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Page added on November 10, 2014
Russian primary industry cannot withstand this roller coaster.
Katarina Lagervall DN called me last Friday and we had a long and interesting conversation about oil and the global economy. A summary of our conversation is now available at dn.se [in Swedish] under “Russian primary industry cannot withstand this roller coaster.” (I have added some clarifications with parentheses)
(Published 2014-11-07 13:17)
Falling oil prices on the world market are hard on the Russian economy. But those who should be most worried about these developments are the oil-dependent nations of the EU. So says oil analyst Kjell Aleklett.
– Our energy costs will be expensive in the long run because we do not have any of our own fossil natural resources. Russia has oil in the ground and if they do not produce it now, they can do so later, he said.
Since June, the price of Brent crude oil has dropped from $ 113 per barrel down to today’s price of around $80 a barrel. For Russia, whose state budget assumes an oil price of around $100, there are serious economic consequences.
What significance has the US’s rapid extraction of shale oil, known as fracking, had for the price of oil?
– It is certainly significant that the United States has increased its production of shale oil. The USA has been able to reduce its oil imports by around 6 percent (a figure that I did not give). But the reduction in China’s oil importation because of their deteriorating economy together with oil production by other oil-producing nations has meant that there is now a surplus of oil. And so prices have fallen, says Kjell Aleklett, oil analyst and Senior Professor, Global Energy Systems, Department of Earth Sciences, Uppsala University.
Is America’s development of shale gas a deliberate move by the US to force prices down and so strike against Russia?
– No. Fracking is a gambling industry and is about short-term investments. It is a very costly business that means you are forced to continue drilling in order to pay your loans. The new production from shale has meant that the price of oil in the US is about $10 below the world price. Meanwhile, the US needs to have an oil price of $80 per barrel for fracking to be profitable. The entire industry faces fierce economic problems ahead.
– If there is a conscious strategy it comes in this case from Saudi Arabia that can change the rate at which it sells oil by millions of barrels per day. The Saudis have financial reserves so great that they can operate at a loss for a number of years, thereby eliminating some of their competitors. The oil market is a major global game and it is Saudi Arabia that holds the strings.
How is Russia affected by the low oil prices?
– They have major economic problems. Russian primary industry cannot withstand this roller coaster and so you will see some projects put on hold. But what the Russians can do in the longer term is to sign new agreements with China. Russia is interested in long-term contracts in order to obtain the means to invest. China understands this and so to secure delivery contracts of 20-30 years duration Russia is turning towards China. But the EU does not appear to have understood this.
What does this mean for the EU’s energy supply?
– In the long term, we in Europe will lose access to some of the Russian oil and we will have major problems with our oil supplies. Our energy costs will be high, says Kjell Aleklett.
So will Russia thus be the winner of this long term global oil game?
– They are the only country in the world that is self-sufficient in all natural resources, such as coal, oil, uranium and the like, and therefore they do not need to import any energy. There is a reason why Vladimir Putin was recently declared to be the most powerful man in the world. That is one of the reasons.
Nevertheless all the indicators are currently pointing downwards for Russia. How will they cope with the current crisis?
– The Russian people are masters of coping with hardship and they will do it again now.
Does the ongoing trade war between Russia and the West actually hit hardest against the EU nations?
– Yes. Europe has the highest energy costs in the world (I do not know if I said the world, but Japan and some other countries also have high costs) because we must import most of our energy. There is nothing at the moment to suggest that we will see renewed global growth and it is (expensive) energy that underlies this situation, says Kjell Aleklett.
Katarina Lagervall
I think Katarina Lagervall summarised of our conversation well. There are parts that she thought less important, and that is OK.
28 Comments on "Russian primary industry cannot withstand this roller coaster."
markopetrov on Mon, 10th Nov 2014 12:12 pm
I dont understand why Russia simple doesn’t stop to sell oil in dollars . Is it such a big problem? Can anyone explain this to me / Thanks
Plantagenet on Mon, 10th Nov 2014 12:20 pm
The EU should be partnering with Russia—not imposing sanctions on Russia. Its too bad that Putin’s invasion of Ukraine has set off another cold war, with negative consequences for Russia,Ukraine, and the EU. The only winner in this mess is China, who has now wrested Russian oil and NG away from the EU, and arranged for the Russian oil and NG to go instead to China.
henriksson on Mon, 10th Nov 2014 12:24 pm
Hopefully this will spur efforts to transition from fossil fuels in Europe.
