US Oil and Gas Fracking and Saudi Arabia oil are Financially Weakening Russia and Iran

Thomas Friedman at the New York Times discusses how lower oil prices helps Saudi Arabia and the United States and hurts Russia

The late Yegor Gaidar, who between 1991 and 1994 was Russia’s acting prime minister, observed in a Nov. 13, 2006, speech that: “The timeline of the collapse of the Soviet Union can be traced to Sept. 13, 1985. On this date, Sheikh Ahmed Zaki Yamani, the minister of oil of Saudi Arabia, declared that the monarchy had decided to alter its oil policy radically. The Saudis stopped protecting oil prices. … During the next six months, oil production in Saudi Arabia increased fourfold, while oil prices collapsed. … The Soviet Union lost approximately $20 billion per year, money without which the country simply could not survive.”

Neither Moscow nor Tehran will collapse tomorrow. And if oil prices fall below $70 you will see a drop in U.S. production, as some exploration won’t be cost effective, and prices could firm up. But have no doubt, this price falloff serves U.S. and Saudi strategic interests and it harms Russia and Iran. Oil export revenues account for about 60 percent of Iran’s government revenues and more than half of Russia’s.

US oil production and natural gas production are hitting or will soon hit the highest levels they have ever been. China and India and developing countries have slower economic growth which reduces the demand for oil. Japan and Europe are going through economic problems that is reducing growth and demand in those areas and around the world.

Saudi Arabia is not cutting oil production in spite of lower oil prices in the $80 per barrel range.

Oil production is high in spite of production problems in Iraq, Libya and other countries.

Six years ago, Russia needed oil prices of $50 to $55 a barrel to balance its budget, but Alexei Kudrin, former first deputy prime minister and finance minister, estimated the breakeven price at $117 per barrel last year. Russia’s dependence on energy exports—and, consequently, its economy’s vulnerability to commodity price fluctuation—was highlighted by the 2009 world financial crisis. As oil plunged from $147 to $34 per barrel, the resource-based economy contracted by almost 8 percent—the largest drop among the G20 top industrial nations.

Last month, Russian news agency Itar-Tass reported that military spending by the country will rise by 21% next year. A few weeks later, Russian Finance Minister Anton Siluanov was quoted by Reuters saying the country “cannot afford” the defense program.

Brent crude is down more than 25 percent from its June high, cutting billions of dollars in tax revenue from Russia’s most valuable export. The budget will fall into deficit next year if oil is less than $104 a barrel, according to investment bank Sberbank CIB. At $90, Russia will have a shortfall of 1.2 percent of gross domestic product.

The Russian budget loses about 80 billion rubles ($2 billion) for every dollar the oil price falls, according to Maxim Oreshkin, head of strategic planning at the Finance Ministry.

In 2009, Russia posted a 5.9 percent budget deficit when oil averaged $61.30 a barrel, 40 percent less than the $98 that was needed to balance the budget that year.

Russian currency reserves are at a four-year low after dropping $57 billion in 2014 to $455 billion last week. The ruble, down 20 percent against the dollar this year, has fallen for five weeks, the longest stretch of losses since March.

Russia has cut deals with China to sell natural gas but China is getting better prices because Russia is being isolated by Europe and the United States. Europe and American Sanctions increase costs and interest rates for Russia and lower the prices they can get.

Oil prices at an average of $70 per barrel instead of $120 per barrel would directly cost Russia $100 billion per year. Sanctions that increase costs of imports and lower gas contract prices would further bleed Russia financially.

The US oil and gas shale looks set to continue to grow for another 10 years and Canada will also be increasing oilsand production. Moderated economic growth in China and India would mean a prolonged period of lower oil prices.

Europe and Japan are weakening their currencies.

John Mauldin makes the case for a long dollar bull market. Mauldin believes we are in the opening act of a multi-year US dollar bull market.

The dollar will become equal to or stronger than the Euro and Japan will drive the yen to about 200 to 1 US dollar.

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