Forget Glasnost, Mikhail Gorbachev and the arms race. What really broke the Soviet Union was the collapse of oil prices in the late 1980s. The late economist Yegor Gaidar, one of Boris Yeltsin’s prime ministers, wrote in 2007 that the empire’s fall could be traced back to Sept. 13, 1985, when Saudi Arabia, fed up with holding back supply to prop up prices, opened the spigots in a quest to recover lost market share. That day, he argued convincingly, was the beginning of the end.
The USSR, pumping almost 12 million barrels a day, was the world’s largest producer at the time. Riyadh’s change in policy caused a price shock: Oil fell from about $25 a barrel to less than $10 in the months that followed, and stayed low for the rest of the decade, costing the Soviet economy $20 billion a year in lost revenue—“money without which the country simply could not survive, ” Gaidar wrote.
Russia is the world’s biggest oil producer again now (though Saudi Arabia is the biggest exporter) but its economy still depends heavily on selling energy. Oil and gas exports account for about half of Russia’s budget and about 30 percent of its GDP. This makes it vulnerable. If the West wanted to punish President Vladimir Putin for his land grab in Crimea, runs the argument, it should target the energy revenues that keep his petro-economy afloat. (…)
(The extract above is published courtesy of Politico. The rest of it is here.)
Investment banks reckon we’re in for it. Opec says it’s happy where things are. China’s oil demand last year was 17.5% higher than the year before.
This is dangerous and short-sighted. In countries like the US and UK, fuel costs are within spitting distance of the records set in 2008, when a big wave of demand destruction spread across the West.
Inflation in China, which prompted two interest-rate rises in Q4 last year, is worrying the government. Another effort to dampen growth can’t be far off. The Fed may end quantitative easing if the US economy picks up, as data on Friday is expected to show it has. That will strengthen the dollar and drive down oil prices.
And the premium Brent (about $98/b) is enjoying to WTI (about $88/b) means we’re in for some kind of correction, soon. Expect a flattening of the contango and a dip in prices back under $80/b, if not lower. And expect the IEA to revise its demand outlooks back down again. Demand destruction, part 2, is on its way.
Update: Saudi oil minister Ali Naimi said today he’s worried about speculators again. No doubt. It’s 2008 all over again.
Update 2: I’ll be interviewing Opec’s Sec-General Abdallah El-Badri next week. Nice guy, always a good interview, always insightful, and with a lot on his plate at the minute.