JuanP on Mon, 10th Nov 2014 12:48 pm
Plant, I agree that Europe should partner with Russia, particularly Germany, IMO.
I disagree completely with you on how we believe this Ukraine crisis got started. I think the USA provoked this crisis on purpose by organizing and financing the protests and the Kiev snipers coup that violently removed a democratically elected president using unconstitutional means, and started the American-Russian Ukrainian proxy war.
I am very angry with the role the USA government is playing in all this, but I am happy because I think in the long term the USA will be the biggest loser in this conflict. The world’s understanding of the USA’s actions in Ukraine are turning most of the people in the world against the USA in a radical way.
I think the Ukrainian war is what will do us in. China and Russia are joined at the hip now because of this, and they will sink the dollar, destroying the American economy.
The American government is being criminally incompetent, and accelerating the demise of the US dollar and the collapse of the American economy. I hope time proves me wrong, but I think we are past the point of no return on this one.
Putin’s Valdai Club speech defined a completely new approach to international relations on Russia’s part, and I fear it is irreversible, IMO. If you haven’t read the speech, I suggest you read it. Know your enemy, and all that.
JuanP on Mon, 10th Nov 2014 1:09 pm
Plant, I will use my country, Uruguay, as an example.
We have presidential elections in Uruguay this month. Both candidates are rich capitalists, one from the left and one from the right. It is likely that the leftist, a former president in his late 60s, will win. One of the factors in his favor is that he is in favor of BRICS and MerCoSur. The other candidate is significantly younger at age 40, he is a pro American 1%er, the son and great grandson of two former presidents.
According to polls, the USA is at its least popular moment ever amongst the Uruguayan people. The approval of the US government’s foreign policies is in single digits in all national polls. And Obama’s highest approval is 13% in one poll, but the average is around 10. Up to five years ago these rates had remained over 50% throughout Uruguay’s history.
The USA and Uruguay always had good relations, but things have been getting worse and worse since the 70s, and relations have deteriorated significantly in the last 12 years. Around 78% of Uruguayans are against any American involvement in Ukraine. It is the same throughout Latin America.
Northwest Resident on Mon, 10th Nov 2014 1:14 pm
I think that Europe has no choice — none. It must partner with Russia because Russia has all the oil/energy that Europe needs. The days of Europe depending on the security shield and diplomatic maneuvers that America pulls on its behalf are coming to and end. I even believe one of the purposes of the Russian sanctions is to rub Europe’s attitude toward Russia in its face, to let them experience first-hand just exactly how much they actually NEED Russia, to break down all those cold-war attitudes. Breaking European dependence on America and replacing it with the cold hard reality of dependence on partnership with Russia is going to be a very painful process, as we currently are witnessing. Just wait until it starts getting really cold in Europe and Russia doesn’t deliver NG for a day or two due to “unforeseen problems”. That will open a lot of eyes and change some attitudes really fast. Pure speculation on my part. But ask yourself this question: What exactly are America’s and Europe’s sanctions against Russia supposed to accomplish? “Punish” Russia. What a joke. There must be a method behind the madness, some unstated goal. Changing public perceptions toward Russia in Europe would explain it, just sayin’…
JuanP on Mon, 10th Nov 2014 1:21 pm
NR, It will be interesting to follow European news this winter. I hope the gas will flow, but I think Kiev might try something at some point. Kiev should be happy with the gas on credit they are getting, but they have behaved in a predictably stupid way so far, so who knows what they will do.
Russia will stop the flow only if forced to, they most definitely want to continue selling as much gas as possible for as long as possible. I believe Putin to be an extremely pragmatic man, and money makes the world go round and he knows it.
