Russia is losing around $40 billion a year due to Western sanctions, but they are not as critical to the economy as lower oil prices, which add $90-100 billion in losses, says Russian Finance Minister Anton Siluanov.
“We lose about $40 billion a year because of the political sanctions and around $90-100 billion a year due to the 30 percent reduction in oil prices,” RIA quotes Siluanov speaking Monday at the International Financial and Economic Forum.
Lower investment and foreign loans along with capital outflow, estimated at $130 billion this year, are the key components of the loss, Siluanov explained.
Siluanov believes the decline in oil prices has a more significant impact on the Russian economy than the international sanctions.
“If we talk about the consequences of geopolitics, of course, they are important for us,” he said. However, he added that “it is not as critical for the course, and even for the budget, as the prices of goods exported by us.”
Talking about the ruble’s depreciation, Siluanov said that fluctuating oil prices should serve as a principal indicator of the ruble’s exchange rate amid a period of high volatility.
“The price of oil has fallen by 30 percent since the beginning of the year. Incidentally, the ruble has weakened by the same 30 percent. When people ask me – listen, you’re the Minister of Finance, what’s the ruble rate going to be? It is impossible to answer because there are a lot of factors. I say, look at oil prices. The behavior of the ruble will depend on them,” said Siluanov.
The price of Brent crude, which is used to calculate the price for Russian Urals blend, has fallen by 30 percent to about $80 a barrel since the end of June; its lowest price for four years.
According to the International Energy Agency, the total supply of oil on the world market in October increased by 35 thousand barrels to 94.2 million (2.7 million barrels more than in October 2013). In the same period, the average daily volume of oil supplies by OPEC countries in the world market amounted to 30.6 million barrels.
OPEC countries are also adding to the oversupply as they’ve been exceeding their quota of 30 million barrels per day for the last six months.
According to IEA experts, the decline in oil demand from China, world’s second largest oil consumer, and rising oil production in the US will lead to a sharper decline in prices in early 2015.
On November 27, OPEC leaders will meet in Vienna to decide whether to shore up oil prices by cutting output.
Oil prices dropped on Monday morning in Asia’s exchange markets after Iran and world powers reached an agreement over Tehran’s nuclear programme. Iran holds the fourth largest oil reserves in the world. Brent price fell by 2.26 per cent, or $2.51 down to $108.54 per barrel, while US light sweet crude fell by 89 cents to $93.95 per barrel (a less than one per cent decline).
After five days of intense negotiations, the major world powers and Iran announced a deal on Saturday evening stipulating that Iran will curb its nuclear activities in return for an easing of the economic sanctions against it. The interim deal paves the way for a new phase of negotiations in six months’ time. Western countries and Israel suspect Tehran of secretly developing nuclear military capabilities behind its civilian programme, but this is a claim that Tehran denies.
The oil markets had been intensely following the negotiations in Geneva. Economic analysts believe the deal could eventually lead to lifting the ban on Iran’s oil exports, which would supply the markets with a million additional barrels a day and help to reduce oil prices, which have dramatically risen as a result of the Iranian crisis and the geopolitical unrest in the Middle East.
Victor Shum, the managing director of IHS Purvin & Gertz Group in Singapore, observed on Monday that: “the impact of the deal on the global oil supply will be limited in the short term because the majority of the sanctions remain.”
Experts also confirmed that if sanctions are indeed lifted, then Iranian exports will increase while Saudi exports will decrease. Both Iran and Saudi Arabia are members of the Organisation of Petroleum Exporting Countries (OPEC).
An oil expert told the Dow Jones newswire that the agreement “does not mean that we will see an influx of oil exports in the markets, because Iran is a member of OPEC and any increase in the Iranian oil supply should be done within the quota system.”
Despite a growing consensus that speculators are behind recent price increases, the government’s almost year-old oil speculation task force has done little more than talk about the problem. From the beginning of January to the end of February, the average retail price per gallon of gasoline jumped 42 cents from $3.30 to $3.72–a spike of 12.7% in just eight weeks. This year’s pain at the pump is eerily similar to last year’s, when gas prices jumped 77 cents from $3.19 to $3.96 in just eleven weeks between February 21 and May 9–a leap of 24.1%.
In response to last year’s problem, in April 2011, President Obama and Attorney General Eric Holder announced the creation of the Oil and Gas Price Fraud Working Group, which was supposed to root out speculators who buy and sell oil futures based on the predicted price of oil. The trouble is, oil industry experts now estimate that financial speculators account for about 65% of the trading in oil futures contracts, up from 30% historically, leading many to conclude that the reversed ratio explains the high and volatile oil and gasoline prices. One analysis estimated that as much as 30% of the current price can be attributed to speculation. While the task force, which has met only four or five times, has been assisting a Federal Trade Commission investigation into gas prices since June 2011, a key problem is that most price speculation is legal, unless a trader relies on insider information or commits fraud, both of which can be difficult to prove.
