Uniqueness
Oil Prices High
General
Prices will remain high- predictive and assumes their supply warrant
Fahey 14 – Associated Press Energy Writer (JONATHAN, Jul 18,2014, “Oil Price Remains High on Global
Turmoil” http://abcnews.go.com/Business/wireStory/oil-rises-past-103-geopolitical-turmoil-24608764
DA: 7/18/14) //MB
The price of oil retreated slightly Friday but remained elevated because of political turmoil around the world.
Concern that conflicts and rising tensions in the Ukraine and the Middle East could disrupt supplies
sent oil prices higher this week, though the world appears to have an ample supply of crude and
supplies have not been affected . The industry calls this higher price, based only on fear, a "risk
premium." "Developments during the past couple of days have added to a long list of geopolitical hot
spots," wrote energy analyst Jim Ritterbusch in a note to clients, which he says "will force the oil complex to maintain
significant amount of risk premium." Benchmark U.S. crude for August delivery fell 6 cents to close at $103.13 a barrel
on the New York Mercantile Exchange. It rose 2.2 percent for the week. Brent crude for September delivery, a benchmark for
international oils, fell 65 cents to close at $107.24 on the ICE Futures exchange in London. U.S. crude closed under $100 per barrel Tuesday for
the first time since May, but that marked the end of a three-week slide in prices. A
large draw in U.S. oil inventories pushed
prices higher Wednesday and then a series of political events gave the market more jitters. The
Obama Administration announced increased sanctions on Russia Wednesday, including against
Russia's largest oil company, over Russia's support of rebels in Ukraine. Then a Malaysian Airlines
passenger plane was shot down over Ukraine Thursday, raising concerns that a wider conflict or
further sanctions could disrupt supplies from Russia, the world's biggest crude exporter outside of OPEC. And later
Thursday Israel launched a ground offensive into Gaza, intensifying turmoil in the Middle East, the
world's most important oil-producing region. These threats to global oil production remain just threats, and analysts say the
likelihood of supply interruptions is small. But it's enough for buyers to buy more oil futures now, to protect against
an actual disruption that sends prices rocketing higher. " Crude oil prices are expected to continue
their recent uptrend due to increasing volatility in the oil market following the uncertainty in Middle
East and highly tentative conditions between Ukraine, Russia and the West," said analyst Myrto Sokou from
Sucden Financial Research in London.
Oil prices rising – Malaysia plane crash and global tensions
FT 7/18/2014 – Anjli Raval, Oil and Gas Correspondent for the Financial Times, 2014 (“Global oil prices
rise after Malaysia plane disaster,” July 18th, Available Online at http://www.ft.com/cms/s/0/cdd096f40e64-11e4-b1c4-00144feabdc0.html#axzz37pbrDsaZ, Accessed 07-18-2014) LB
The price of oil on both sides of the Atlantic rose on Friday as news of the Malaysian airline crash
intensified geopolitical strains and raised fears over a disruption to crude supplies. Although no
stoppages are imminent, the crash in eastern Ukraine has brought into focus tensions between Russia
and the west, one day after the US ratcheted up sanctions against Russia’s biggest companies –
including the world’s largest listed oil producer, Rosneft. Prices had lowered over the past few weeks amid weakness in the
physical markets and as investor anxieties over global supply disruptions eased. The front-month Brent contract had fallen to the biggest
discount to the second-month in four years earlier this week – known in industry jargon as contango – which implies a surplus of crude
available for delivery. But
the past two sessions have seen the price of oil rebound and analysts say prices
are likely to remain at these higher levels. “The Brent ‘supercontango’ of 2014 did not last very long,” said Olivier Jakob,
analyst at Petromatrix. “Volatility is back in the oil markets and trading volume is back with a revenge.”
Future oil prices will remain high — buyers are leaving the market
Ausick 14 — Paul Ausick, Energy Editor at 24/7 Wall Street, 2-17-2014, “The Oil Futures Market: Prices
Are High Because Nobody Wants to Play,” 24/7 Wall Street, http://247wallst.com/energybusiness/2014/02/17/the-oil-futures-market-prices-are-high-because-nobody-wants-to-play/
Gasoline prices in the United States have risen nearly six cents a gallon in the past month, and the spot price
for a barrel of West Texas Intermediate (WTI) crude oil has risen from $97.63 at the end of December to $99.47 now,
after a brief sojourn last week above $100 a barrel. We noted Monday morning that gasoline prices remain above $3 a gallon in every state,
with a national average of $3.34 a gallon, and we note some of the temporal reasons for the higher prices.¶ Pump prices are not likely to fall
much in the next few months as refineries enter the turnaround period when they stop producing cheaper winter gasoline and begin making
more expensive summer fuel.¶ There
may be a more fundamental change also keeping crude oil prices high at
a time when U.S. production is at its highest level in more than a dozen years: the futures market is
being abandoned by non-commercial (i.e., speculative) participants. Even commercial participants are
looking to get out of the trading business. Occidental Petroleum Corp. (NYSE: OXY) has said that it will “reduce” its proprietary
trading business and Hess Corp. (NYSE: HES) is trying to sell its Hetco trading operation.¶ As these market participants leave the
market, fewer buyers remain, which lowers the futures price that producers can get as a hedge for
future production. The result is an increase in price spreads between current cash spot prices and futures prices — cash prices rise and
futures prices fall. That leads to a market condition called backwardation.¶ The following chart shows the difference between the current WTI
price per barrel and the price 12 months out.¶ As
more players exit the futures market, there are fewer buyers
willing to take the long side of the bet on future crude prices. The result could well be lower
inventories, a result already noted by the International Energy Agency (IEA) in its most recent report:¶ At the end of December [global]
commercial inventories stood at 2,559 million barrels, their lowest absolute level since 2008. Moreover, the stock deficit to five-year average
levels widened slightly to 103 million barrels, the first time the 100 million barrel level has been exceeded since mid-2004.¶ There is evidence
that as backwardation increases, stockpiles decrease. Crude prices remain high and so do refined product prices. Energy
economist Philip Verleger notes in his latest weekly newsletter:¶ Looking to the future, we see no reason for commercial inventories to
increase. The market offers no incentive at the moment to build stocks. To the contrary, it is imposing growing punishments on those who hold
oil. For this reason, we agree with the IEA that the glut will be more and more elusive.¶ In other words,
prices will remain high and
probably rise even higher as commercial inventories are drawn down. It looks like summer driving is going to be
expensive.¶
Predictive
Oil prices will continue to spiral upward in the years ahead
Block 6/25 — Ben Block, staff writer at Worldwatch Institute, 6-25-2014, “Energy Agency Predicts High
Prices in Future,” Worldwatch Institute, http://www.worldwatch.org/node/5936.
The world can expect energy prices to continue their generally upward spiral in the years ahead if
global energy policies remain the same, the International Energy Agency (IEA) reported this week.¶ Rapid
economic development in China and India, coupled with relatively consistent energy use in industrialized nations, will likely strain the world's
ability to meet a projected rise in energy demand of some 1.6 percent a year until 2030, the agency predicted Wednesday in its annual World
Energy Outlook report [PDF].¶ The IEA
significantly increased its projections of future oil costs in this year's
report due to the changing outlook for demand and production costs. It now expects crude oil to
average $100 per barrel over the next two decades and more than $200 per barrel in 2030 , in nominal
terms. Last year's forecast estimated that a 2030 barrel would amount to only $108.¶ "One thing is certain," said Nobuo Tanaka, the
IEA's executive director, in a prepared statement. "While market imbalances will feed volatility, the era of cheap oil
is over."¶ Oil and natural gas resources are expected to supply the world for more than 40 years at
current consumption rates. But the report expressed concern that rising world energy demands will outpace
production.¶ "There remains a real risk that under-investment will cause an oil-supply crunch in that
timeframe," the report said. "The gap now evident between what is currently being built and what will be needed to keep pace with
demand is set to widen sharply after 2010."¶ The price of meeting the world's energy demands is estimated at $26.3 trillion through 2030-an
average of more than $1 trillion a year, the IEA said.¶ In
addition to higher prices, most new oil fields are offshore or
smaller than in years past, making oil extraction more difficult than ever. "Oil resources might be
plentiful, but there can be no guarantee that they will be exploited quickly enough to meet the level
of demand," the report said.¶ Demand for oil is predicted to rise from the current 85 million barrels per day to 106 million barrels per day
in 2030, the report said. Due to this year's high oil prices, the predictions are 10 million barrels per day less than what was projected last year.
Still, this represents an increase of 1 percent per year.¶
Low Supply
OPEC Oil prices will continue to rise — low supply from Iraq turmoil
McGovern 6/14 — Bob McGovern, staff writer at Boston Herald, 6-14-14, “Experts: Gas prices will
rise,” Boston
Herald,http://bostonherald.com/business/business_markets/2014/06/experts_gas_prices_will_rise.
Gas prices in the United States will continue to rise as OPEC’s second-largest oil producer fends off
total collapse at the hands of extremists, experts say.¶ The price of oil rose to $107 yesterday as the
crisis in Iraq reached a fever pitch. Oil prices rose more than 4 percent this week alone, and experts are
worried the continued violence could have an ongoing effect on prices at the pump.¶ “The violence and
turmoil in Iraq is already affecting oil prices and have boosted the price to a 10-month high,” said
Mary McGuire, director of public and legislative affairs at AAA Southern New England. “It’s likely that
we’ll see an increase this week or the week after at the pump as the result of our new oil prices.”¶
Fear in oil-producing countries can have a drastic effect on the bottom dollar.
