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PostOil Prices Continue to Decline (Randy Black, USA, 12/01/14 1:44 am)
In the matter of the ongoing global plunge of the price of energy, with oil crashing the $70 per barrel threshold weeks ahead of my recent prediction, I'm seeing indications of oil dropping even lower.
As predicted a month or more ago, the pressure will be on Russia and Venezuela, who depend on artificially inflated prices to keep their increasingly dependent economies and social strata afloat.
It would seem that Iran is now at risk.
When similar circumstances occurred more than two decades ago, the USSR collapsed. Are we witnessing the collapse of the Russian Federation and its allies to the extent that we witnessed then?
There is talk of crude oil dropping to $40 a barrel, per Bloomberg on November 30.
Because oil has dropped more than 37 percent this year, and because "shale" oil production may be profitable in the US at $42 per barrel in the newer fields, and because there is no indication that production will lessen in the USA, there is room for anticipation.
From Bloomberg: Oil and gas provide 68 percent of Russia's exports and 50 percent of its federal budget. Russia has already lost almost $90 billion of its currency reserves this year, equal to 4.5 percent of its economy, as it tried to prevent the ruble from tumbling after Western countries imposed sanctions to punish Russian meddling in Ukraine. The ruble is down 31 percent against the dollar since June.
On the opposite side, we read: While oil's decline wrenches oil-rich nations that squandered the profits from recent high prices, the world economy overall may benefit. Source: ibid.
Net: (Russia) is running a budget deficit of 16 percent of gross domestic product, partly because much of its declining oil production is sold domestically at subsidized prices. Oil is 95 percent of exports and 25 percent of GDP, OPEC says. "Venezuela already qualifies for fiscal chaos," (a Russian official) Yergin said.
Is Mexico at risk? Maybe yes, perhaps no. Oil's share of Mexico's exports fell to 13 percent in 2013 from 38 percent in 1990, even as total exports more than quadrupled. Electronics and cars now account for a greater share of the country's shipments (thanks to NAFTA?). Though oil still accounts for 32 percent of government revenue, the Mexican government has based its 2015 budget on an average price of $79 a barrel.
Time will tell if the huge increase of American oil and gas production over the past twenty years will credit free enterprise. I can predict that the current administration will take the credit even though the evidence will credit free enterprise on private lands rather than those lands under federal jurisdiction.
JE comments: I spent Thanksgiving weekend as the guest of an oil family (my sister and brother-in-law) in Houston, America's oil city. Oil prices were the topic of the visit, especially on Friday, when stocks in the sector skidded up to 10%. The word in Houston is that Saudi Arabia is refusing to limit production not in collusion with the US, as Putin claimed, but rather to put the squeeze on the smaller and upstart producers in the United States. Big (and Little) Oil in this country is already cutting back on drilling. Many of the shallow-pocket players are at grave risk.
I'll agree with Randy Black that prices could drop as low as $40, as they did in 2008-'09. The first victim of the financial meltdown of the oil economies would likely be Venezuela.
I originally thought the sanctions against Russia would cause an increase in prices.