump in sales due to lower gas prices here, attack on U.S. fracking which competes with their solar, etc. How and why they would encourage this I don’t know but it seems an interesting line of thought.

    I await thinking of people who actually know (or think they know) what they are talking about.

  9. IA

    A weak Russia is a net minus for China.

  10. TK421

    Aha, thanks.

  11. Ian Welsh

    The US /really/ wants Russia down, and while low oil prices will hurt certain US sectors, the general consensus of economists if that low oil prices are good for the US.

  12. hvd

    I don’t disagree re: U.S. wants with regards to Russia. But if what I have been reading about Citibanks position is close to right then the consequences there might be awfully hard to unravel. And although you are right that lower oil prices should be good for the U.S. economy it seems to me that most, if not all of the profits end up being shared by China as manufacturer and the .1 as skimmers of all profits. Leaving very little for real sustained growth but a small bump of profitability for the above named.

    I agree that a militarily strong Russia is a net plus for China but not sure that a Russia economically capable of bargaining hard with China is as they sort out their internal dynamics.

    Finally it wouldn’t, of course, surprise me to find U.S. and Saudi working together on this but ultimately it doesn’t make much sense as Citibank and the oil goons control an awful lot of the U.S. government.

  13. bob mcmanus

    but ultimately it doesn’t make much sense as Citibank and the oil goons control an awful lot of the U.S. government.

    Naomi Klein, Shock Doctrine

    The big oil guys wouldn’t mind a culling that returned wildcatter assets to their rightful owners.
    And if Citibank went down, there is not a doubt in my mind that they would get another multi-trillion dollar bailout, if Obama had to send the National Guard into the streets to get it and sell the safety net to Republicans. This would further inform the rest of us of our proper position:supine. I have been expecting another crash toward the end of the Obama administration. Say hi to President Jeb and one-party rule.

    Venezuela and Iran are also vulnerable targets here.

    Again, extending Empire to Oligarchs of US-Germany-Japan-China-Saudi Arabia, I just don’t see the weakness and terminal decline. For a complicated understanding of what they want (which has nothing to do with what they say) seems to me Empire is doing pretty well. They are taking everything

  14. Monster from the Id

    Oh, the Empire may defeat any and all human foes.

    But empires mean order, and Mommie Dearest Nature prefers chaos.

    Let’s see Darth Cheney waterboard the Second Law of Thermodynamics into submission.

    Let’s see Mitchell and Jessen torture carbon dioxide into bouncing heat away rather than absorbing it.

  15. Lisa FOS

    HVD: “I don’t really see U.S. involvement unless we want to assume that U.S. always does dumb shit.”

    Yes it does. The reports of the US and Saudi Arabia colluding in dropping the oil prices are really well documented by now. The fact is that SA also saw this a ‘hail mary’ pass to take out the US/Canadian tar sands and shale oil production as well.

    Currently US foreign policy objectives of ‘get Russia and Iran’ dominate. In other terms, the neo-cons and the Israeli lobby are more powerful than the US oil industry and Wall St (though WS will get a bailout) .

    Now, Wall St is on the hook for billions (many, many billion) of dollars, but the reason it hasn’t pulled the plug on this nonsense is that is has been guaranteed ‘protection’ of its profits.

    This is why there are ‘stealth sanctions; at work too. Unofficially Russia has been frozen out of the international money markets, hence the Ruble decline. US State Dept and Treasury have been tapping various financial organisations on the shoulder and telling them not to roll over Russian debt for the last 3-4 months.

    Again they would not do this unless they were guaranteed no loss of profits by the respective Govts and central banks.

    The US oil industry has been left hanging on the vine so to speak. It is very unlikely it will get any bailouts…so all those oil companies and oligarchs are getting a hard lesson on what happens …”when you don’t count, despite what you thought”.

    Collateral damage so to speak, the entire US elite system is now united on full ‘get Russia mode’…which in the end means nuclear war…..

  16. Ian Welsh

    Link on the debt rollover Lisa? I hadn’t seen that and it’s very important if true. That’s practically an act of war.

  17. Trixie

    Right, US banks are not allowed to rollover loans. That’s always been part of the stated sanctions. And it is a declaration of war given Russia’s exposure to USD.

    Nothing “stealth” about it, thought this was well known.

  18. V. Arnold

    Looks like China is set to bail Russia out.
    Tyler Durden at Zero Hedge;
    http://www.zerohedge.com/news/2014-12-17/china-prepares-bailout-russia

  19. V. Arnold

    Frankly, I don’t see how Obama can win this stupidity fostered by himself (or at least his masters).
    Putin is playing chess against Obama’s checkers.

  20. hvd

    Can’t disagree with any of comments above. But still think China is biggest winner from all this and U.S. is likely biggest loser.

    And yes, tragically, most of the evidence in to date would demonstrate that U.S. always does dumb shit.

  21. Monster from the Id

    Putin plays chess.

    Obama’s imperial-capitalist masters play Monopoly.

    Never forget: Capital is Emperor Palpatine. Uncle Sam is merely Darth Vader.

  22. Mary McCurnin

    Where is Jeff? God, I miss him.

  23. Kurt

    The price of light sweet crude oil futures reached our target of $54.50 earlier than I expected. I thought the decline would continue until the *next* cycle low, which would be in autumn 2015, but price fell so rapidly in recent weeks that it appears the present cycle low matters more. Price will probably start to climb from around here on a weekly time frame, and based on longer-term chart measurements I think it’s unlikely (not impossible) that it will revisit the current low in the next two years.

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