Another Advantage

…of low oil prices. Low prices are good for American consumers, especially in winter, when we not only have to drive, but we have to heat our homes.

Here’s an additional advantage, though.

But falling crude prices, US-led sanctions and diminished oil exploration threaten Russia’s oil industry and raise questions about its capacity to continue underwriting President Vladimir Putin’s ambitions at home and abroad.

Sanctions hurt Russia in a lot of economic ways, but that interference with Putin’s designs on eastern Europe can last only as long as the sanctions régime holds up. The falloff in exploration actually would work to Russia’s (and Iran’s) benefit, were it to last a long time, as that would diminish supply relative to demand, and so would raise oil prices.

That’s the kicker, though. Russia (and Iran) need $100+ oil in order to balance their budgets. Today’s $30 price, which I think will last at least into the intermediate future, if fracking and shale oil haven’t more permanently altered the supply availability environment, means that if Putin wants to continue his aggression against his neighbors, if he wants to continue to try to reconquer those nations and so reconstitute the old Soviet Union empire, he’ll have to borrow money to do so.

However, the only thing he has with which to repay such debt is revenue from oil and natural gas sales; the Russian economy is that dependent on extraction—it produces nothing else. At today’s prices, Putin will have to sell 3+ times as much oil as he would have had to just a couple of years ago. That creates a vicious circle: the more oil he produces and sells, the longer downward pressure on oil price continues.

And with Iranian production entering the market shortly, courtesy of Khamenei’s Best Bud President Barack Obama, those prices will be the recipient of additional downward pressure.

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