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NSS translation with a foreword by Vince Dhimos.
The following is our translation from Russian of a detailed analysis from EADaily of world oil prices and their potential effects on the Russian economy. Long story short, future oil prices depend a lot on the nature of the US sanctions in November. Putin recently stated at an economic forum (quoted below): “The market is balanced now. The fact that the price of oil is growing is not so much the result of our activities [as part of the OPEC + agreement], but the result of largely attendant circumstances, expectations of decisions on Iran - by the way, absolutely illegal decisions and harmful to the world economy,” said Vladimir Putin at a press conference at the annual Russian Energy Week forum, which opened in Moscow today. Can you imagine Trump saying something this intelligent and insightful? Does he know or care that the high oil prices are harmful to the world economy? Does he know that the US is part of the world and that if you stick a pin in the world economy the US yells ouch? Putin’s finger is on the economic pulse of Russia and the world. Trump, in stark contrast, sees everything that happens as a sign that the US is getting greater and greater. His notion of the fracking industry is especially rose-coloured. He knows so little about economics that he thinks oil sales turnaround means profits. In other words, if you bought 5 marbles for a dollar and immediately sold them all for 80 cents, that in Trump’s world would be positive because you sold something and got money for it. And you could declare bankruptcy and not have to pay the person you bought them from. He believes devoutly that the stock prices signal a healthy economy when real economists know that the current high prices signal nothing but a bubble that is bound to pop at any time. The old America knew that a stock price must be governed by the price to earnings index, because if the price pulls too far away from the expected earnings per share, you are dealing with a casino, not a stock market, and suckers are given a false incentive that makes the owner rich. We are seeing a casino. Trump likes casinos. He is far removed from reality but he knows how to bait the hook. The only way for oil companies to survive is off of government largesse, and Trump is their Santa Clause, having ushered in a new tax law that, instead of charging oil companies taxes, gives them US taxpayer money. The same people who voted for him and now worship him believing in his wisdom are now forking over their hard-earned money to the oil companies sucking at this administration’s teat! Desmogblog writes: “Thanks to the new tax law, [oil company] Continental took home an extra $700 million because its effective tax rate for 2017 was negative 406 percent.” “To be clear — this bill which was signed at the end of 2017 was applied to the deferred tax liabilities that were already on the books — thus erasing a large chunk of the liabilities for these companies that had built up while the industry kept borrowing to drill more and ultimately lose more money. Simply a bailout of reckless financial behaviour by any other name." Of course, Trump, who, according to the below analysis, caused the hike in oil prices with his reckless sanctions on Iran (levied not for the benefit of the US people but for Israel and the Saudis), is now begging OPEC to lower these prices so that US consumers can afford gas for their cars. But if Trump had had an ounce of consideration for the rest of the world, including other oil producers like Iran and Russia, there would be no crisis. Unfortunately, for Trump there is no way out of the hole he has dug. He can’t go to the taxpayer and say “sorry, folks, but US oil companies will never run in the black without taxpayer funded bailouts. The bailouts are permanent. Thanks for your hard work, suckers. Now get back to the ditches.” Remember that Trump supporters were furious at Obama for giving away tax money to people as a reward for sitting on their arses all day. They were right to be angry at incentives for loafing. But now, instead of giving money to the poor, the Trump administration is giving your earnings to irresponsible investors who should have known there was no profit in fracking to extract gas or oil. They knew what it cost to extract the hydrocarbons and they knew how much they could sell them for. It was simple math but they were too lazy to do the calculations. But worse, they knew the government would bail them out. Even a Democrat administration would do it, because the US is not a democracy or democratic republic, it is a dictatorship of the billionaires. There’s no difference between the political parties. We are back to Bush II and the bailouts. But don’t worry, it will get worse. BEGIN TRANSLATION Oil phantom of a new crisis: the price per barrel is divorced from reality from EADaily The current level of oil prices above $80 a barrel with the prospect of growth to $100 is deemed an anomaly by many market participants and experts. The main factor pushing up prices is the upcoming introduction of US sanctions against Iran, and if this risk turns out to be overvalued, then after a few months oil may return to more usual levels in recent years. If growth continues for quite a long time, this does not bode well for the global and Russian economies. The events preceding the crises of 2008 and 2014 remind us that the acceleration of oil prices is a sure sign of impending economic cataclysms. “The market is balanced now. The fact that the price of oil is growing is not so much the result of our activities [as part of the OPEC + agreement], but the result of largely attendant circumstances, expectations of decisions on Iran - by the way, absolutely illegal decisions and harmful to the world economy,” said Vladimir Putin at a press conference at the annual Russian Energy Week forum, which opened in Moscow today. At the moment, due to