GregT on Mon, 10th Nov 2014 1:43 pm
JuanP,
Plant very often parrots what he hears in the media. I am starting to believe that he has little ability to think for himself.
Your posts above are spot on, IMO, and I agree with you 99%. I do have a problem with blaming the US government with complete incompetency however, I believe that what they doing is part of a bigger plan. What that plan is, isn’t exactly crystal clear to me at this point, but I suspect that it will become clearer as time goes on. I do have my suspicions, we will just have to wait and see how the insanity progresses.
Northwest Resident on Mon, 10th Nov 2014 1:45 pm
JuanP — I agree. And I would bet $100 that “something happens” to cut off the NG flow to Europe for a day or two this winter. Putin will blame whoever, and everybody else will blame Putin. Serious games being played here. But the end result, I believe, will be a general shift in European attitude to one of “screw it, we’re stuck with Russia, let’s make the best of it.” That’s the only thing that makes sense to me. But that’s just me.
JuanP on Mon, 10th Nov 2014 1:45 pm
“Since June, the price of Brent crude oil has dropped from $ 113 per barrel down to today’s price of around $80 a barrel. For Russia, whose state budget assumes an oil price of around $100, there are serious economic consequences.”
I agree that this oil price drop has serious consequences for the Russian economy, but not for budgetary reasons as the article implies. Russia’s export income is reduced, negatively affecting the trade balance in a serious way costing Russia tens of billions of dollars.
The budget hasn’t been affected at all so far because it was made on a $96 annual average oil price, which will not be that far from this year’s average. The Ruble’s excessive devaluation has more than compensated for the lost income caused by the oil price drop, since most Russian energy sales are in foreign currencies but the Russian budget is in Rubles. Basic economics, please correct me if I’m wrong.
That said, 2015 will be a very challenging year for the Russian economy.
Davy on Mon, 10th Nov 2014 1:48 pm
Mark, to answer your question the dollar is used by too many countries and too much in trade to be avoided. Russia will succeed with some bilateral deal especially with the Brics. Even this will be subject to what makes economic sense depending on the the health of the ruble and dollar.
We are entering a dangerous time with global systemic risk being tied up In the foreign exchange markets. The dollar is going up in value hammering the carry trade. This going to play havoc on the debt markets.
JuanP on Mon, 10th Nov 2014 1:56 pm
Greg, My comment about the US government crimnal incompetence is in the context that they are supposed to be doing that which is in the best interests of the American people, and they are proving completely incapable of doing anything right and it seems to be getting exponentially worse. I agree that there is a plan at work here, but I have no idea what it is.
NR, I agree that Europe and Russia will have to make up at some point. In a post collapse world, geography will rule the day.
JuanP on Mon, 10th Nov 2014 2:08 pm
I like that an European university professor like Kjell Aleklett sees things this way. His assesment of things is very similar to mine. I respect this guy’s opinions.
I particularly agree with his comments regarding Russia’s strategic strengths. I think Russia will have one of the highest qualities of life in the world for decades after Peak Oil. The amount of natural resources they have in relation to their population is unparalleled in the world, as the prof correctly points out.
Davy on Mon, 10th Nov 2014 2:12 pm
Yea, Juan, if there is much of a world. Resources only have a useful life if you have an economy that can use them. None of us have a clue where, what, and when this collapse will shake out to.
JuanP on Mon, 10th Nov 2014 2:50 pm
Davy, Yes, it is all very hypothetical and things will not play out as we imagine. Life is one surprise after another, but resources, particularly land, water, and energy are the key.
Countries with good resources/populations will fare better. I don’t see many ways that the Chinese could end up better than Americans, Russians, or Uruguayans for example. It is possible but highly unlikely, IMO.
JuanP on Mon, 10th Nov 2014 4:34 pm
Russia ends dollar/euro currency peg, moves to free float,
http://rt.com/business/203959-russian-ruble-free-float-bank/
kervennic on Mon, 10th Nov 2014 5:06 pm
This is good news. Cheap oil has made our life harder. It is harder now to live from your work because everything come from abroad for nothing from fruit to instruments.
