Russia is one of the lowest cost producers of a barrel of oil in the world. Even after paying their taxes to the government their costs are far lower, close to $20 per barrel break-even point, than anyone else in the world when one factors in external costs.
When you don’t owe anyone anything you are free to tell them, “No.”
Sure, the Saudis produce at similar cash costs to the Russians but once you factor in its budgetary needs, the numbers aren’t even close as they need something closer to $85 per barrel.
They can’t tell their people, “No,” you have to do without. Because the populace will revolt.
Russia can ride out, if not thrive, in this low price regime because :
- the ruble floats to absorb price shocks in dollars.
- A majority of their oil is now sold in non-dollar currencies – rubles, yuan, euros, etc. – to lessen their exposure to capital outflows
- the major oil firms have little dollar-denominated debt
- low extraction costs.
- its primary governmental budget ebbs and flows with oil prices.
All of this adds up to Russia holding the whip hand over the global market for oil.
The ability to say, “No.”
And they will have it for years to come as U.S. production implodes. Because they can and do produce the marginal barrel of oil.
That is why oil prices plunged as much as 10% into today’s close on the news they would not cut production.
There is a cascade lurking beneath this market. There is a lot of bank and pension fund exposure in the U.S. to what is now soon-to-be non-performing fracking debt.
Liquidations will begin in earnest later this year.
But the market is handicapping this now.
I cannot overstate how important and far-reaching this move by Russia is. If they don’t make a deal here they can break OPEC. If they do make a deal it will come with strings that ensure pressure is lifted in other areas of stress for them.
The knock-on effects of oil plunging from $70 per barrel to $45 over two months will be felt for months, if not years.
And it is no shock to me that Russia held their water here. If they didn’t, I would have been surprised.
This was Putin’s opportunity to finally strike back at Russia’s tormentors and inflict real pain for their unscrupulous behavior in places like Iran, Iraq, Syria, Ukraine, Yemen, Venezuela and Afghanistan.
He is now in a position to extract maximum concessions from the U.S. and the OPEC nations who are supporting U.S. belligerence against Russia’s allies in China, Iran and Syria.
We saw the beginnings of this in his dealings with Turkish President Erdogan in Moscow, extracting a ceasefire agreement that was nothing short of a Turkish surrender.
Erdogan asked to be saved from his own stupidity and Russia said, “No.”
This condition of producing the marginal barrel of oil in a deflationary world places Russia in the driver’s seat to drive U.S. foreign policy behavior in an election year.
Talk about meddling in our elections!
The Achilles’ heel of the U.S. empire is the debt. The dollar has been its greatest weapon and it is still king. And it is a weapon with a great deal of power but wielded only against the U.S.’s allies, not Russia.
Markets will adjust and calm down in a few days. The panic will subside. But it will come back soon enough in a more virulent form. Today is a replay of 2007-08 but this time Russia is far better prepared to fight back.
And when that happens, I suspect it won’t be the Saudis or the Turks that come running to ask Russia to save them, but the U.S. and Europe.
TAP – UK can raise fuel duty without lifting price at the pumps. Conservatives can cut other taxes.