By: Marwan Salamah*
Dec 25, 2014
If protecting market share is OPEC’s primary objective in not reducing oil production, and if oil prices remain depressed or continue their downward journey over the next few months, then it becomes only a matter of time before OPEC members begin to pounce on each other’s market shares and on non-OPEC shares.
In such a scenario, the outcome is likely to be in favor of whoever has the lowest cash production costs and the highest surplus funds to weather the oil revenues squeeze. Of the big producers, Saudi Arabia and Kuwait are the best positioned to win such a price war and Venezuela and Nigeria are likely to be the biggest losers followed at some distance by Iran, Iraq and then Russia.
There are many possible outcomes. One is where Venezuela goes bankrupt and implodes politically. This could lead to government change, which probably is not an unwelcome outcome for the USA.
It is claimed that Latin America’s anti-US league is fairly dependent on Venezuela’s financial support in one way or the other. The media pundits are already, naively, attributing Cuba’s rapprochement with the USA as Havana ditching Venezuela’s grub train in favor of the US’s.
Similarly, Nigeria could stumble creating opportunities that invite its different factions to a bloody civil war that would eventually splinter the country into its ethnic, tribal and religious parts.
Nigeria is already reeling from the oil price crash. Oil income represents approximately 80% of Government Revenues, external reserves have shrunk and it currency (The Naira) had dropped around 50% on the open market. The Central Bank officially devalued the currency in November by 8.38% , and the import of some luxury goods has been banned. Additionally, the country is on the verge of presidential elections, which usually polarizes the populace.
Iran could follow suit and, if its internal unrest pushes it into a corner so tight that the Ayatollahs are forced instigate a regional mini or major war with, say, Saudi Arabia and consequently the rest of the GCC countries. That would certainly spike the oil price up.
However, the most frightening scenario would apply to Russia. Russia is being squeezed to death by Western trade & banking sanctions and NATO is systematically encroaching on its hitherto untouchable borders. The Rubble exchange rate is crashing edging its economy into Stagflation. Eventually, Russia could retaliate.
Russia is not by any means a “Banana Republic” and cannot be pushed around. It is a huge country with a highly developed industrial economy and has centuries of experience of “going-it-alone” without the assistance of its many foes. It also has a nuclear arsenal that can destroy the entire world at the blink of an eye, or push of a button.
While Russia’s economy is dependent on oil & gas revenues, it is not entirely so, nor as much as the western media would like us to believe. Oil & gas revenue are not the backbone of the economy but a tool that has driven its excellent growth in the past decade. Oil & gas represented in 2012 jut 16% of GDP and 52% of Government budget revenues. So, theoretically and as a rough rule of thumb, the impact of a 50% drop in Dollar oil prices and a 50% fall in the Ruble exchange rate could mean that the government oil revenues in Rubles would remain the same for internal Government expenditures (at least in the short and medium terms). Of course, that would be inflationary and it would impact the cost of import of foreign capital goods as well as luxury consumer items. But, a belt tightening exercise never hurt a distressed economy, or so thinks the IMF and World Bank.
Additionally, Russia still has quite a few tricks up its sleeve. It has actively been retaliating against the western sanctions for some time now. One of which is gravitating towards the many capable and rich partners in the world that do not see “eye-to-eye” with the West. The BRICS trade partnership is one such potentially very powerful counter action to the American and European attempts at world hegemony. In other words, it is not over for Russia until “The Fat Lady Sings”.
That Fat Lady could sing when, an angry and cornered but powerful Russia retaliates with its last card and switches to selling its oil and gas in Rubbles instead of US Dollars. Today is historically the only time that an energy starved Europe may succumb to switching away from Dollars. The World could quickly follow suit, which would be bring the artificially inflated US Dollar crashing down dragging the US economy with it, and that, my dears would be a recipe for a World War.
* General Manager of Orient Consulting Center