1. The USGovt is now waging war on Russia and Iran with every weapon at its disposal short of outright overt invasion by official US military forces. That latter, with a Republican Congress, is not unlikely.
2. The USGovt economic sanctions on Iran have seriously affected the Iranian economy, and the economic sanctions on Russia are now beginning to bite. The latest weapon is the price of oil.
3. Russia and Iran appear to need a price of about $100 – $110/bbl to balance their budgets. Venezuela’s need is significantly higher. In the last couple of months the price of oil has fallen by about 40% — from about $110 to less than $70/bbl
4. Three media headlines A, B and C sum up the situation:
A. From Forbes: It’s Time To Drive Russia Bankrupt (March 2014)
B. From WSJ: Sanctions Nearly Halve Iran Oil Export Revenue in Two Years, OPEC Says (July 2014)
C. From Russia Today: Sanctions & weaker oil prices could cost Russia 4% of GDP (Sept 2014)
Below are some extracts and my comments on the geopolitical effects of dramatically falling oil prices.
5. UK Telegraph July 9 2014, Ambrose Evans- Pritchard: Oil Drop Is Big Boon For Global Stock Markets, If It Lasts:
Tumbling oil prices are a bonanza for global stock markets, provided the chief cause is a surge in crude supply rather than a collapse in economic demand. …Nick Kounis from ABN Amro says it will add $550 billion of stimulus to world markets. “That is fantastic news for the global economy,” he said.
6. The reason for the price drop is a slow down in demand from China (accounting for about a third of the price move according to AE-P) and surging supply from debt financed fracking companies in the US. In other oversupply periods Saudi Arabia has cut back production to stabilize prices. This time they are continuing to produce at the same rate.
7. The House of Saud does not move without the imprimatur of the House of Bush. Clearly the USGovt “Deep State” has determined that the likely benefits of pressuring Russia and Iran are worth the risks.
8. What are the risks?
a. The oil producing countries not already in, or preferring not to be in the “Anglo-Saxon” orbit (Russia, Iran, Venezuela, “ISIS”, (The Caliphate), and many others…) will be seriously hurt, as will Brazil and every oil producer. With a prolonged (six months to a year) hiatus in oil pricing, the energy junk bond market in the US will be under severe pressure. (see Ambrose Evans-Pierce extract below). Clearly the USGovt has thought thru that eventuality and believe it is containable.
b. During that time will the Russians and Iranians roll over (as did Gorbachev in 1990, and Kruschev in 1962) or begin to play really rough — whatever that means? The US Govt is betting on the former. I very, very much doubt they are right. The Japanese attack on Pearl Harbor was a desperation move by Japan to attempt to remove economic sanctions (oil embargo) which was strangling their economy. I do not see a Putin led Kremlin, or a mullah led Iran or an understandably riled up “non-Saudi” Islamic world acquiescing to extreme economic pressure from the USGovt.
c. Thanks to the revelations from Snowden and Assange and the behavior of President Obama, it is now clear to every “Intelligence Agency” in the world that the US President is a figure head whose word cannot be trusted, and that the USGovt has a very strong aversion to “peace”. The post Gorbachev looting of Russia by “free market” oligarchs and the chaos and looting of Iraq by western oil companies demonstrates what lies in store for countries who join the “Anglo-Saxon” club. Will extreme economic hardship force a union? I doubt it.
In a piece for the UK Telegraph on July 9 2014 Ambrose Evans-Pritchard warns that Fossil Industry Is The Subprime Danger Of This Cycle.
The epicentre of irrational behaviour across global markets has moved to the fossil fuel complex of oil, gas and coal….oil and gas investment in the US has soared to $200 billion a year. It has reached 20% of total US private fixed investment, the same share as home building….This has never happened before in US history, even during the Second World War when oil production was a strategic imperative…..upstream costs in the oil industry have risen 300% since 2000 but output is up just 14% [..] The damage has been masked so far as big oil companies draw down on their cheap legacy reserves….… companies are committing $1.1 trillion over the next decade to projects that require prices above $95 to break even. The Canadian tar sands mostly break even at $80-$100. Some of the Arctic and deepwater projects need $120. Several need $150. Petrobras, Statoil, Total, BP, BG, Exxon, Shell, Chevron and Repsol are together gambling $340 billion in these hostile seas.
He amplifies the warning below
UK Telegraph August 11 2014: Oil And Gas Company Debt Soars To Danger Levels To Cover Cash Shortfall
The world’s leading oil and gas companies are taking on debt and selling assets on an unprecedented scale to cover a shortfall in cash, calling into question the long-term viability of large parts of the industry. …… The EIA said revenues from oil and gas sales have reached a plateau since 2011, stagnating at $568 billion over the last year as oil hovers near $100 a barrel. Yet costs have continued to rise relentlessly.
…Global output of conventional oil peaked in 2005 despite huge investment. [..] the productivity of new capital spending has fallen by a factor of five since 2000. “The vast majority of public oil and gas companies require oil prices of over $100 to achieve positive free cash flow under current capex and dividend programmes. Nearly half of the industry needs more than $120,” ..
… companies are committing $1.1 trillion over the next decade to projects requiring prices above $95 to make money. Some of the Arctic and deepwater projects have a break-even cost near $120 . The IEA says companies have booked assets that can never be burned if there is a deal limit to C02 levels to 450 (PPM), a serious political risk for the industry. Estimates vary but Mr Lewis said this could reach $19 trillion for the oil nexus, and $28 trillion for all forms of fossil fuel.