Oil tanks...........

The most cursory glance at the Brent Crude price ticker show that oil has not merely gone south, but fallen off the cliff. It is currently around $85 from its 2008 high of $145. West Texas is $81.

 

It has tanked!

 

How long this will last is anybody’s guess; oil markets are notoriously difficult to predict, but there will be winners and losers.

 

First up are motorists; already there is a price-war at supermarket filling stations.

 

 

Then agriculture which, surprisingly, is a much bigger consumer of energy than industry mainly because most fertilisers are petroleum-based and partly because especially in arid areas farmers consume large amounts of electricity to pump water. Lower energy prices will be a big fillip to manufacturing throughout Europe with the possible exception of Germany. Its mad pursuit of ‘green’ energy makes its costs triple those of the US.

 

The effects in America will be something of a paradox. It is the largest importer of oil and the largest consumer. At the same time it is the largest producer, well on the way to self-sufficiency. Industry should benefit. Already we have seen industrial resurgence, especially in the plastics and fertiliser industries. But there will be an adverse impact on the shale industry because it is expensive to produce, and oil at $85 makes a large proportion of shale sands uneconomic.

 

Other winners could be the dozen or so countries that spend vast amounts on fuel subsidies.

 

But in the true spirit of schadenfreude it is more agreeable to look at the losers.

 

Venezuela is deep in the merde. Chavez blew the sovereign wealth fund on buying votes with unaffordable social benefits. The country is hopelessly in debt. Inflation is running at 60%. It needs oil to be consistently at $120 to avoid going the way of Argentina.

 

Then there is Iran which needs oil to be $135 or thereabouts to finance its profligate spending on both its nuclear programme and the many subsidies that keep the masses quiescent.

 

Russia is by far and away the most interesting member of the losers’ club.

 

The present  game-play between Russia and the West has precedent.

 

It is widely believed that in the 1980s Reagan and the Saudis  fitted up the Soviet Union by cranking up oil supply and virtually bankrupted it. It ran out of cash and suffered the humiliation of asking for a Western bail-out.

 

Putin’s Russia is inherently weaker as a result of his own economic mismanagement. The USSR was a major industrial nation at the forefront of high-technology such as the space industry. Now it is over-dependent on oil and  gas. It no longer makes much that others wish to buy, and non-oil exports have fallen  to single- figure percentages. Its infrastructure is falling apart, its economy is riddled with market barriers, and it is near the bottom of the league for competitiveness.

 

There is no independent judiciary, a major disincentive for investment as there is little confidence in the sanctity of contracts. Education is abysmal.

 

Life expectancy is low, and there is a demographic problem with an aging population.

 

There is a rush to convert roubles into hard currencies and capital flight is about 5% of GDP annually. Sanctions are making it near-impossible for Russian banks to have access to Western credit with $150bn of debt due for repayment within the year.

 

Russia needs oil to be at $100 to meet its obligations at the same time as Putin is increasing defence spending to a massive 4% of GDP.

T

he conundrum is why  Saudi is selling itself short by opening the taps.

 

It seems to be déjà vu all over again.

 

The scuttlebutt is that Saudi wanted Putin to pull the rug from under Assad in return for which they would carve up the oil market between them. Vlad is not playing – at least not yet. With the drop in Gulf-oil dependency since the 1980s, Saudi no longer has its political clout of old, but we are not yet in the end-game. Saudi needs $100 per barrel to break even but with its enormous dollar reserves it can withstand low prices for a long while. However, its welfare programme means that the money-pot is not bottomless.

 

In the meantime, Russia is shut out of Western financial markets and its banks are unable to roll-over a vast amount of foreign debt. Oil production is at risk through lack of Western technology and capital. It costs three times as much to drill one kilometer in Russia as it does in the US.

 

Russia is predicting that oil will bottom-out at $60. If this is even roughly accurate, things are not going to get better.

 

The Ukraine adventure is beginning to look like a very, very bad idea.