The Geopolitics Of Slightly Cheaper Oil

Looking over Russia’s budget for the coming year, Callum Williams observes how many of its assumptions depend on oil prices remaining pretty high:

graph_3In 2015 Russia will need an oil price of about $105 a barrel to balance its budget (see chart). But crude is currently trading in the mid-$90s, down by about 10% since May. Weak demand from China and healthy supply from America help explain the drop.

Lower dollar-denominated oil prices are not so bad for Russia, given that the rouble has weakened so much. But over the past few years the budget’s reliance on oil revenues has increased. When excluding oil, there was a shortfall of 3.6% of GDP in 2007, but now it is more like 10%. Russia expects to run a small budget deficit (about 0.6% of GDP) this year. That prediction is optimistic—the Kremlin is banking on an oil price of $100. The latest predictions from Energy Aspects, a consultancy, show that the price of Brent is not expected to pass $100 for about nine months.

Steven Mufson details how the dip in demand and surge in US production is bad news not only for Russia, but Iran as well:

Crude oil and oil products made up 46 percent of Russia’s budget revenues in the first eight months of this year. At a time when the West is trying to sanction Russia for its incursions in Ukraine, a 10 to 20 percent drop in oil prices could prove powerful. Still, it’s still a far cry from the 1980s, when Saudi Arabia produced enough oil to flood the market and drive prices down so far that many experts say it sped up the fall of the Soviet Union. That’s not going to happen now, but Russia could be squeezed a bit.

Iran, whose oil exports are limited by sanctions related to its refusal to limit its nuclear program and open it up to greater international scrutiny, will also suffer a setback. Iran’s oil minister Bijan Namdar Zangeneh late last month called on the Organization of the Petroleum Exporting Countries to keep oil prices from falling any further. “Given the downward trend of the oil prices, the OPEC members should make efforts to offset their production to keep the prices from further instability,” Zangeneh said according to Shana, a news agency supported by Iran’s oil ministry.

But according to Keith Johnson, the other Gulf petrostates are much less vulnerable:

“In the short term, the Saudis are the last ones who need to worry. They can sit it out for a couple of years, even with oil below $90,” said Laura El-Katiri, a research fellow at the Oxford Institute for Energy Studies. Other Gulf states, such as Kuwait and the United Arab Emirates, can also resort to deficits or spending tweaks to weather a price storm, she said. That may partly explain the deaf ears turned by Saudi Arabia and other big OPEC members to Iran’s pleas. Of the big producers, Iran by far requires the highest prices to remain fiscally sound, by some estimates as much as $130 a barrel. Further, Iran has been hammered by Western sanctions that have cut its oil exports — and earnings — almost in half.

Yet Saudi Arabia, still the world’s swing oil producer and a visceral opponent of Shiite Iran, has little interest in slashing output. Quite the contrary: Saudi Arabia on Wednesday suddenly started offering discounts to maintain its market share, even if it undermines overall crude prices.