Price Shocks Coming Now
Rising volatility inevitable — Iraq production disruptions cause price shocks
Bawden 6/16 — Tom Bawden, Environmental Editor for The Independent (London), 6/16/2014, “Long
years of oil price stability are at risk, BP’s top economist warns,” The Independent,
http://www.independent.co.uk/news/business/news/long-years-of-oil-price-stability-are-at-risk-bpstop-economist-warns-9540548.html
Escalating violence in Iraq threatens to unleash an oil price spike that would put an end to the greatest
period of price stability for nearly half a century, BP’s chief economist has warned. The unusually high level of disruption
to global oil production since the Arab Spring began in 2011 has been matched by a sharp rise in US oil output as a result of
its fracking boom. This has kept supplies constant and prices stable, according to BP’s Christof Rühl. US oil production soared by 1.1 billion
barrels last year – the biggest rise in the country’s history – as the fracking companies increasingly turned their technology from gas to oil. This
balanced out the disruption to supplies in the past three years in Africa and the Middle East, where outages have been running at 3 million
barrels a day, compared with just 100,000 a day in the previous decade, BP figures show. Without the disruptions, the oil prices would have
tumbled, while without the surge in US production they would have soared, says Mr Rühl. “This is the three-year period
which has seen the least price volatility since oil prices were no longer regulated in 1970. If the world had only had these disruptions which we
have seen in the last three years since the beginning of the Arab Spring you would have seen oil prices spiking and a discussion about strategic
reserve release and damage to the economy and all the rest of it. “And at the other extreme, if we had only seen these massive US oil
production increases you would have seen prices coming under pressure and talk of Opec cuts,” Mr Rühl added. But he warned that, sooner
or later, the period of price stability would come to an end – with the problems in Iraq looking like a
key contender to upset the status quo.
Oil prices increasing, multiple reasons
LeVine 6/12 — Steve LeVine, Washington Correspondent for Quartz, 6-12-14, “Oil prices aren’t
coming down any time soon, and Iraq is just the latest reason,” Quartz, http://qz.com/220082/oilprices-arent-coming-down-any-time-soon-and-iraq-is-just-the-latest-reason/.
The upheaval in Iraq threatens to exacerbate a three-year-old trend in which unusual geopolitical
disruptions have become the new normal. A key impact—high oil prices when analysts say bulging
new supplies should be sending them far lower.¶ That is because much of the geopolitical turmoil has been
in or involved oil-producing countries. “We are witnessing the failure of the petro-state,” Citigroup’s
head of commodity research, Edward Morse, told Quartz.¶ Up until 2011, an average of 500,000 barrels of oil a day was
off the market at any one time for maintenance and other reasons, a volume that triggered no perceptible price volatility. Temporary
aberrations like Hurricane Katrina took 1.5 million barrels off the market in 2005, and the 2003 attack on Iraq removed 2.3
million barrels a day.¶ But starting in 2011, the disruptions often began to exceed 2 million barrels a day. Among the culprits were the Arab
Spring and follow-on uprisings, the chaos in Nigeria, Iran sanctions and of course Russia president Vladimir
Putin’s crypto-invasion of Ukraine.¶ Then last July, Libyan militants stormed oil export facilities and shut them down. As of
now, the country pumps just one-eighth of the 1.6 million barrels of oil a day it produced before Muammar Qadhafi’s ouster in 2011. All
in all, about 3.5 million barrels of oil a day have been off the market around the world since last fall.
Those barrels have offset a 1.8 million-barrel-a-day surge of supply from the US. As a consequence, oil
prices have continued to soar. And this increase has been exacerbated recently by China’s recordsetting hoarding of oil.
High Prices Bad
Oil prices may rise to as much as $120 per barrel — Iraq
Kumar and Verma 6/18 — Manoj Kumar, staff writer, and Nidhi Verma, staff correspondent, 6-1814, “Iraq-driven oil spike threatens to blow hole in budget – sources,” Reuters,
http://in.reuters.com/article/2014/06/18/india-budget-iraq-idINKBN0ET0IY20140618.
The government expects oil prices to rise as high as $120 per barrel for several months because of
fighting in Iraq, potentially driving a hole of at least 200 billion rupees ($3.3 billion) in the budget, two
government sources told Reuters.¶ Prime Minister Narendra Modi won last month's general election by a landslide with promises of faster
economic growth and new jobs, tapping into voter anger over India's longest slowdown in a quarter of a century.¶ Ahead of his maiden budget
next month, Finance Minister Arun Jaitley is grappling with a food inflation scare, and now faces the risk that higher oil prices could swell the
government's subsidy bill.¶ "If
oil prices remain high even for three to four months around $120 a barrel, it
could have a significant impact on the fiscal deficit and economic growth," a senior Finance Ministry official told
Reuters on condition of anonymity.¶ The official added that this could increase subsidy costs by 200-225 billion rupees in the fiscal year to
March 31, 2015.¶ That would threaten the deficit target of 4.1 percent of gross domestic product inherited from the last government.¶ "If
oil
prices remain high, it would not be easy to meet the fiscal deficit target," the source added.¶ India, the world's
fourth-largest oil consumer, imports around 4 million barrels a day of crude oil - costing $165 billion a year at current prices, or more than a
third of its total import bill.¶ The last government based its interim budget in February on an assumption that India's basket of oil imports
would cost around $105 per barrel on average in the current fiscal year.¶ Prices
for Brent crude, an international oil
benchmark, have risen by $3 to $113 over the past week, during which Islamic militants have taken control over tracts of
northern Iraq and threatened the authority of the Baghdad government.¶ For every dollar that oil prices rise, the
government incurs annual costs of 70-75 billion rupees (around $1.2 billion) to compensate state oil firms for selling
diesel, kerosene and other fuels at below cost.¶ Subsidies are assessed quarterly, based on the average oil price in the preceding quarter. That
means that the higher expected oil price would feed through into subsidy costs in the second half of
the fiscal year.¶
AT: Shale Boom Lowers Prices
Low prices from shale oil boom is only temporary. Long-term prices are still on the
upside.
Beschloss 6/17 — Morris Beschloss, economist at the Desert Sun, 6-17-14, “US Shale Oil Boom Calms
Global Oil Prices, Retains Availability,” The Desert Sun,
http://www.desertsun.com/story/money/industries/morrisbeschlosseconomics/2014/06/17/us-shaleoil-boom-calms-global-oil-prices-retains-availability/10694881/.
What the Obama Administration either fails to understand, or is oblivious to, is that the world is increasingly dependent on America’s
three year-old “fracking” boom that has lifted U.S. oil production by about three million barrels per day
to more than eight million barrels currently. Simultaneously, Canada has added another one million BPD, almost exclusively
from the “tar sands” of Alberta Province’s Athabasca region. Building the Trans-Canada XL oil pipeline would obviously accelerate Canadian
crude shipments to U.S. Gulf Coast refineries, building America’s daily crude oil availability to over 10 million barrels per day, likely topping
today’s leaders, Russia and Saudi Arabia.¶ This
is of particular importance, as the Middle East and North African oil
fields have retracted by an estimated 3.5 million BPD, due to civil wars in Libya, disturbances in Iraq, civil war in
Syria, ideological tribal strife in Nigeria, and sanctions imposed against Iran. Also, with Europe depending on Russia’s oil and natural gas
pipelines relying on 30% of their crude oil, sanctions or other economic punitive actions against Russia, would wreak turmoil on the European
economy, already teetering on the edge of a new recession.¶ According to reliable energy experts, the
breakdown in oil supplies
previously indicated would rise from the current $106 per barrel for West Texas Intermediate, and
approximately $115 for Brent crude to an estimated $150 to accommodate universal crude oil needs,
were it not for America’s “fracking surge.”¶ While China continues to represent the pivot point for the up/down direction of oil
pricing, as the world’s largest user, Beijing’s economic direction will magnify the price movements forthcoming in this year’s second half. U.S.
demand, which is hanging in at around 19 million barrels per day has already closed the import gap to 25% of its total consumption from 60% as
late as 2005. Although there are divergent schools of thought regarding the direction of oil pricing in the next few years, there is unanimity that
the balance of pricing power has shifted from the turbulent Middle East, North Africa and Russia to how quickly and voluminously the U.S. oil
production capability and refining potential can be brought to market.¶ With U.S. stockpiles mounting in the intermediate timeframe, a nearterm price drop, especially in light of a Southeast Asian demand cut, could find U.S. central inventories in a temporary overstock mode. This
could even become more severe if Iran and Iraq, containing the second and third largest global oil reserves resolve the geopolitical pressures
However, a realistic longer term outlook, which envisions a worldwide
demand growing from current 90 million barrels per day now, to 120 million BPD within the next
decade, would indicate global prices sharply on the upside, with the U.S. and Canada’s maximum
output becoming the global center of gravity in the oil world.¶ A faint thunderclap, already being
heard is the cutback in capital expenditures by oil giants Exxon Mobil, Chevron, and Royal Dutch Shell,
as exploration costs soar, awaiting the opportunities by these lead corporations to be assured of
expanding economic demand and the acceptance of higher prices with it.
that have reduced their exports.¶
Oil prices will stay high, shale oil boom will not change prices
Badiali 3/31 — Matt Badiali, editor of S&A Resource Report, 3-31-2014, “Why gasoline prices are so
high in spite of the shale boom...,” The Crux, http://thecrux.com/shale-oil-is-booming-but-youre-stillpaying-50-to-fill-up-your-gas-tank-this-is-why/.
