It is not just the US-EU imposed sanctions which are hurting the Russian economy, but the plummeting oil prices. And at the current price which just hit a five year low of $68 per barrel there is no relief in sight.
As is often the case the oil market, in terms of prices, reacts very sensitively to any type of interference. Whether it be However, what is true for a long time, such as natural law, now it seems like it is revoked, writes Deutsche Welle.
Oil prices in recent months have fallen by more than 20 percent – despite severe crises in some of the major countries in which it is pumped: Russia is knee-deep involved in the Ukrainian conflict, Iraq is seeing a never-ending struggle with radical Islamists of the self-proclaimed “Islamic state”, Nigeria has been affected by the epidemic of Ebola; all these factors, and often just one of them would cause the oil prices to skyrocket in the past, however, this time around they go completely ‘unnoticed by the oil exporters. This begs the questions who is controlling the oil prices and to what aim?
In mid-October the Deutsche Bank Research published a study in which it explored the consequences of the low price of oil will have for the most important countries in which these raw materials are exploited. In laymen’s terms, the study established the minimum price per barrel for the oil exporters to be able to balance their budgets.
Russia, for example, draws almost of half of its revenue from energy exports, be it natural gas or oil. And of course, the oil price is associated with gas price. According to figures Deutsche Bank, Russia needs oil to be sold around $ 100 per barrel in order to balance its budget. Currently the oil price is well below that at – about $ 85 per barrel. And it will have serious consequences, says analyst Stefan Meister from the German Society for Foreign Policy (Deutsche Gesellschaft für Auswärtige Politik – DGAP).
The issue of Russian budget
“The Russian budget is not sufficiently funded. And that is particularly burdensome given the sanctions of the West and the zero growth of the economy in Russia “, says Stefan Meister. The Berlin expert on Russia in an interview with Deutsche Welle said that low oil prices for Russia are considerably more painful than the sanctions of the West.
These developments in the oil market have fueled conspiracy theories. In Russia, the current state of affairs is reminiscent of the Eighties when the oil prices have fallen dramatically – one of the causes of the breakup of the Soviet Union. Recently, Nikolai Patrushev, a secretary of the Russian National Security Council said in an interview for the government newspaper “Gazeta Rossijska” that the “United States has done the same some three decades ago when it caused a decline in the price of oil to drive the Soviet Union into bankruptcy”.
Also the report of the Russian Institute for Strategic Studies RISS, published in mid-October, says that the current decline in oil prices has to do with an agreement between the US and Saudi Arabia. Indeed, Saudi Arabia has not shown any indication that it will reduce exploitation of oil in order to stabilize prices. On the contrary: it increased its production of oil in November while at the same time it objected to the request by Venezuela to hold a special meeting of the Organization of Petroleum Exporting Countries (OPEC) before their regular meeting which took place at the end of November. The meeting buttressed Saudi Arabia’s earlier demand to keep the oil production at the current levels. It is worth mentioning that Saudi Arabia also needs a price of $99 per barrel to balance its budget. But during the years when the price was exorbitantly high Saudi Arabia made a comfortable nest of 450 billion US dollars so it has plenty ‘petty’ cash to cover its balance while it mulls over its next steps.
High oil prices are also limiting Iran’s room for maneuver in negotiations over its nuclear program. The less revenue Tehran earns, the more important the relief from international sanctions becomes. The Berlin expert on energy Westphal, rejects claims that Saudi Arabia and the United States increased exploitation of oil in order to increase the pressure on Russia and Iran, but at the same she acknowledges the timing.
Washington is exuberant though that this pressure on Russia and Iran is spilling over on Venezuela which needs a price of $162 per barrel to balance its state budget – a feat that seems less probable now when the oil price is only half of that.
Cheap oil may aid China and its industry though, something that Washington has been trying to curtail for year. But you can’t win them all, can you?