Yesterday, I wrote about the fallacy that falling oil prices are causing the stock market to tank. So the market is not a loser as a result of the falling price of petroleum. Let's look now at the real losers from this price drop.
Obviously, the biggest losers are those who produce oil. For wells already in production, the daily costs don't change very much, if at all, as the price of oil goes down or up. That means that an oil price drop comes essentially dollar for dollar out of the profits of the producer. For a company, that would reduce earnings, and that is not good. For a country, however, this drop can be a disaster.
So is it a bad thing that oil producing countries are losing revenue? In some cases the answer is yes, but for the most part, the answer is a resounding NO. Let's just consider the effect in three countries.
In Russia, the single biggest factor in the economy and in the revenue of the Putin government is energy production. Russia's government survives on the money that its sales of oil and gas generate each day. Cutting the oil price by 40% is a devastating blow the Russia's ability to fund its military adventures in Ukraine as well as all its other activities. Add in the expected export of natural gas from the USA to Europe and the pipeline expected to be built from the Israeli offshore fields to southern and eastern Europe, and the Russian revenues from natural gas are also looking quite shaky. If Putin ever needed did not understand that Russia could not really afford its imperial pretensions, he ought to get the point now. Simply put, the drop in oil prices is putting a lot more pressure on Putin to stop his invasion of Ukraine than any move taken by the USA or NATO.
In Iran, the partial lifting of sanctions was supposed to result in a gusher of oil money for the regime in Teheran. Instead of sneaking oil out of the country for sale on the black market, the mullahs thought they were getting a full return to the days of their receiving funding to help run their theocracy. Instead, Iran finds itself at a point where its oil is bringing in too little to pay for any renewed exploration across the country. Indeed, Iran's oil revenues are falling at the present world price even as the markets have reopened somewhat to their oil. Many people believe that it is this fiscal pressure on Iran that is the goal of the Saudis and their ramped up production which has led to falling oil prices. The price drop is "sanctions by another name". If Iran no longer has the money for weapons and other military expenditures as well as for domestic subsidies that keep the more restive population of Iran from rising against the government, the mullahs are likely to choose self preservation and cut back on the military adventures.
In Venezuela, president Maduro is in big trouble. First of all, Maduro had little going for him (aside from being selected by Hugo Chavez). The economy is in shambles, inflation is rampant, and capital is fleeing the country. A drop in the oil price leaves the Maduro government with no money to spend on subsidies or other moves to try to keep a hold on power. Indeed, if the price of oil stays in the range of sixty dollars per barrel for the next year, Maduro is likely to be ousted during that time. Since Maduro is probably the most strident anti-American leader in this hemisphere (outside of Cuba), his fall would be a rather positive development for the USA.
So low oil prices are a major gift to America's consumers and a major problem for Russia, Iran and Venezuela. What more could one want?
Obviously, the biggest losers are those who produce oil. For wells already in production, the daily costs don't change very much, if at all, as the price of oil goes down or up. That means that an oil price drop comes essentially dollar for dollar out of the profits of the producer. For a company, that would reduce earnings, and that is not good. For a country, however, this drop can be a disaster.
So is it a bad thing that oil producing countries are losing revenue? In some cases the answer is yes, but for the most part, the answer is a resounding NO. Let's just consider the effect in three countries.
In Russia, the single biggest factor in the economy and in the revenue of the Putin government is energy production. Russia's government survives on the money that its sales of oil and gas generate each day. Cutting the oil price by 40% is a devastating blow the Russia's ability to fund its military adventures in Ukraine as well as all its other activities. Add in the expected export of natural gas from the USA to Europe and the pipeline expected to be built from the Israeli offshore fields to southern and eastern Europe, and the Russian revenues from natural gas are also looking quite shaky. If Putin ever needed did not understand that Russia could not really afford its imperial pretensions, he ought to get the point now. Simply put, the drop in oil prices is putting a lot more pressure on Putin to stop his invasion of Ukraine than any move taken by the USA or NATO.
In Iran, the partial lifting of sanctions was supposed to result in a gusher of oil money for the regime in Teheran. Instead of sneaking oil out of the country for sale on the black market, the mullahs thought they were getting a full return to the days of their receiving funding to help run their theocracy. Instead, Iran finds itself at a point where its oil is bringing in too little to pay for any renewed exploration across the country. Indeed, Iran's oil revenues are falling at the present world price even as the markets have reopened somewhat to their oil. Many people believe that it is this fiscal pressure on Iran that is the goal of the Saudis and their ramped up production which has led to falling oil prices. The price drop is "sanctions by another name". If Iran no longer has the money for weapons and other military expenditures as well as for domestic subsidies that keep the more restive population of Iran from rising against the government, the mullahs are likely to choose self preservation and cut back on the military adventures.
In Venezuela, president Maduro is in big trouble. First of all, Maduro had little going for him (aside from being selected by Hugo Chavez). The economy is in shambles, inflation is rampant, and capital is fleeing the country. A drop in the oil price leaves the Maduro government with no money to spend on subsidies or other moves to try to keep a hold on power. Indeed, if the price of oil stays in the range of sixty dollars per barrel for the next year, Maduro is likely to be ousted during that time. Since Maduro is probably the most strident anti-American leader in this hemisphere (outside of Cuba), his fall would be a rather positive development for the USA.
So low oil prices are a major gift to America's consumers and a major problem for Russia, Iran and Venezuela. What more could one want?
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