I had just wrapped up my talk to a small group of private-equity folks when a hand went up in the back of the room…¶ “Will
the shale oil
boom drive the price of gasoline down?”¶ I get this question all the time… It’s the first thing people ask after I tell them how
great and prolific shale oil is.¶ But the answer is no. And the reason is simple – exports.¶ We export a lot of
petroleum out of the U.S., which takes the extra supply out of our market and keeps the price of the
stuff we want – gasoline and diesel – high.¶ In December 2013, the U.S. exported the most petroleum products in the 31 years
that the U.S. government tracked the data.¶ I know, I know, you may have heard that it’s illegal to export crude oil. While that’s technically
true… we still exported
137.8 million barrels of “Not Oil” in December. Not Oil is crude oil that was refined
into gasoline, jet fuel, or diesel. Some of the exports aren’t even useful products… just partially refined oil.¶ That’s how refineries
get around the export ban. In 2013, we sent 1.3 billion barrels of Not Oil abroad. That’s a 12% increase from 2012. The question that I had
was… where did it all go?¶ The answer to that question is in the table below. I cobbled this together from data published by the U.S.
Energy Information Administration (EIA). I broke down the values to show the percent of U.S. exports to various
countries and regions. As you can see, it goes all over the world…¶ ¶ ¶ So if you are looking for the reason it costs you
$50 to fill up the gas tank in your Camry… blame those guys. They keep buying, so the refiners keep selling. And with the
latest developments in Russia, U.S. refiners may find new markets in Europe too. You can read more about that here.
Oil Prices Low
General
Oil prices low and stable – Libyan production
IBT 7/12/2014 – M Rochan, staff writer for International Business Times, 2014 (“Crude Oil prices Drop
as Libya Restores Production and Iraq Output Fears Fade,” July 12th, International Business Times,
Available Online at http://www.ibtimes.co.uk/crude-oil-prices-drop-libya-restores-production-iraqoutput-fears-fade-1456400, Accessed 07-18-2014) LB
Crude oil futures dropped on 11 July, and traded lower for the week as a whole, as Libya restored oil
production and as concerns surrounding short-term threats to Iraqi production faded. Brent August contract
finished $2.01, or 1.9%, lower at $106.66 a barrel on 11 July. Prices are down over 3.5% for the week. West Texas Intermediate August contract
finished $2.10, or 2%, lower at $100.83 on 11 July. Prices are down some 3.1% for the week. Commerzbank Corporates & Markets said in a note
to clients: "Sooner than expected, the price of Brent oil fell back into its familiar trading range between $105 and $110 per barrel. Market relief
has been triggered above all by the outlook of growing Libyan supply. "Libyan
daily production should rise to 800
thousand barrels per day within just a few weeks, after standing at around 200 thousand barrels back
in June. Moreover, negotiations on Iran's nuclear programme look set to return into focus in coming
days." "A basic agreement shall be reached by 20 July to replace the current interim agreement based
on which Iran is allowed to export just 1 million barrels of crude oil per day. Even with Iran heavily
reliant on higher oil revenues and the West - against the backdrop of the conflict in Iraq - attaching
greater importance to Iran in global policy terms, the negotiating parties are still far apart. "This is why
we believe the interim agreement is ultimately likely to be extended. In that case, the oil price should
stick within its range between $105 and $110 per barrel, where it has been trading on more than two
thirds of the past 260 trading days," Commerzbank added.
The long-term outlook for global oil prices is lower, perhaps much lower, giving a strong boost to the
U.S. economy while potentially crippling the economy of Vladimir Putin's Russia. Vast new discoveries
of oil and natural gas in the U.S. and around the globe could drive the oil price to as low as $75 a
barrel over the next five years from a current $100.
The demand side, too, will put pressure on the supremacy of petroleum. For the first time in its 150year history, the internal combustion engine can be run efficiently on alternative fuels from a number
of sources, including natural gas. As these alternatives are increasingly introduced, global consumption
of oil will slow its growth and flatten out.
Enlarge Image
Barron's Graphics
Citigroup's head of global commodity research, Edward Morse, believes the combination of flattening
consumption and rising production should mean that "the $90-a-barrel floor on the world oil price over
the past few years will become a $90 ceiling." Within a new trading range with a $90 ceiling, Morse sees
an average of $75 as plausible.
That's a far cry from the old paradigm, promoted in the past 40 years, which posited ever-greater
demand for petroleum as developing economies grew, and a slowdown on the supply side -- the
looming prospect of "peak oil," whereby global production maxes out and falls into decline. To the
contrary, unconventional sources of crude oil totaling more than a trillion barrels -- the equivalent of
more than 30 years of extra supply -- have been discovered in the past five years. The majority is
recoverable at $75 or less, and much is now being tapped.
Within the next five years, growth in U.S. production of oil should make this country a net exporter,
ending a pattern that has persisted since World War II. "While this country will still be importing plenty
of medium and heavy crudes, most of the imports will come from Canada and Mexico," says Morse. "So
the U.S. will no longer have to worry about disruptions in supply that might disrupt economic activity.
That's why we call it the era of North American energy independence."
British economist Alfred Marshall famously likened supply and demand to the blades of scissors, and the
blades are also poised to cut oil prices in the rest of the world. On the supply side, unconventional
sources of oil are being tapped in countries that include India, Bahrain, and Uganda. On the demand
side, a third of the auto fleet in Brazil can already run on fuel other than petroleum.
THE RECENT AGGRESSION by the oil-and-gas exporting nation of Russia reminds us of the fragility of
global energy supplies. At the same time, the oil-and-gas abundance in this country has influenced
concrete proposals for dealing with Russia. Energy consultant Philip Verleger has publicly proposed as a
"meaningful response to Russian aggression" that the U.S. sell the nearly 700 million barrels in its
Strategic Petroleum Reserve as a way to "drive oil prices down and impose significant harm on Russia,"
since the SPR is "no longer needed for national security." And an editorial in The Wall Street Journal
recently proposed that the Department of Energy "approve immediately the 25 applications for
liquefied natural gas…export terminals," since "every dollar of U.S. gas is one less dollar flowing to Mr.
Putin's economy."
Such proposals would have been unthinkable as recently as five years ago, when the old paradigm was
still dominant and domestic supplies of oil and gas were a source of worry.
Over the next five years, the effects of the global oil-and-gas boom should prove a grim object lesson for
the Russian economy on the downside of the "resource curse." Russia's economy "largely depends on
energy exports," according to a study from the U.S. Energy Information Administration. That works well
when prices are high, but quite badly when prices fall.
Oil-and-gas revenues account for 70% of Russia's total exports and more than half the income of its
federal government. Russia exports more than seven million barrels of oil a day, second only to Saudi
Arabia. One key difference between Russia and the No. 1 exporter is that more than 60% of Russian oil is
produced in Siberia, where costs are much higher. A fall in the world price to $75 from $100 would
therefore have a much greater impact on the net revenues that Russia earns from oil than is earned by
the Saudis.
The downside of the resource curse could also be felt in Russia's reliance on sales of natural gas. About
75% of Russia's natural gas exports go to Western Europe, providing 30% of its requirements, at prices
that are two and three times the price in the U.S. That enormous premium stems from the fact that
there is no world market for natural gas, given the prohibitive cost of shipping it in its unaltered state.
Hence, the argument for accelerated approval of liquefied-natural-gas export terminals. With abundant
natural gas now available in so much of the world -- including Australia, South Africa, Brazil, and
Argentina -- within the next five years, something resembling a global market in liquefied natural gas will
likely develop. That would break the local monopoly of the Russians in their market, enabling Europeans
to buy from other sources, and weighing on the premium Russian gas now commands.
AMY JAFFE, EXECUTIVE DIRECTOR for energy and sustainability at the University of California, Davis, coauthored a recent study with Rice University economics professor Mahmoud El-Gamal predicting that
barring a "war that destroys physical installations for the production and/or transport of oil," the oil
price will "fall precipitously over the medium term of three to five years."
Jaffe believes the average price could fall below $75, based in part on her view that oil-production costs
are not fixed. "Research shows that costs track oil prices and not the other way around," she observes.
As oil prices move lower, demand for drilling rigs and related equipment falls, lowering the cost of
drilling. And that's bad news for Putin.
"The Russian government's budget is expected to need an oil price of over $100 to stay balanced
between now and 2020," Jaffe says. "A $75 average could make the ruble's recent tailspin look trivial by
comparison."
Steve Briese, publisher and writer of the Bullish Review of Commodity Insiders newsletter, is currently
projecting an imminent plunge in the oil price to the $70 region. His bearish outlook is based on the
recent peak in the net short position of businesses involved with oil. These businesses, also called
"commercials," use futures and options on West Texas Intermediate crude traded on the New York
Mercantile Exchange as part of their business strategy.
The futures and options market in WTI crude is actively used by refiners that would naturally take long
positions in these derivative contracts to hedge against a price rise, and producers who would naturally
take short positions in order to hedge against a price decline. The fact that the net short position of
these commercials recently set a record indicates that refineries are lightening up on their long
positions. While this leaves them exposed to a price rise, it also means they will benefit if the price
declines.
Briese uses published data from the Commodity Futures Trading Commission to track the bets of these
bona fide hedgers with an eye to betting accordingly. In his view, since they are in the oil business and
therefore close to the scene, they are the true insiders, whose consensus outlook is better than anyone
else's. Perhaps these insiders recognize that the new paradigm is here to stay.