Onl a few speculator are benefiting, we are only beggars.
Feemer on Mon, 10th Nov 2014 5:42 pm
Europe needs to rapidly increase efficiency and renewable energy/energy union. This will lower energy prices, save people money, make Europe more competitive and secure. I agree the West is not innocent in the Ukraine crisis, but Russia is clearly supporting rebels and invading (illegally). Why is this illegal you ask? The US and Russia signed a treaty in the early 90’s explicitly guaranteeing Ukraine’s territorial/political sovereignty in exchange for the nukes there
Makati1 on Mon, 10th Nov 2014 7:16 pm
Feemer, any ‘rapid’ increase is only going to happen in debt and destruction, not growth in ‘renewables’ or efficiency.
If you improve efficiency, you get rid of jobs. THAT is the problem these days. It was part of what began the Great Depression in the US and continues to this day. Over production and fewer jobs. You can make a car every 5 minutes, but you cannot sell it if there are no employed consumers.
Davy on Mon, 10th Nov 2014 7:49 pm
Feem, there is diminishing returns to efficiency and we are very close to that point IMHO. Efficiency is counter to redundancy and sustainability. It is a term related to complexity and energy efficiency. It generally means increasing complexity and with less but achieving more. So we have carved the fat off into the muscle and heading for the bone then what?
What we need is less with less. There is nothing more to it. It is sweet and simple. When this less with less starts the global system will be over. Efficiency is what got us to where we are now. Maybe we have some more room for more but all it is doing is delaying the inevitable. Efficiency has no future long term. It will only save BAU a few months or years.
markopetrov on Tue, 11th Nov 2014 7:21 am
Davy thank you on your answer. I am not an economist maybe I am stupid but I don’t still understand , why Russians can not ask rubles for their oil because the oil is real stuff and currencies are fiat paper, and even in that process thy can earn a lot , because if you want oil you need to by rubles first. I think without Russians 10mbpd world will last 90days , strategic reserves
Davy on Tue, 11th Nov 2014 9:19 am
Mark, they are that is the trend and the Russian are smart business people. It just can’t be done overnight.
Now that the world is rolling out of the petrodollar at an accelarated pace for a variety of reasons it will happen sooner than latter.
The talk of the dollars death are in reality the talk of the end of BAU. The voices just don’t get a grip yet that when the dollar dies so will our economic system. Don’t be fooled by the propaganda on either side.
Personally I think there is a grand plan at the top for a new currency system maybe with gold as a core element. Problem is too late, BAU and globalism are nearing an end. No amount of coordination or planning will stop the descent.
markopetrov on Tue, 11th Nov 2014 10:13 am
sorry Dave what is BAU
JuanP on Tue, 11th Nov 2014 10:27 am
Marko, BAU is an acronym that stands for Business As Usual.
JuanP on Tue, 11th Nov 2014 10:34 am
Davy “Efficiency is counter to redundancy and sustainability. ”
I would also add resilience as another loser of efficiency. Like you said all muscle, no fat. That’s a dangerous place for one to be, cause at that point you start feeding on your muscles becoming weaker.
GregT on Tue, 11th Nov 2014 10:38 am
Feemer,
The agreement that you mentioned above is the ‘Budapest Memorandum’. It clearly states that:
” Russia, the U.S., and the UK confirmed, in recognition of Ukraine becoming party to the Treaty on the Non-Proliferation of Nuclear Weapons and in effect abandoning its nuclear arsenal to Russia, that they would:
“Refrain from using economic pressure on Ukraine in order to influence its politics.”
The US State Department did exactly that. Spending 5 billion dollars to open up trade in the Ukraine to western interests, and fomenting the overthrow of Ukraine’s democratically elected government.
Russia is only trying to stop what can best be described as ethnic cleansing.
Davy on Tue, 11th Nov 2014 10:46 am
Marko, sorry I use acronyms too often but that is part of our group talk. Stick around we always need new blood.
markopetrov on Tue, 11th Nov 2014 3:48 pm
davy thank you I found this site very interesting. I will be around