Low Oil Prices in the New Year Are Screwing Petrostates

Category: In The News Published: Saturday, 03 January 2015 Written by Admin

Low oil prices in 2015 could spark an economic revival in the United States while impoverishing Russians, Venezuelans, and other petrostate citizens.

The New Year starts with oil prices at their lowest since 2009. This week they dropped around $1, to $53.11 for West Texas crude and $56.75 for Brent traded in London.

Oil prices have plunged partly because of the shale boom in the United States, the biggest oil importer in the world. Fracking has opened massive new supplies of oil in places like North Dakota, where drillers cant find enough roughnecks to hire. Diminished demand from Europe and China, where economic growth has slowed, is also helping to suppress prices.

Saudi Arabia, the worlds biggest oil exporter, has meanwhile maintained a steady flow of oil, even as the price has fallen by around 50 percent since June. This has prompted observers to speculate that it is purposefully driving prices down to inconvenience strategic adversaries such as Iran.

The end of fracking is closer than you think. Read more here.

The desert kingdom would normally be expected to curtail production and choke supply to drive up the cost of oil, as other OPEC nations unsuccessfully petitioned it to do recently. But the superrich Saudis appear willing to lose money because low oil prices are harming their economic rivals and punishing their geopolitical enemies, Fadel Gheit, managing director and oil analyst at Oppenheimer amp; Co., a New York investment bank, told VICE News.

The fall of the oil prices is not just something ordinary and economical, this is not due to only global recession, Iranian President Hassan Rouhani recently asserted. The main reason for it is (a) political conspiracy by certain countries against the interest of the region and the Islamic world, and it is only in the interest of some other countries.

Gheit believes that Saudi Arabia wants American drillers whose cost of extracting oil and gas from shale is many times that of Saudi producers and other competitors to go bust as the price of oil plummets. The superrich Saudis can afford to play that game.

Saudi Arabia has enormous foreign reserves which can withstand the low oil prices for years, he noted, but he didnt think North Dakotans had much to worry about in the New Year. Im very optimistic that American production will be able to cope with low oil prices for a lot longer than many people think.

The American oil industry is already getting help from its friends. President Barack Obama recently eased the US ban on exporting oil, a move that could further drench the market in oil and lower prices but also give domestic drillers access to international customers in 2015. Republicans set to control Congress in the New Year are championing a complete repeal of the ban.

Heres why low gas prices might not be bad for the environment. Read more here.

We need to rethink outdated laws that were passed during an era of energy scarcity, said Republican Texas Congressman Joe Barton as he introduced a House bill to lift all export restrictions in December. Recent analysis confirms lifting the export ban would spur economic growth and create hundreds of thousands of additional jobs, while at the same time lowering prices at the pump. It would also diversify the world oil supply strengthening US energy security and giving us more leverage in foreign policy matters.

The low cost of oil has already tipped OPEC founding member Venezuela into a recession that will almost certainly linger into 2015, prompting President Nicolas Maduro to speak darkly of a US conspiracy to dismantle the oil cartel.

It is a two-year plan, which is affecting the prices of commodities and many developing economies, Maduro said this week. The US wants to impose a unipolar world controlled from Washington. That is madness.

Low energy costs are expected to put more money in the pockets of car-crazy Americans, helping the American economy in general. The current average for gasoline prices in the US is $2.25, according to the AAA, meaning road trips, work commutes, and other drives are a lot cheaper than a few years ago. Thats money saved that can be spent elsewhere.

Its a tax break for the consumer, said Gheit.

But the low price of oil is wreaking havoc with the economies of Iran and Russia. Sunni Muslim Saudi Arabia and Shiite Muslim Iran have long been enemies. Now Iran and Russia are supporting Syrian President Bashar al-Assad, while the Saudis back the rebels in the Syrian civil war.

Iranian officials are now cutting budgets and raising taxes, potentially on previously sacrosanct tax-exempt religious organizations, to make up for funds lost from cheap oil.

Theres no saving Russias imploding economy from the worlds hurt feelings. Read more here.

Russia, meanwhile, is facing a potentially devastating recession. The ruble lost half its value against the US dollar in 2014. Its not clear how Russian President Vladimir Putin and the state-owned companies he controls will cover the their foreign debts or maintain his iron grip on power in the Kremlin. Oil exports comprise as much as 30 percent of the countrys gross domestic product, according to the American Enterprise Institute. Its government passed a budget for 2015 that is based on an average price of $100 per barrel.

Russia is in big, big trouble, said Gheit. Theres mismanagement, corruption. Even Putin is under pressure, tremendous pressure. If oil prices dont reverse in the next two years, he is history. He is going to lose the support of the people. Russians are in no mood to go back to the bread lines that their parent and grandparents experienced years ago.

Follow John Dyer on Twitter: @johnjdyerjr

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