THE GAME CHANGERS on the supply side are the three new types of oil production that have not been
counted as part of the oil supply until recently: deepwater oil, shale oil, and oil sands. Each of these
sources of oil has been estimated at more than 300 billion barrels, totaling more than one trillion barrels
in all. That's a huge addition to previously estimated reserves of some 1.5 trillion barrels. According to
Citigroup energy analyst Eric Lee, a good proportion of the extra trillion barrels could be recoverable at
$75 a barrel or less. In fact, he notes that a $75 cost estimate could even be on the high side, as
production costs for shale and even deepwater can continue to fall over time.
Deepwater oil has been tallied at 317 billion barrels by the Norway-based oil-and-gas source Rystad
Energy. Of that total, Rystad estimates that 53 billion barrels are recoverable off the shores of North
America.
What slowed development of deepwater drilling was the 2010 disaster in the Gulf of Mexico involving
BP (ticker: BP), which killed 11 people and spilled millions of barrels of oil. But two weeks ago, the
Environmental Protection Agency lifted the ban on BP's right to bid on oil leases in the Gulf of Mexico. A
few days later, BP bid successfully on 24 leases in the Gulf in an auction held in New Orleans. Elsewhere,
activity had already picked up in regions that include East Africa (63 billion barrels) and the Asia-Pacific
region (32 billion barrels).
Shale oil, recoverable mainly through hydraulic fracturing, or fracking, has been estimated by the U.S.
Energy Information Administration at 345 billion barrels, of which 58 billion barrels are recoverable in
the U.S. The EIA report of June 2013 estimates that the 310-million-barrel increase in U.S. oil production
in 2012 over 2011 was "largely attributable to increased production from shales and other tight
sources."
Oil sands, according to the BP Statistical Review, are found in just two countries: Canada, at 167.8 billion
barrels, and Venezuela, at 220 billion. In the oil-sands case, it is not clear whether production would
continue with $75 oil. But as Citigroup's Morse points out, "While current investors might be
discouraged by $75, other companies would be open to investing, including state-owned companies in
the Far East, since the cash flow would be robust for 40 years or so." Investors with a 40-year outlook
might not be deterred by a $75 average price if they are bullish on a long-term basis.
Meanwhile, at current prices, the BP Statistical Review reveals 25.9 billion barrels of Canadian oil sands
as "under active development."
On the demand side, petroleum's monopoly of the transportation market is being challenged by
abundant natural gas recoverable from shale. According to estimates by Advanced Resources
International, an energy consulting firm that compiles data in conjunction with the EIA, shale-gas
resources in the U.S. amount to a staggering 1,161 trillion cubic feet, compared with 285 trillion cubic
feet in Russia, and a world total of 7,795 trillion cubic feet. On a British-thermal-units basis, 7,795 trillion
cubic feet of natural gas is the equivalent of 1.4 trillion barrels of crude oil.
AS THE NEARBY CHART SHOWS, domestic oil and natural-gas prices used to track each other fairly
closely. The reason for the correlation: Oil drilling invariably produces natural gas as a byproduct. By
2009, however, the correlation began to break down, with natural-gas prices moving to a steep discount
to oil prices, as gas production soared. A barrel of oil contains the energy-equivalent of some 5.55
million BTUs. At the current natural-gas spot price of $4.30 per million BTUs, a barrel at $75 buys nearly
17.5 million BTUs-worth of natural gas -- more than three times as much.
This multiple is already being exploited. In a major study, Citigroup's Morse, together with a team of
other analysts, has calculated that there is huge potential for savings if trucks, buses, ships, and
ultimately passenger vehicles are run with natural gas rather than petroleum fuels. The study also notes
that the conversion is well under way. Waste Management (WM) has made it known that 80% of the
trucks it buys are fueled by cheaper natural gas. Cummins (CMI) and joint-venture partner Westport
Innovations (WPRT) sell an engine that runs on both liquid natural gas and compressed natural gas.
Westport Innovations specializes in retrofitting engines with natural-gas components.
Enlarge Image
According to the Citigroup study, the low-hanging fruit lies in commercial fleets setting up refueling
stations along routes of 400 miles or less. In the U.S., that includes heavily trafficked routes in the
Northeast and in Southern California. Intracity traffic that includes passenger buses and other short-haul
vehicles can also shift to natural gas.
Transportation accounts for nearly half of the oil the world consumes each year, and trucks alone use
nearly one of every nine barrels consumed. Also ripe for natural-gas substitution is the consumption of
oil for industrial uses -- accounting for more than one in five barrels consumed -- and for electricity
generation, which still accounts for one in 18 barrels consumed worldwide. Moreover, when mixed with
petroleum, fuels that can be made from natural gas, like ethanol and methanol, can help meet evermore-stringent Corporate Average Fuel Economy, or CAFE standards, being mandated over the next
several years.
Taken together, these trends should be more than enough to cause global consumption of oil to slow its
growth over the next several years and then flatten out. There is even the potential for global oil
demand to begin declining. Yossie Hollander, co-founder of the Fuel Freedom Foundation, a nonprofit
dedicated to breaking the world's oil addiction, argues that passenger vehicles can run economically on
methanol and ethanol made from various sources, including natural gas.
"Methanol can be made today competitively with existing technology, from energy resources with which
the United States is well endowed -- natural gas, coal, biomass, garbage, or any other organic material,"
Gal Luft, an advisor to the Fuel Freedom Foundation, argues in Petropoly, co-authored by Anne Korin.
"In the future, perhaps even recycled carbon dioxide could be commercially converted into methanol,
providing an elegant solution to the otherwise seemingly economically irresolvable issue of fossil-fuelsderived greenhouse-gas emissions."
THE OIL AND GAS BOOM is not welcome to environmentalists, although it should be. The replacement
of coal with natural gas for electricity generation has reduced carbon-dioxide emissions, and emissions
of sulfur dioxide and nitrogen oxides fall as natural gas replaces petroleum. Also, lower energy prices
confer disproportionate benefits on people of modest means, who spend a larger share of their income
on energy than do richer folk.
But the dangers of deepwater drilling and of fracking, and the use of fossil fuels for decades to come, are
already provoking pushback from the greens. In the end, however, as Trevor Houser of the Peterson
Institute remarks, "Provided that industry accepts reasonable levels of regulatory oversight, the oil-andgas boom is unlikely to be stopped by environmentalists."
"The history of mankind," observes Morse, "at least since the invention of the wheel, is a history of
cheaper and cheaper energy. Modern civilization would be impossible without cheap energy. I believe
we are entering another period of cheaper energy that should last 50 years or more."
Low oil prices inevitable — 9 reasons
Colombo 6/9 — Jesse Colombo, Forbes economic analyst, 6-9-2014, “9 Reasons Why Oil Prices May
Be Headed For A Bust,” Forbes, http://www.forbes.com/sites/jessecolombo/2014/06/09/9-reasonswhy-oil-prices-may-be-headed-for-a-bust/.
Though the U.S. shale oil boom of the past several years has led to a renewed surge of domestic oil
production as well as an oil glut, crude oil prices have remained stubbornly high. There are a growing number of
reasons, however, why crude oil prices are likely to finally experience a bust in the not-too-distant future.
I avoid making firm predictions about the oil market because there are so many conflicting variables that affect oil prices, from supply and
demand, geopolitics (which is inherently unpredictable), and the global monetary environment, but it is important to be aware of several
factors that have a high probability of pushing crude oil prices lower in the next couple of years.¶ 1) The
unwinding of record speculative bullish bets¶ To prop up the global economy after the 2008 financial crisis, global central
banks dramatically cut interest rates and printed trillions of dollars worth of new currency via quantitative easing programs. Extremely
stimulative monetary environments increase the desirability of hard assets such as oil and other
commodities because they are a hedge against currency debasement and the associated risk of
inflation.¶ For the past half-decade, institutional investors have clamored into the crude oil market, causing prices to soar 140 percent from
their post-financial crisis lows. The chart below shows that large crude oil futures speculators (green line under chart) are currently making a
record bet of 423,136 net contracts on the continued appreciation of oil prices:¶ The data that I am citing comes from the U.S. Commodity
Futures Trading Commission’s weekly Commitments of Traders (COT) report that shows the aggregate number of futures and options contracts
that are held by three different categories of futures market participants: large speculators, small speculators, and commercial hedgers.¶ Large
speculators – the group that is placing the record bullish crude oil bet – are typically investment funds that trade in a trend-following manner,
which means that they tend to capture the middle part of market moves, but are often wrong at important market turning points. The nature
of the large speculators’ trend following trading systems cause them, as a group, to bet most aggressively right before the trend reverses. As
the old Wall Street adage goes, “when everybody gets to one side of the boat, it usually tips over.” For this reason, large speculators become an
effective contrary indicator when their aggregate trading positions reach extreme levels, either on the upside or the downside.¶ While extreme
aggregate trading positions can persist for quite a while, as is the case in the crude oil market for the past few years, they are still a reliable
indication that a powerful market reversal is likely to occur when the proper catalyst eventually appears and sends speculators heading for the
exits. So far, no bearish catalyst has presented itself in the crude oil market, but the other points that I’ve listed in this piece may combine to
form a perfect storm that finally causes the oil market to crack.¶ 2)
The “smart money” is growing increasingly bearish¶ In
the futures market, there is a buyer for every seller, and a bull for every bear (on a contract-by-contract basis).
For every futures contract currently being held by bullish large speculators in the oil market, there is someone on the opposite side of the trade.
