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Generational Dynamics Web Log for 28-Nov-2014
28-Nov-14 World View -- Oil prices crash after OPEC meeting ends in discord

Web Log - November, 2014

28-Nov-14 World View -- Oil prices crash after OPEC meeting ends in discord

Russia and Venezuela on their knees with oil prices plunging

This morning's key headlines from GenerationalDynamics.com

Oil prices crash after OPEC meeting ends in discord
Oil price plunge pressures budgets of oil exporting countries
Russia and Venezuela on their knees with oil prices plunging

Oil prices crash after OPEC meeting ends in discord

OPEC

OPEC

The 12-nation oil cartel, the Organization of Petroleum Exporting Countries (OPEC), ended its meeting in Vienna on Thursday in discord. Poorer members, such as Iran, Iraq, Angola and Venezuela, had been calling for an agreement where all cartel members would cut production of oil, in order to force a global increase in the price of oil.

However, Saudi Arabia refused to agree to any such cuts. News of the discord led to a crash in oil prices. Oil was selling for $100-120 per barrel just a few months ago. But on Thursday, West Texas Intermediate plunged to $67.75 a barrel (for January delivery), while London's Brent North Sea crude nosedived to $71.25.

The plunge in oil prices is occurring because of a glut in the oil markets, and the glut in turn is caused by high production and decreasing demand. A lot of the glut has come about because of America's increased production of shale oil (fracking), which has made America the number one oil producer in the world. Even the OPEC cartel, which was supposed to be limiting combined oil production from the 12 members to 30 million barrels per day actually produced 30.6 million barrels per day in October. The reduction in demand is largely due to slowing growth in Europe and China. Reuters and AFP

Oil price plunge pressures budgets of oil exporting countries

Although the plunge in oil prices will cause a fall in gasoline prices, which is good news for consumers, it's going to put a great deal of pressure of the budgets of oil exporting countries that were counting on oil prices above $100 per barrel.

I've been listening to a number of analysts throw out different numbers for how high oil has to be for each country's budget to balance. The following list is a synthesis of all that I heard:

+----------------+--------+
| Libya          |   $184 | 
| Iran           |   $131 | 
| Algeria        |   $131 | 
| Venezuela      |   $110 | 
| Russia         |   $105 | 
| Nigeria        |   $100 | 
| Saudi Arabia   |   $ 98 | 
| UAE            |   $ 80 | 
| Kuwait         |   $ 78 | 
| Qatar          |   $ 77 | 
+----------------+-----------+
Table: Oil price per barrel required
to balance each country's budget

According to analysts, in order for American fracking operations to make money, oil prices have to be at least $65-70 per barrel. Analysts say that Saudi Arabia is keeping prices low as a long-range investment in order to suppress America's fracking industry, and that Saudi Arabia has enough currency reserves that it can sustain these low prices for 6-12 months. However, poorer countries will be in trouble much more quickly.

Russia and Venezuela on their knees with oil prices plunging

Oil revenue as share of government revenue (Quartz)

Oil revenue as share of government revenue (Quartz)

When Vladimir Putin first became president of Russia in 2001, oil revenues accounted for just 9% of the Russian economy. In 2013, oil revenues accounted for 52% of the Russian economy. On Thursday, the ruble currency slumped to historic lows against the dollar and the euro. Even at a price of $80 per barrel of Urals crude, the federal budget will run a deficit of 2-2.5%.

There's a feeling that Venezuela is getting its comeuppance with the plunge in oil prices. Hugo Chávez used to stick it to the United States whenever he could, because high oil prices made his country wealthy. But instead of saving any of that money, he wasted it on huge socialist programs design to buy popularity for himself and for his party, the United Socialist Party of Venezuela (PSUV). These included things like subsidizing food so that prices are one-sixth of market prices.

But now Chávez is gone, and oil prices are plunging. His successor, Nicolás Maduro, doesn't have anything like Chávez's charisma, so he's been trying to borrow some charisma from Chávez by pretending to be able to talk to him in the afterlife. According to Maduro:

"I'm going to confess that a bird approached me, and approached me again and said ... that the commander [Chávez] was happy and full of love for the loyalty of his people ... must be proud."

I don't know how many people believed the talking bird story, but other PSUV politicians are saying things that are much harsher. According to one of Chávez's cabinet ministers, "It’s painful and worrying to see a Presidency that doesn’t show leadership." He criticized the “repetition of the approaches formulated by Comandante Chávez, without the necessary coherency."

The broader picture is that the plunging oil prices are part of a global deflationary spiral. I said, starting in 2003 when I first began writing about Generational Dynamics, that it was predicting deflation. Mainstream economists have been predicting high inflation and even superinflation every quarter for years, so they've been wrong every quarter and Generational Dynamics has been right. Quartz and Moscow Times and Panama Post and ABC (Madrid) (Trans)

(Comments: For reader comments, questions and discussion, see the 28-Nov-14 World View -- Oil prices crash after OPEC meeting ends in discord thread of the Generational Dynamics forum. Comments may be posted anonymously.) (28-Nov-2014) Permanent Link
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Oil prices crash after OPEC meeting ends in discord

Oil price plunge pressures budgets of oil exporting countries

Russia and Venezuela on their knees with oil prices plunging

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Generational Dynamics Web Log for 28-Nov-2014
28-Nov-14 World View -- Oil prices crash after OPEC meeting ends in discord