Nevertheless, the fact that the U.S. today is producing more of its own oil than it has in years, and supply is actually outstripping demand, has many demanding action on gasoline prices. This year, however, the President is emphasizing his proposal to eliminate tax breaks that net the oil companies about $4 billion per year. Given the lack of success of the oil speculation task force, those tax breaks are probably safe for now.
To Learn More:
Whatever Happened to Task Force on Oil Speculation? (by Kevin G. Hall, McClatchy Newspapers)
U.S. Use of Gasoline is Down, Yet Pump Prices are Up as Speculators Move In (by Noel Brinkerhoff and David Wallechinsky, AllGov)
Gas Prices Up, but so Are Profits and Exports as Refiners Hold Back Production (by Noel Brinkerhoff, AllGov)
- Obama’s Oil Speculation Task Force Has Met Just A ‘Handful Of Times’ Since Its Creation (thinkprogress.org)
- speculation is expensive! (dimitrisnowden.wordpress.com)
Sanctions, Threats and Speculators
It’s hard to miss the higher cost of gas every time we fill up our cars these days, but the News Media doesn’t do a very good job of explaining why. There isn’t any mystery, though, if you read the financial press and oil industry sources: We’re paying extra for gas because of rising tensions in the Middle East and especially the scare over a possible US or Israeli attack on Iran. In effect, we’re paying a “war tax” at the gas pump, and the cost will only get higher unless we put aside the talk of war and get down to serious diplomacy to settle the differences in the region.
Here’s what the Wall Street Journal had to say recently, under the headline Oil Rise Imperils Budding Recovery:
Rising oil prices are emerging once again as a threat to the U.S. economic recovery just as it appears to be gaining momentum. Oil prices have climbed sharply in recent weeks as mounting tension with Iran has raised the threat of a disruption in global supplies. On Wednesday, oil futures on the New York Mercantile Exchange rose $1.06 to $101.80 a barrel on reports that Iran had cut off sales to six European countries in response to the European Union’s newly stepped-up sanctions.
The world market price for oil is headed upward of $110 a barrel, which could translate into $4 gasoline before too long. If an actual war breaks out, we could soon be remembering the current price at the pump as “cheap gas”.
But what about “Drill Baby Drill” to lower the price of gas – as the Republicans demand? Political rhetoric aside, the reality is that there is a world market price for petroleum which cannot be significantly lowered by marginal increases in US supply. International oil prices are rising even as US oil production has increased during the past decade. Do you think US suppliers are going to sell us domestically-produced oil at a discount lower than the world market price? Keep dreaming. That’s just not the way the oil companies do business.
For example, after the US Arctic oil fields were developed and the TransAlaska pipeline came into service – despite serious environmental objections – large amounts of Alaskan oil were exported rather than sold in the lower 48 states. Between 1996 and 2004 almost a 100 million barrels of Alaska crude were shipped to Japan, Taiwan, Korea and China. Direct export of North Slope oil was eventually banned by Congress, but refined petroleum products – gasoline, heating oil, jet fuel – continue to be shipped abroad from refineries in Alaska and the lower 48. Today Gulf Coast refineries find it more profitable to sell gasoline to Latin America instead of shipping it to the East Coast, where the law would require them to use US-flagged tankers with American crews. The US is now a net exporter of refined petroleum products, even as the rising price of gas continues to put a strain on struggling families with no alternative means of transportation.
But an even higher war tax on gas is not inevitable. Diplomacy with Iran could still diffuse the conflict before the unthinkable happens. Despite all the alarmist and warmongering rhetoric, especially from Republican presidential candidates, we are not facing an imminent nuclear threat from Iran. US intelligence agencies are unanimous in judging that Iran does not have an active nuclear weapons program at this time. In fact, the Iranians – like all the other countries in the Middle East except Israel – have signed the Nuclear Non-Proliferation Treaty and they have the right under its safeguards to produce low-enriched uranium for power plants and medical research. All of Iran’s nuclear materials are under real-time inspection by the International Atomic Energy Agency. The only nuclear weapons in the Middle East right now are the hundreds of warheads belonging to the US and Israel.
Despite this reality – and in the face of opinion polls showing Americans prefer a diplomatic solution to the Iran issue rather than a military conflict – some politicians seem determined to drive us into yet another Middle East war. Ironically, the very same politicians who are trying to make a partisan issue out of the price of gas are the ones who are pressing for policies to sharpen the regional tensions that have caused them to rise.
After the bitter experience of Iraq and Afghanistan, we should have learned enough to demand a peaceful way out of this conflict. If we fail, a new war could have unpredictable and catastrophic results throughout the region. Of course, in that case, $5 gas might be the least of our problems.
Jeff Klein is a retired local union president active with Dorchester People for Peace (firstname.lastname@example.org)