In the current crude oil market, it is the commercial hedgers that are taking the exact opposite position as the large speculators:¶ Commercial
hedgers are the actual producers and users of crude oil (the Exxons and BPs) who utilize the futures market as a form of insurance against
adverse price moves. Commercial hedgers are considered to be the “smart money” because, after all, they are the physical crude oil market
and have firsthand information about future supply and demand trends.¶ Commercial hedgers now have a record 445,492 net contract short
position in the crude oil futures market, which indicates that their greatest concern is not an increase in crude oil prices, but a sharp decline.
Commercial crude oil hedgers are aware of many of the bearish points that I am discussing in this article, which likely explains why they are
heavily hedging against a coming crude oil bust.¶ 3) The global monetary environment is tightening ¶ As discussed in point
#1, the crude oil price boom of the past half-decade is due in large part to the incredibly stimulative monetary environment that has been
created by central banks in a desperate attempt to prop up global economy after the financial crisis. Now that unemployment is falling and the
risk of an imminent deflationary crisis has been reduced in the U.S. and U.K. (two major countries that are running QE “money printing”
programs), the current global economic cycle is moving into a phase in which stimulative central bank policies will be gradually pared back and
eventually reversed.¶ The U.S. Federal Reserve is expected to complete the tapering or ending of its QE3 program by the end of 2014, while the
Fed Funds Rate is expected to start rising as early as 2015. Similarly, Bank of Japan is now preparing for the eventual ending of its Abenomics
monetary policy now that it is much closer to achieving its 2 percent inflation target. Bank of England is considering plans to start raising
interest rates in the coming years as well, which is a precursor to the tapering of its QE policy.¶ The European Central Bank, however, is bucking
the monetary tightening trend after cutting its benchmark interest rate last week by 10 basis points to 0.15 percent and introducing a deposit
interest rate of negative 0.10 percent. The ECB is also considering launching its own quantitative easing program in the future. Unlike the U.S.
Federal Reserve’s QE programs, a European QE is not likely to be as supportive for crude oil prices because even mere rumors regarding it have
weakened the euro and boosted the U.S. dollar in the past month, which has put downward pressure on commodities prices. Many
commodities, including oil, are priced in U.S. dollars, so central bank policies that are bullish for the dollar are typically bearish for commodities
prices. The simultaneous tightening of U.S. monetary policy and the loosening of European monetary policy could set the stage for a powerful
bull market in the U.S. dollar.¶ The
U.S. Federal Reserve’s policies are by far the most important monetary
variable for crude oil prices, so its tightening over the next few years represents the ending of one of
the key driving forces behind crude oil’s bull market of the past half-decade. In addition, the massive
inflation and imminent currency devaluation that many commodities traders had expected to occur as
a result of quantitative easing programs has not materialized and is unlikely to in the near future.¶ 4)
The shale oil boom is increasing supply¶ Surging North American oil production, courtesy of the recent U.S. shale and Canadian
oil sand booms, is dramatically reducing U.S. oil imports and has even led to a glut of light, sweet crude oil in the United States.¶ In the past
five years, U.S. oil production experienced a sharp reversal of its long-term downtrend and recently
hit a twenty-five year high:¶ Net U.S. oil imports fell to a 28-year low in 2013 as a result of the shale oil boom:¶ U.S. oil production is
expected to grow to 9.2 million barrels a day in 2015 and 9.6 million by 2016, which would make the U.S. the world’s largest oil producer, ahead
of even Saudi Arabia and Russia. Canada’s oil sand boom is expected to boost the country’s oil production by 500,000 barrels per day to achieve
a total production of 3.9 million barrels per day in 2015, much of which will be exported to the United States.¶ As the world largest oil
consumer, the United States’ oil boom has significantly decreased the country’s reliance on foreign sources of oil, particularly from the volatile
Middle East. This is one of the main reasons why global oil prices have remained relatively flat for the past several years despite the Arab Spring
revolutions that led to an 80 percent decrease of Libyan oil production and other disruptions, as well Russia’s recent invasion of eastern
Ukraine. According to oil analyst Lysle Brinker, oil prices may have soared to as high as $150 a barrel without the increase of U.S. oil
production.¶ A glut of light, sweet crude oil is even forming in the United States as a result of rising domestic oil production as well as the U.S.
crude oil export ban that dates back to 1975. Oil companies and oil-producing states such as Texas and North Dakota are pushing to have the
export ban lifted so that the U.S. can export some of its newfound energy bounty to the global oil market. While shale oil deposits are found
throughout the world, other countries face greater difficulties in their attempts to replicate the U.S. oil shale boom.¶ The same technologies
that have enabled the oil shale boom – fracking and horizontal drilling – have also led to a nearly 40 percent increase in U.S. natural gas
production since 2007. Now one of the lowest cost fuels, natural gas is expected to further reduce the United States’ reliance on oil, particularly
for electricity generation, heating, chemical manufacturing, and even transportation.¶ The high price of oil in the past decade has been a major
driving force behind the U.S. shale energy boom because it enabled the use of new drilling technologies that would not have been economically
viable at lower prices. The
continuation of the U.S. shale energy boom in the next few years is likely to put
pressure on crude oil prices in accordance with the principle, “the only cure for high prices is high
prices.”¶ 5) Production is starting up again in many countries ¶ Oil production and exports are poised
to begin again in many countries that experienced severe disruptions in recent years:¶ Iran: After Western
economic sanctions were placed on Iran due to its nuclear program caused a near-collapse of its economy and currency in 2012, the nation
appears ready to strike a deal so that it can export its oil to the West again. Oppenheimer oil analyst Fadel Gheit claims that the Iran-related
“supply risk premium” accounts for 20-30 percent of the price of oil, which would disappear and send prices to the $75-$85 range once a deal is
finally struck with the West. 1 million more barrels of oil per day could enter the market when Iran’s nuclear issue is resolved.¶ Iraq: Iraq’s oil
production recently hit a 30-year high as its oil industry rebuilds after the war and decades of underinvestment. Iraq has the world’s fifthlargest proven oil reserves, and several hundred thousand more barrels of oil per day are expected to come online this year alone.¶ Libya:
Libya’s oil production plunged by over 80 percent from 1.6 million barrels a day to just 237,000 barrels a day after the country’s revolution in
2011. While Libya’s oil situation remains volatile due to protests that have shut down pipelines and ports, an eventual resolution could double
production to 500,000 barrels a day.¶ Venezuela: Despite numerous political challenges that have reduced Venezuela’s oil production in the
past decade, Leo Drollas, the head of the Centre for Global Energy Studies, expects 250,000 more barrels of oil per day to come online this year.
European energy companies Eni SpA and Repsol SA have signed deals last week to invest up to $500 million each to develop Venezuela’s Perla
oil field, which is considered to be one of the most important discoveries of the past decade.¶ 6)
OPEC’s limited ability to boost
prices by cutting production¶ When oil prices dropped significantly in the past, OPEC countries would cut their oil production to
bolster the price of oil. Growing fiscal deficits in many OPEC nations in recent years, however, make it far more
difficult to cut oil production because these countries can no longer afford the loss of oil revenues.¶ 7)
Global oil demand is slowing¶ Led by China and other emerging nations, global oil demand spiked in the years following the 2008
financial crisis, which contributed to oil’s bull market. Since 2011, oil demand growth has slowed significantly to a halfdecade low largely due to the ongoing economic slowdown in China and emerging economies:¶ 8) The
global economic “recovery” is actually another bubble¶ As discussed in the last point, oil demand and prices
are highly dependent on global economic growth. The financial crisis and subsequent Great Recession was what popped the
2008 oil bubble after prices reached nearly $150 per barrel. After the price of oil sank in late-2008, the post-2009 economic recovery helped oil
prices to rise 140 percent from their financial crisis low.¶ Unfortunately, my extensive research has found that the global economic recovery
that has driven oil prices higher is actually an artificial, bubble-driven recovery that I call a “Bubblecovery.” In a desperate attempt to prevent a
deflationary depression, central banks pumped trillions of dollars worth of liquidity into the global financial system and cut interest rates to
virtually zero percent. In short order, new economic bubbles started ballooning in China, emerging markets, Canada, Australia, Nordic
countries, commodities, tech startups, and U.S. equities and housing prices, to name a few (read my Bubblecovery article for more
information). Property and credit bubbles are inflating once again all around the world in a pattern that is very similar to the last decade’s
bubble that caused the financial crisis in the first place.¶ This chart shows that Canada’s housing and household debt bubble is even worse than
the U.S.’ bubble last decade:¶ These days, it makes no difference whether you look at the charts of property prices and debt in Canada, or in
Australia, Norway, Hong Kong, China, or Singapore; the charts all look the same and show the same classic bubble pattern. The world is caught
up in an epidemic of post-2009 bubbles, but the vast majority of people are completely unaware and in denial.¶ Here are a few terrifying
statistics that show how dangerous China’s economic bubble is:¶ China’s total domestic credit more than doubled to $23 trillion from $9 trillion
in 2008, which is equivalent to adding the entire U.S. commercial banking sector.¶ Borrowing has risen as a share of China’s national income to
more than 200 percent, from 135 percent in 2008.¶ China’s credit growth rate is now faster than Japan’s before its 1990 bust and America’s
before 2008, with half of that growth in the shadow-banking sector.¶ The post-2009 economic bubbles are the primary reason why the global
economy started growing again because bubbles create temporary growth booms before ending in crises. When
the post-2009
bubbles pop, global economic growth is going to sink (and there will not be a quick recovery like last
time), which will reduce demand for oil.¶ 9) The ending of the commodities supercycle¶ As I mentioned in the
last point, commodities are one of the key bubbles that I have identified. Artificial, debt-driven economic growth in China and other emerging
market nations combined with the unprecedented ocean of central bank liquidity caused commodities prices to triple since 2002:¶ Hundreds of
billions of dollars worth of investment capital clamored into commodities as investors began to treat commodities as a new long-term asset
class, similar to equities and bonds. Many of these investors also viewed commodities as a way to play the China and emerging markets boom.¶
Record high commodities prices spurred a massive global exploration and extraction boom that is now leading to growing gluts in numerous
commodities, particularly growth-sensitive commodities like copper and iron ore, as rising supply is met with slowing demand from China and
emerging markets. As stated earlier, “the only cure for high prices is high prices.” When the post-2009 global economic bubble pops, I believe
that commodities prices will
finally experience a true bust.