uncertainty, there is a potential for rising oil prices, but everything will depend on trends at the beginning of November, Russian Energy Minister Alexander Novak said on the sidelines of the forum, referring to November 4, the deadline that the US authorities provided to companies to curtail the purchase of Iranian oil and cooperation with Iranian counterparties. As a result, the balance in the global oil market may change dramatically in the direction of a supply shortage. “Factors on the supply side play a key role in raising current oil prices,” says Economic Development Minister Maxim Oreshkin, recalling also the situation in Venezuela, where over the past two years oil production has dropped by a million barrels a day. Will the largest oil suppliers be able to compensate for the outliers if the effect of anti-Iran sanctions is fully manifested? Saudi Arabia, Iraq and Russia are in the most advantageous position to fill the gap and earn on Iran’s misadventures, according to today's Bloomberg newsletter, which a few days ago predicted the possibility of oil prices rising to $100 a barrel. In September, according to Bloomberg, based on tracking the movement of oil tankers, Iranian oil exports fell to 1.7 million barrels per day. Even if Donald Trump’s sanctions fail to achieve the goal and Iran is able to sell about 1 million barrels on the world market, as was the case with Obama, Iran’s partial withdrawal from the world market, the agency says, will still create a big hole in the oil supply. These prospects forced even inveterate alarmists to change their positions. “For the time being we forecast some increase in the price of oil. I think this can happen even for two or three years, ” the head of the Accounts Chamber, Alexei Kudrin, said several days ago. When he was RF Finance Minister, Kudrin had regularly warned about the temporary nature of the rise in oil prices. In the next three years, Kudrin believes, the demand for oil will grow by more than 3 million barrels per year. The new oil rally is accompanied by production growth, or statements to that effect, in many countries. At the end of September, Saudi Foreign Minister Adel Al-Jubeir said his country would continue to increase production to stabilize prices in the face of heightened demand for oil. Kazakhstan intends to increase oil production at its largest Kashagan field from 340–350 thousand barrels per day this year to 370 thousand barrels in 2019 and 450 thousand barrels in 2020, the country's energy minister Kanat Bozumbayev said during the Russian energy week. Libya has already brought production to 1.25 million barrels per day and plans further growth, said Mustafa Sanalla, head of the country's national oil corporation, at the same summit. In Russia, according to the latest data of the Central Dispatching Office of the Fuel and Energy Complex, since the beginning of June, oil production increased by 2.4%, and in September alone, the average daily production increased by 1.2% to 1.548 million tons. “We have already increased 400 thousand barrels per day, as we agreed with our partners. If necessary, we can increase by another 200-300 thousand barrels per day, ”Putin said at a plenary session of the Russian energy week. “We expect approximately 555 million tons this year. We have forecasts that we can increase production, although incentive measures are being worked out now, ”added Alexander Novak. After November 4, the next “Day X” for the world oil market should be December 6 - the next ministerial meeting in the OPEC + format is scheduled for this date. By and large, the objectives of the agreement to reduce oil production, achieved by OPEC and its partners at the end of 2016, were fulfilled a year ago, when oil steadily consolidated above $60 a barrel of Brent. Therefore, during the June meeting already, certain relief measures were taken under the agreement - the parties to the transaction decided to avoid over-fulfilment of its original conditions, which in practice would have led to an increase in production by 1 million barrels per day. In June, the agreement by OPEC was exceeded by 47%; in July this figure dropped to 21%, and in August - to 10% with a simultaneous increase in oil production by 278 thousand barrels per day. The above-mentioned production growth in Russia is also associated with relief measures for the transaction. Now, the rise in oil prices, in anticipation of anti-Iranian sanctions, calls into question the need to extend the agreement on the same terms, although in its September forecast, OPEC lowered its estimate of oil demand in 2018 to 1.62 million barrels per day, and next year to 1.41 million barrels per day. Obviously, the fate of the OPEC + agreement will be clearer after November 4. “So far, the rise in oil prices is based mainly on expectations of sanctions imposed against Iran,” commented Vasily Tanurkov, deputy director of the Corporate Ratings Group at the Analytical Credit Rating Agency (ACRA), commenting on the current situation. - If we want to talk facts, then the only thing worth noting is the decision of the parties to the OPEC + agreement to comply with the agreement, despite US pressure to increase production. But at the end of the year the agreement expires, and at current prices there is a high probability that either it will be cancelled completely or the production quotas will be greatly increased. The fears about Iran look strongly inflated. Indeed, Iran can cut oil exports, but hardly catastrophically and hardly for long. Certain short-term problems may arise, for example, with tankers or insurance, but the most important thing in this story is that the only country that imposes sanctions on Iran is the United States, and China and the European Union take a special position. Therefore, it can be expected that if not in the next month, then by the end of the year oil prices will return to some more rational level. In the next six months, we can expect a decline in oil prices - it is too optimistic