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Opinion
June 1, 2018 www.intellinews.com I Page 21
According to the methodology used by the In- ternational Energy Agency, the US produced an average of 13.17mn barrels per day in 2017 but in the fourth quarter of this year that may rise to 15.28mn, an increase of over 2mn barrels and almost all of that competing in global markets. Neither Moscow nor Riyadh, not to mention the Russian oil majors, are willing to continue sup- porting the US oil industry and helping it gain market share.
At first glance it may appear counter-intuitive that Russia, the world’s biggest oil exporter, when re- • fined products are added to crude, would not only
be willing to participate in some action that will
bring the oil price lower, but actually push for it. After all, every additional $1 per barrel over a full year is worth approximately $2.5bn for the coun- try and with the bulk of that going into the federal budget via taxes.
But there are very good reasons why the Kremlin was unhappy with oil looking set to breach the $80 per barrel level and is relatively more relaxed in the low to mid $70s range;
• Two oil-based slumps are enough. In 2008-
09, Russia was shocked when the price of
oil fell from almost $140 per barrel to $40
and pulled the economy into recession. GDP contracted by 7.8% in 2009. But that slump, • although nasty, was short-lived and a rapid
oil price recovery helped the economy return
to 4.5% growth in 2010. In mid-2014 the oil
price again fell and although the imposition of sanctions from August that year added some strains, the recession of 2015-16 was mostly
due to the oil price slide. The government was able to ride that slump by blaming economic warfare waged by western nations. A third oil induced recession may be harder to explain, or • forgiven, by a less tolerant public. The view in
the Kremlin appears to be “let’s not test it” by risking another price again spike to $100.
• Oil had stopped driving growth. Another reason for not wanting to see oil higher is
because it had stopped working as an effec- tive driver of economic growth from late 2012. In 2013, GDP grew by 1.3% or one-third of
two years earlier and despite the fact that the price of crude traded near $110 per barrel all year. That was the year when the government was forced to accept that the oil driven boom had become exhausted and the economy needs to move in a different direction, a fact acknowledged by President Putin in his Fed- eral Assembly Address in December that year.
Budget rule is working. The reason why Rus- sia is much better placed to live with a more modest oil price than is the case with all of
the OPEC nations is because it was forced to make policy adjustments as a result of sanc- tions. The Finance Ministry could not com- fortably borrow on international markets and the banks were also effectively locked out. It meant that there was no choice but to main- tain tight spending discipline and to let the ruble devalue and free-float. The legacy of that period is that the budget assumes $42 oil, and a modest deficit, for this year the aim is for a balanced budget with $44 oil through to 2021. All oil taxes above this price are diverted to financial reserves, which have grown by over $80bn since January last year.
Russia does not need the money as much as it used to. The budget needed $115 per barrel to balance in 2013. This year it will balance at $54 per barrel, assuming the current ruble- dollar exchange rate. At $75 per barrel the budget will run a surplus of $30bn. Of course, a higher price would generate a larger sur- plus but, now that financial stability has been achieved, there are greater priorities.
Higher oil revenue creates internal instabil- ity. It used be said that if you asked a liberal reformer what Russia most needed to change the economy the answer would be “ten years of low oil”. Whatever the merits of that state- ment, the fact is that higher oil wealth does reduce the momentum for change and caus-