Long-term oil prices are slumping dramatically
Prezioso 2/3 — Jeanine Prezioso, Deputy Editor at Reuters, energy correspondent, 2013 Gerald Loeb
Award Winner, 2-3-14, “Analysis: As U.S. debates oil exports, long-term prices slump below $80,”
Reuters, http://www.reuters.com/article/2014/02/03/us-oil-prices-slump-analysisidUSBREA120G020140203.
Long-term U.S. oil prices have slumped to record discounts versus Europe's benchmark Brent, with
some contracts dropping below $80 in a dramatic downturn that may intensify producers' calls to ease
a crude export ban.¶ Oil for delivery in December 2016 has tumbled $3.50 a barrel in the first two
weeks of the year, trading at just $79.45 on Friday afternoon, its lowest price since 2009. That is an
unusually abrupt move for longer-dated contracts that are typically much less volatile than prompt
crude. For most of last year, the contract traded in a narrow range on either side of $84 a barrel.¶ The
shift in prices on either side of the Atlantic is even more dramatic further down the curve, with
December 2019 U.S. crude now trading at a record discount versus the equivalent European Brent
contract. The spread has doubled this month to nearly $15 a barrel, data show.¶ The drop in so-called
"long-dated" U.S. oil futures extends a broad decline that has pushed prices as much as $15 lower in
two years. It also coincided with an abrupt drop in near-term futures, which fell by nearly $9 a barrel
in the opening weeks of 2014 amid signs of improving supply from Libya.]
The long-term outlook for global oil prices is decreasing — $75 a barrel
Epstein 3/29 — Gene Epstein, American economics editor at Barron’s Magazine, 3-29-14, “Here
Comes $75 Oil,” Barron’s,
http://online.barrons.com/news/articles/SB50001424053111903536004579459323209921860.
The long-term outlook for global oil prices is lower, perhaps much lower, giving a strong boost to the
U.S. economy while potentially crippling the economy of Vladimir Putin's Russia. Vast new discoveries
of oil and natural gas in the U.S. and around the globe could drive the oil price to as low as $75 a
barrel over the next five years from a current $100.¶ The demand side, too, will put pressure on the
supremacy of petroleum. For the first time in its 150-year history, the internal combustion engine can
be run efficiently on alternative fuels from a number of sources, including natural gas. As these
alternatives are increasingly introduced, global consumption of oil will slow its growth and flatten out.¶ ¶
Citigroup's head of global commodity research, Edward Morse, believes the combination of flattening
consumption and rising production should mean that "the $90-a-barrel floor on the world oil price
over the past few years will become a $90 ceiling." Within a new trading range with a $90 ceiling,
Morse sees an average of $75 as plausible.¶ ¶ That's a far cry from the old paradigm, promoted in the
past 40 years, which posited ever-greater demand for petroleum as developing economies grew, and a
slowdown on the supply side -- the looming prospect of "peak oil," whereby global production maxes
out and falls into decline. To the contrary, unconventional sources of crude oil totaling more than a
trillion barrels -- the equivalent of more than 30 years of extra supply -- have been discovered in the past
five years. The majority is recoverable at $75 or less, and much is now being tapped.¶
Oil prices are heading down for the next few years
Conerly 13 — Bill Conerly, economic and business analyst, 5-1-13, “Oil Price Forecast for 2013-2014:
Falling Prices,” Forbes, http://www.forbes.com/sites/billconerly/2013/05/01/oil-price-forecast-for2013-2014-falling-prices/.
Oil prices are headed down, and I mean down at least $20 a barrel. The key reason is that prices have
been high. It’s not a paradox, but a result of the long time lags in oil production.¶ Oil prices were fairly
stable from 1986 through 2001, averaging just $20 per barrel. Then prices started rising, spiking to $134
just as the recession began. The price of oil has been above $80 for the past two and a half years. With
rising prices has come a dramatic increase in exploration activity. During the era of low prices, the
number of drilling rigs in operation around the world was 1,900 on average; now we are at nearly
double that pace, and we have been for nearly three years.¶ Drilling activity results in oil production,
lasting for many years after the drilling is over. Take a look at the accompanying chart of drilling rigs and
total production. Drilling jumped up after the oil price hikes of 1973 and 1979. By 1986, increased oil
production brought prices crashing down. Oil exploration quickly followed suit.¶ Production, however,
continued to grow long after new drilling declined. When drilling was high, much of the activity was
exploratory—trying to find the oil. When prices fell, the riskiest drilling made no sense. What was left
was in-fill. The oil field had been identified, and further wells were needed to best utilize the resource.
These wells are fairly low risk, with high rewards compared to the cost of the drilling rig. As a result,
even low levels of drilling activity led to substantial increases in global production.¶ Today we’ve had
moderately strong drilling activity for several years. New fields have been identified and delineated.
Now we’ll see fairly mild drilling activity but continually increasing production.¶ In the past year
production has been soft, barely growing, but that’s a reflection of weak demand. In the short run,
production can be dialed back to save more oil for the future. In the long run, though, production
capacity rules the roost.¶ What of demand? Demand should grow a little slower than the global
economy. Unless the world starts to boom—an unlikely scenario, given problems in Europe and the
United States—production capacity will grow faster than demand, pulling prices down.¶ What of peak
oil worries? The concept is often sound when looking at one well—but even a single well will sometimes
be re-worked to increase its output. For the world as a whole, the peak oil theory fails to consider that
higher prices lead to greater exploration for new oil fields, greater in-fill drilling of established fields,
better care of older wells, and development of new technology for all of these functions. The world’s
oil production will peak when the cost of finding new oil rises and the development of alternative
energy makes the value of oil decline.¶ Over the coming few years, look for oil prices to decline at
least below $80 a barrel and quite possibly more.
High Supply/Shale Boom
Future oil prices falling due to high supplies
Friedman and Berthelsen 14 — Nicole Friedman, energy markets reporter at WSJ, and Christian
Berthelsen, staff writer at WSJ, 2-11-14, “U.S. Lowers Crude-Oil Output Outlook for 2014, 2015,” Wall
Street Journal,
http://online.wsj.com/news/articles/SB10001424052702303650204579377081898396074.
The U.S. will face a tighter supply-and-demand picture for crude oil and petroleum products this year
and next than previously expected, government forecasters said Tuesday.¶ The U.S. Energy
Information Administration lowered its forecasts for U.S. oil-production growth in 2014 and 2015 in its
short-term energy outlook, and raised its expectations for the country's consumption of oil products.¶
The U.S. is likely to produce 8.42 million barrels a day of crude oil this year, down from 8.54 million
barrels a day in the EIA's previous forecast but still up from 7.44 million barrels a day in 2013. For 2015,
the EIA forecasts production of 9.19 million barrels a day of oil, down from 9.29 million barrels a day
previously.¶ The output forecasts were adjusted because of "indications that severe weather this
winter has caused temporary slowdowns in completing new wells," according to the EIA.¶ The EIA
expects consumption of oil products to reach 18.91 million barrels a day in 2014 and 18.97 million
barrels a day in 2015, up from prior forecasts for 18.88 million barrels a day this year and 18.96 million
barrels a day next year.¶ To help fill the gap, the U.S. may need to import more oil than expected. The
EIA forecasts net imports of oil and oil products at 25% of U.S. oil demand by 2015, a higher share than
previously forecast but still the lowest level since 1971. U.S. reliance on foreign oil peaked at more than
60% of domestic demand in 2005.¶ The EIA expects net imports to decline from 6.2 million barrels a
day last year to 5.49 million barrels a day this year and 4.65 million barrels a day in 2015.¶ U.S. oil
production has been robust because of hydraulic fracturing and horizontal drilling techniques that
have enabled energy producers to tap into supplies trapped in shale-oil fields.¶ U.S. production
peaked in 1970, when it reached an annual average of 9.6 million barrels a day, the EIA said.¶ The agency
raised its expectations for global oil consumption to 91.62 million barrels a day this year and 92.99
million barrels a day next year, up from 90.36 million barrels a day in 2013. Most of the growth will
come from developing nations, especially China.¶ Consumption among the industrialized nations that
comprise the Organization for Economic Cooperation and Development is expected to stay relatively
flat, while emerging-market economies such as China will account for "almost all" consumption growth,
the EIA said.¶ In 2015, non-OECD demand will overtake flat OECD demand for the first time, exceeding it
by nearly 1 million barrels a day.¶ The EIA said it expects world supplies to increase by 1.7 million
barrels a day in 2014 and 1.4 million barrels a day in 2015, with most of the growth coming from
countries outside the Organization of the Petroleum Exporting Countries—especially the U.S., Canada
and Brazil.¶ U.S. energy officials expect global and domestic crude prices to moderate this year as the
world's supplies outpace consumption.¶ Domestic benchmark crude prices are likely to average $93 a
barrel in 2014 and $90 a barrel during 2015, the EIA said in its February short-term energy outlook.¶
Prices for U.S. retail gasoline, which fell on average from 2012 to 2013, are expected to fall again in
2014 to $3.44 a gallon, and in 2015 to $3.37 a gallon.¶ Globally, the EIA said it expects Brent crude
prices to weaken as a supply boom from the U.S. and other countries outstrips world consumption.
