December 25, 2014

A BOOST WE COULD HAVE HAD ANY TIME SIMPLY BY TAXING IT:

Oil's Swift Fall Raises Fortunes of U.S. Abroad (ANDREW HIGGINS, DEC. 24, 2014, NY Times)

After a precipitous drop, to less than $60 a barrel from around $115 a barrel in June, oil prices settled at a low level this week. Their fall, even if partly reversed, was so sharp and so quick as to unsettle plans and assumptions in many governments. That includes Mr. Putin's apparent hope that Russia could weather Western sanctions over its intervention in Ukraine without serious economic harm, and Venezuela's aspirations for continuing the free-spending policies of former President Hugo Chávez.

The price drop, said Edward N. Luttwak, a longtime Pentagon adviser and author of several books on geopolitical and economic strategy, "is knocking down America's principal opponents without us even trying." For Iran, which is estimated to be losing $1 billion a month because of the fall, it is as if Congress had passed the much tougher sanctions that the White House lobbied against, he said.

Iran has been hit so hard that its government, looking for ways to fill a widening hole in its budget, is offering young men the option of buying their way out of an obligatory two years of military service. "We are on the eve of a major crisis," an Iranian economist, Hossein Raghfar, told the Etemaad newspaper on Sunday. "The government needs money badly."

Venezuela, which has the world's largest estimated oil reserves and has used them to position itself as a foil to American "imperialism," received 95 percent of its export earnings from petroleum before prices fell. It is now having trouble paying for social projects at home and for a foreign policy rooted in oil-financed largess, including shipments of reduced-price petroleum to Cuba and elsewhere.

Amid worries on bond markets that Venezuela might default on its loans, President Nicolás Maduro, who was elected last year after the death of Mr. Chávez, has said the country will continue to pay its debts. But inflation in Venezuela is over 60 percent, there are shortages of many basic goods, and many experts believe the economy is in recession.

But the biggest casualty so far has probably been Russia, where energy revenue accounts for more than half of the government's budget. Mr. Putin built up strong support by seeming to banish the economic turmoil that had afflicted the rule of his predecessor, Boris N. Yeltsin. Yet Russia was back on its heels last week, with the ruble going into such a steep dive that panicked Russians thronged shops to spend what they had.

"We've seen this movie before," said Strobe Talbott, who was President Bill Clinton's senior Russia adviser in the aftermath of the Soviet Union's 1991 collapse and is now president of the Brookings Institution in Washington.

Russia's troubles have rippled around the world, slashing bookings at ski resorts in Austria and spending on London real estate; spreading panic in neighboring Belarus, a close Russian ally; and even threatening to upend Russia's Kontinental Hockey League, which pays players in rubles.

"It is a big boost for the U.S. when three out of four of our active antagonists are seriously weakened, when their room for maneuver is seriously reduced," Mr. Luttwak said, referring to Russia, Iran and Venezuela.



As for the impact of low prices on US shale, Levi says, even if the market figures out a breakeven price for American producers (which is hard, because it varies from well to well), that's going to change in two years and even more in five years, as the technology continues to develop.

All of the above said, Levi cautions against thinking of Saudi Arabia as some sort of mastermind of the global energy story. It's unclear how many steps ahead the Saudis actually are. 

"Don't overestimate the strategy of OPEC," he says.

Posted by at December 25, 2014 7:34 AM
  

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