to expect that they will stay at the level of 85-90 dollars per barrel, although in the short term they could grow on expectations. " The fact that the current level of oil prices is rather a deviation from the norm is also signalled by the Russian Ministry of Finance. Even in the mid-summer draft of the main guidelines of the budget, tax and customs tariff policy for 2019 and for the planned period 2020 and 2021, it was stated that high oil prices are supported mainly by temporary factors, including geopolitical ones, eg, by the collapse of oil production in Venezuela, by the administration’s policy USA, etc. The unfolding situation is similar to the period of high oil prices of 2011–2013, the Ministry of Finance warns. At that time, according to the ministry, the marginal cost of oil extraction was about $ 80-90 per barrel, but actual prices were above long-term equilibrium, fluctuating around $ 110 per barrel. Geopolitics also contributed to this: the “Arab Spring” of 2011, which provoked the wars in Libya and Syria, and the US anti-Iran sanctions. Then, after a period of high prices in 2011–2013, OPEC’s price war with US shale oil followed, and the worldwide oil extraction cost fell to the current $50–60 dollars per barrel. “Thus, if the cost of oil continues to remain above long-term equilibrium levels, the price collapse will repeat again. There are enough resources for world extraction - the United States, Canada, other countries have the capacity and will increase production, ”the Ministry of Finance said in a document that considers the price of oil around $50 a barrel sufficient for balancing the world market. So far, the rise in oil prices has one obvious plus. Their current level allows to impose a federal budget with a decent surplus. The base price of Urals oil, set in the fiscal rule that came into force this year, is generally $40 per barrel - all oil and gas revenues above this value are used by the Ministry of Finance to buy foreign currency. The average price of Urals in September was $78.06 per barrel, which is 1.4 times higher than in September 2017, and almost twice as high as the base value. As a result, in the next month, the Ministry of Finance will earmark a total of 475.7 billion roubles for the purchase of foreign currency from the beginning of currency interventions. In the draft federal budget for 2019, sent to the State Duma at the end of September, a 30 percent increase in revenues was allowed (about 20 trillion roubles against 15.3 trillion roubles in the budget for the current year), which, with an approximately 10 percent increase in expenses, gives a surplus of 1,9 trillion. But high oil prices are only theoretically beneficial for Russia, since they are an obstacle to expanding the range of exported goods and carry new potential stress for the economy, warns Vasily Koltashov, head of the Center for Economic Research at the Institute of Globalization and Social Movements. In addition, the increase in oil prices creates prerequisites for accelerating inflation, pushing up the cost of fuel by increasing the attractiveness of the export alternative for oil producers and fuel producers. In today's interview with the newspaper Vedomosti, the president of Lukoil, Vagit Alekperov, stated in plain text: “We do not believe it is necessary to raise the excise tax on gasoline by another 3 roubles starting January 1. Given the current situation in the foreign market, it is not necessary for the price to grow again. We need to move away from this, and start road funds at the expense of general budget revenues. ” “It seems that so far fuel prices have not caught up with the incipient rise in oil prices,” says Vasily Tanurkov. “But at the same time, the rouble, the exchange rate of which is important for domestic fuel prices, has begun to strengthen, and the Central Bank has done everything it could to make the strengthening last until the end of the year. Therefore, it can be argued that the rouble is now inadequately cheap, especially in relation to oil prices. But a lot depends on what the new package of US sanctions, to be introduced in November, is like. So, for gasoline prices, uncertainty is even higher than for oil prices. The rouble exchange rate may continue to show greater volatility under the influence of geopolitics. ” Volatility is the key word voiced in Vladimir Putin’s final speech at the plenary session of the Russian Energy Week. Under these conditions, the horizon of any forecasts is reduced to the limit. “The price of oil can be higher in the framework of the large-scale speculative game that we are now seeing, and this is not a sluggish game, but a fast one,” says Vasily Koltashov. - the surprise will not be in the higher level of oil prices by itself, but whether it lasts for a long time. The inadequate level of oil prices creates a dangerous situation for the global economy. We have already done this more than once - it is worth remembering the oil rally before the 2008 crisis and the collapse of oil prices of 2014–2016. A high oil price level is unprofitable for the world economy, and this means that they will fall. Consequently, the question is how far they will fall and what will be consequences for the world economy. ” At the same time, Koltashov notes, the new rise in oil prices coincided with the deepening problems of developing economies, which was reflected in the recent wave of devaluation of their currencies. “With a decrease in the purchasing power of a significant part of world currencies, an increase in oil prices indicates that the capital that had left emerging markets was used to speculate on oil and price scattering. This situation is alarming, because the level of risk is very significant. If the high oil price holds for a long time, then a series of defaults and political crises may follow, including a wave of consumer impoverishment, ”the expert suggests. Nikolay Protsenko END OF TRANSLATION
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