The agency said it expects Brent to average $105 a barrel in 2014 and $101 a barrel in 2015, below the
current level of $108.90.¶ OPEC is expected to reduce crude production to offset the growth in supply,
the EIA said. OPEC is likely to produce 29.6 million barrels per day in 2014 and 29.3 million in 2015. The
forecasts were slightly higher from the EIA's January report.
Increasing oil supply will continue to drive down oil prices, EIA proves
Eaton 14 — Collin Eaton, staff writer at the Houston Chronicle, 1-8-2014, “US oil boom will slow in
2015, feds forecast,” Fuel Fix, http://fuelfix.com/blog/2014/01/08/us-oil-boom-could-ease-in-2015-eiasays/.
Increasing oil supply from the U.S. and other non-OPEC countries is expected to drive down prices for
Brent, the international benchmark crude, to an average $102 per barrel in 2015 from an average $109
per barrel last year. Meanwhile, U.S. benchmark crude West Texas Intermediate will likely trail Brent
by a $12 per barrel discount next year 2015, the EIA reported.¶ WTI fell further behind Brent last year
after pipeline companies untangled a bottleneck of crude in Cushing, Okla., stranded at storage facilities
on the way to Gulf Coast refineries. That had kept U.S. oil prices elevated for several years. International
crude prices, especially in North America, may also face pressure this year from rising oil output from
the Middle East and slowing economic growth and oil demand in China, Moody’s Investors Service
reported this week.¶ Crude supplies from non-OPEC companies are expected to reach a record increase
of 1.9 million barrels per day this year. Prices at the pump are also expected to fall next year on the
surge in crude: Drivers could pay an average $3.39 for a gallon of regular in 2015, down from a
projected $3.46 this year, according to EIA estimates.
Oil prices are lowering significantly due to higher supplies
Rocco 14 — Matthew Rocco, staff writer, 1-9-14, “U.S. Shale Boom Drives Record Oil-Related Exports,”
Fox Business, http://www.foxbusiness.com/industries/2014/01/09/us-shale-boom-drives-refinedproduct-exports/.
Exports of refined products from the U.S. have risen sharply in recent years, another byproduct of the
shale boom that has reshaped energy markets.¶ Access to lower-cost crude from shale plays like Eagle
Ford in Texas and North Dakota’s Bakken have given domestic refiners a an edge over international
competitors, Standard & Poor’s said in a report this week.¶ Meanwhile, several nations have yet to
unleash their own vast shale reserves, potentially throwing another wrench into energy prices. The
U.S. is the only country so far to see a high level of shale oil and gas production.¶ The shale boom has
proven to be a positive development for refiners looking overseas to Europe, Japan, China, Latin
America and other regions. According to S&P, exports of refined products have surged by more than
60% to about 1.7 million barrels a day since 2010.¶ S&P added that while not as significant, more fuelefficient automobiles are pushing domestic fuel demand lower and thus freeing up oil to be refined into
products for export.¶ Revenues, operating expenses and credit metrics of certain U.S. refiners have
strengthened, S&P explained, especially for refiners located close to shale plays.¶ The report also said
the “rising tide” of U.S. exports is putting pressure on various Caribbean refiners to cut back or close
operations. In some markets, like low-sulfur diesel, gasoline and jet fuel, American refiners are taking
market share from some European competitors.¶ Before the rapid increase in U.S. oil output, America
was a major destination for European gasoline. The country’s need for imported gasoline has
decreased significantly, hurting refiners in Europe and transatlantic shippers that would normally bring
gasoline to the U.S. and low-sulfur diesel back to Europe.¶ S&P noted how some of the more
sophisticated U.S. refiners were put at a disadvantage once the shale boom kicked off. Many refiners
modified facilities to process heavier crude, not the light, sweet crude being produced at shale plays.¶
The move was intended to prepare refineries for an expected supply increase and price drop for
heavier crude. Light, sweet WTI crude used to trade at a premium to Brent and heavier grades like
Maya, but the rapid increase in U.S. shale production has reversed that relationship.¶ Laws largely
prohibiting U.S. crude oil exports have also kept the price of WTI and other domestic crude slates
relatively low, S&P said.¶ Some lawmakers in Washington, including Republican Sen. Lisa Murkowski of
Alaska, have called for the U.S. to lift the export ban that began in the 1970s. Oil giant Exxon Mobil
(XOM) has also voiced support for such a move, citing a projected 40% jump in U.S. liquid supplies by
2040.¶ Overseas Shale Potential¶ Global energy producers have yet to embark on their own shale boom,
even as countries like Russia, China and Argentina sit on large amounts of technically recoverable
shale oil and gas.¶ However, it remains to be seen what portion of those reserves are economically
recoverable.¶ “Although great potential exists for future shale-derived hydrocarbon production, it
remains to be seen what percentage of non-U.S. shale resources can be extracted at a profit,” S&P
explained in a separate report.¶ Russia is estimated to have the largest shale oil reserves of 75 billion
barrels, according to the Energy Information Administration. The U.S. is No. 2 with 58 billion barrels,
followed at a distance by China, Argentina and Libya.¶ China is believed to have 1,115 trillion cubic feet
of recoverable shale gas. The EIA estimates that Argentina has 802 trillion cubic feet, while the U.S. is
fourth at 665 trillion. Algeria likely has the third-largest shale gas reserves.¶ While the U.S. energy
industry has roared ahead, shale reserves overseas face several development hurdles such as a lack of
drilling resources, land ownership issues and government regulations.¶ Also, the characteristics of shale
can vary from country to country, so techniques that work in the U.S. may not be directly applicable to
other nations.¶ “Although these hurdles will slow shale reserve development outside North America-and in some instances may make production unfeasible--we expect that global shale production will
become increasingly significant beyond 2020,” S&P said.
Oil prices decreasing and stabilizing as a result of US energy independence
Hill 6/19 — Patrice Hill, staff writer, 6-19-14, “U.S. oil flow helps keep prices in check as threats rise
overseas,” The Washington Times, http://www.washingtontimes.com/news/2014/jun/19/us-oil-flowhelps-keep-prices-in-check-as-threats-/?page=all.
America’s growing energy independence is paying major dividends this spring, helping to keep a lid on
fuel prices despite sudden threats to major global oil supplies in Iraq and Russia that in the past would
have sent prices soaring.¶ Sunni Muslim extremists who have taken over large portions of northern Iraq
have shown their willingness to use oil supplies as a weapon, taking control over the nation’s biggest
refinery in Baiji temporarily Wednesday after having sabotaged a major pipeline funneling oil through
Turkey for export.¶ Their advance on Baghdad and regions farther south threatens to cripple Iraq’s ability
to expand output at its most prolific and important southern oil fields as well, potentially dealing a blow
to China and other oil-thirsty Asian nations that were looking to Iraq for supplies in the future.¶ The Iraq
crisis follows Russia’s takeover of Crimea and its backing of rebels fighting the Kiev government in
eastern Ukraine, prompting the U.S. and Europe to threaten broad sanctions on Russia’s economy,
including its vital oil sector. Such sanctions have the potential to throttle oil exports from the world’s top
producer and deprive much of Europe of a critical source of oil.¶ In the past, either of these two major
threats to oil supplies — and certainly both of them together — would have sent world oil prices
soaring and pushed prices at U.S. gas pumps to uncomfortable and possibly unprecedented levels. But
that is not happening, and analysts are attributing the relative calm, with premium crude prices having
risen moderately to a range around $106 a barrel in New York so far this week, to the gusher of oil
coming out of America’s heartland, which is holding down prices.¶ Ben Montalbano, research director
for the Energy Policy Research Foundation Inc., said the surge in U.S. oil output from the Bakken, Eagles
Ford and other big shale formations in the nation’s midsection not only has created an embarrassment
of oil riches that is moderating energy prices in the U.S., but it is also giving the world a substantial
margin of excess production capacity that is preventing the kind of astronomical spike in global oil
prices seen during comparable oil crises in the past.¶ “Oil prices would likely be $20 to $40 dollars per
barrel higher than they are now,” in the $125 to $150 range, and the OPEC oil cartel would be
struggling to address shortages, Mr. Montalbano told the website Real Clear Energy. “Without the
increase in U.S. oil production over the past few years, OPEC’s excess capacity would be at or near
zero.Ӧ Pump prices rose modestly to around $3.67 a gallon on average this week for regular gasoline in
the wake of last week’s extremist takeover of northern Iraq, according to Gasbuddy.com. They remain
just slightly above the $3.63 average level this spring and the $3.61 level posted a year ago, and far
below the levels over $4 where gas prices regularly landed before the shale oil boom.¶ The restraint in
fuel prices is not entirely new, though it has been noticeable this week. Mr. Montalbano said the glut of
oil coming out of the Midwest has had the beneficial effect of holding down oil prices for several years.
It enabled the world to easily absorb the loss of 1 million barrels a day of premium crude production
caused by the collapse of Libya’s oil industry several years ago, as well as the subsequent loss of 1
million to 1.5 million barrels a day of Iranian crude exports because of a U.S.-led sanctions regime since
2012. Neither of those events had much impact on world oil prices — in a departure from the past.¶
“Sanctions against Iran, civil war in Libya, and general unrest in the Middle East have all had minimal
effects on price volatility — thanks to the U.S. energy renaissance,” said Jared Meyer, a policy analyst at
the Manhattan Institute for Policy Research. “The most important contribution to oil’s price stability
has been the substantial increase in U.S. production.”
US shale boom lowering prices, especially light oil in Canada
Lewis 2/5 — Jeff Lewis, energy reporter, 2-5-14, “How the U.S. shale boom is putting pressure on
Alberta’s light oil,” The Financial Post, http://business.financialpost.com/2014/02/05/how-the-u-s-shaleboom-is-putting-pressure-on-albertas-light-oil/?__lsa=b12f-50fd.
The U.S. shale boom is poised to cut demand for Alberta’s light oil, amid mounting fears of a glut and
calls from energy companies to ease restrictions on exporting crude from U.S. shores.¶ Steady
production gains from the U.S. Bakken and the Eagle Ford shale play in Texas could overwhelm U.S.
refineries by mid-2016 and drive down prices unless legislators in Washington ease restrictions on
exports, analysts at RBC Capital Markets said in a report Wednesday. Save for shipments to Canada, the
U.S. prohibits exports of crude oil under a ban that dates to the 1970s.¶ “You’re going to come to a wall
at some point where there’s too much oil and nowhere to put it in the U.S. without oil exports being
allowed,” said Leo Mariani, senior U.S. analyst with RBC in Austin, Tex.¶ “At that point we certainly would
suspect that if we don’t have exports then you’re going to start to see pretty dramatic oil-on-oil
competition, where guys are trying to compete for sales with the same refiners and end users.Ӧ
Whether the U.S. allows exports could have significant ramifications for Alberta. Deep discounts on
Western Canada Select, the key heavy oil marker, have narrowed substantially against the West Texas
intermediate benchmark from a year ago.¶ But light oil is under increasing pressure. Edmonton Par, a
light oil blend, plunged more than US$20 below WTI in December, according to Scotiabank.¶ Prices have
snapped back, “but I think that there is a risk because of the huge and quite remarkable development of
light, tight oil,” said Patricia Mohr, vice-president and commodity markets specialist at the bank in
Toronto.¶ Canadian Oil Sands Ltd., which owns the largest share of the Syncrude Canada Ltd. project,
said Jan. 30 sales of its synthetic crude oil sold for $10.84 under WTI in the fourth quarter. The oil
fetched a $2.52 premium in the same period a year ago.¶ The company warned investors that rising U.S.
production could push sales to more distant refineries, leading to higher transportation costs. Volatile
prices “will persist for several years until additional pipeline or other delivery capacity is available to
deliver crude oil from Western Canada” to new markets, the company told investors.¶ The prospect of a
U.S. oil glut “is a risk and the key reason why Suncor and Total decided not to go ahead with another
upgrader in Alberta,” Ms. Mohr said. The hugely expensive plants convert raw bitumen into refineryready oil.¶ The two companies last year scrapped plans to build the $11.6-billion Voyageur mega-plant,
fearing the project wouldn’t be competitive with lower-cost shale oil.¶ “That’s starting very much to play
out as we expected,” Suncor chief executive Steve Williams said this week. “What we’re seeing now is
the Voyageur-type investment, it’s very difficult to justify doing that.”¶ RBC estimates the U.S. can
accommodate another two million barrels a day of production growth before testing refinery and
storage limits. Output could slow without exports if WTI prices drop below US$80, Mr. Mariani said.¶
“We don’t foresee the same problem happening for heavy oil,” he added. “The real issue in the U.S. is
light oil.”
A2 political turmoil
Oil prices will remain low despite turmoil- brent benchmark proves
AP 14 – The Associated Press ( July 15th, 2014, “Oil price falls below $100 a barrel despite turmoil in
Libya on stronger dollar, supplies” http://www.startribune.com/business/267060021.html DA: 7/18/14)
//MB
The price of oil fell below $100 a barrel for the first time since May even as the deteriorating security
situation in Libya has raised questions about whether the country can soon increase crude exports.
Benchmark U.S. crude for August delivery fell 95 cents to close at $99.96 a barrel on the New York
Mercantile Exchange. Oil is down 5 percent since the beginning of the month. Brent crude, a
benchmark for international oils used by many U.S. refineries, fell 92 cents to close at $106.02 on the
ICE Futures exchange in London. Prices have been falling in recent weeks as worries about supply
disruptions from Iraq eased and on the prospect of more supplies from Libya. Weaker than expected
economic data for the first half of the year prompted the International Energy Agency and other experts
to trim their forecasts for short and medium term demand. On Tuesday, Fed Chair Janet Yellen's
remarks to Congress on the U.S. economy strengthened the value of the U.S. dollar, also helping to
push oil lower. Because oil is priced in dollars, a stronger dollar makes oil look comparatively more
expensive — and therefore less desirable — to holders of other currencies.
AT: Iraq Conflict
Oil prices are decreasing, Iraq conflict only has temporary effect, and US output rising
Shenk 6/26 — Mark Shenk, staff writer for Bloomberg News, 6-26-14, “WTI Oil Slips to Two-Week Low
as Iraq Output Seen Rising,” Bloomberg, http://www.bloomberg.com/news/2014-06-26/brent-falls-forsecond-day-as-iraq-output-seen-rising.html.
West Texas Intermediate oil dropped to a two-week low and Brent fell on signs that the insurgency in
Iraq won’t curb output and as U.S. stockpiles climbed.¶ Iraq’s crude exports will increase next month,
Oil Minister Abdul Kareem al-Luaibi said yesterday. Government forces repelled an attack by the Sunni
Islamic State in Iraq and the Levant on the Baiji refinery north of Baghdad. U.S. crude stockpiles rose by
1.74 million barrels to 388.1 million last week, the Energy Information Administration said yesterday.¶
“Prices are retreating because the insurgency hasn’t had a material impact on the Iraqi production and
we might be looking at a gain in exports,” said Gene McGillian, an analyst and broker at Tradition
Energy in Stamford, Connecticut. “Prices are consolidating here just below the nine-month highs.”¶ WTI
for August delivery slipped 66 cents, or 0.6 percent, to $105.84 a barrel on the New York Mercantile
Exchange. It was the lowest settlement since June 11. Futures are up 7.5 percent this year.¶ Brent for
August settlement fell 79 cents, or 0.7 percent, to end the session at $113.21 a barrel on the Londonbased ICE Futures Europe exchange. It was the lowest close since June 16. Prices have increased 2.2
percent this year.¶ The European benchmark crude’s premium to WTI narrowed to $7.37 from $7.50
yesterday.
Oil prices are slipping again, Iraq conflict is receding
Johnson 6/25 — Christopher Johnson, Energy Correspondent for Reuters, 6-25-14, “Oil falls below
$114 but Iraq conflict curbs losses,” Reuters, http://in.reuters.com/article/2014/06/25/markets-oilidINKBN0F00QR20140625.
Brent crude slipped below $114 a barrel on Wednesday as the risk of supply disruption in Iraq
appeared to recede and after a rise in U.S. inventories pointed to ample stockpiles for the world's
biggest oil consumer.¶ Oil has made sharp gains in the past two weeks as concerns over fighting in Iraq,
OPEC's second-largest producer and exporter, pushed the North Sea benchmark above $115, its highest
since September.¶ But with exports from Iraq's southern terminals running near record levels and most
of the country's oilfields in the peaceful south, far away from the Sunni insurgency, worries about
supply have been easing.¶ Brent LCOc1 dropped 60 cents to $113.86 a barrel by 0755 GMT, after gaining
34 cents on Tuesday. Prices, up almost 6 percent over the past two weeks, have receded from a ninemonth top of $115.71 reached on June 19.¶ "The risk of losing some Iraqi oil production is not zero,
but it is very low, 5-10 percent, I think," said Carsten Fritsch, senior oil and commodities analyst at
Commerzbank in Frankfurt.¶ "But the tail risk will keep oil prices elevated for now. Hence, I expect Brent
to stay above $110 for the time being."¶ Sunni insurgents are battling government forces for control of
Iraq's biggest refinery - the 300,000-barrels-per-day Baiji complex - that has been under threat for nearly
two weeks since militants overran northern cities. [ID:nL6N0P51PO]¶ "Markets have already factored in
the Iraq situation - unless something more chaotic happens. The threat of supply disruptions is
receding," said Avtar Sandu, senior commodities manager at Phillip Futures.¶ U.S. crude CLc1 climbed 20
cents to $106.23 a barrel. It hit $107.50 in early Asian trade after federal officials approved exports of
condensate, an ultra-light oil, in a marginal relaxation of a 40-year ban on U.S. oil exports. U.S. crude
closed down 14 cents in the previous session. Analysts say allowing more U.S. oil to be exported could
help tighten the domestic market, pushing up prices. U.S. officials have told energy companies they can
export a variety of condensate if it has been minimally refined, a U.S. Commerce Department
spokesman confirmed to Reuters, although he said there had been "no change in policy" towards crude
exports.¶ News of a rise in U.S. crude oil and gasoline stocks helped drag oil prices lower.¶ U.S. crude
inventories rose by 4 million barrels in the week to June 20, to 382.6 million barrels, compared with
analysts' expectations for a decrease of 1.6 million barrels, data from the American Petroleum Institute
showed on Tuesday.¶ Crude stocks at the Cushing, Oklahoma, delivery hub rose by 424,000 barrels, the
API said. [ID:nZXN047B00] [ID:nL2N0P51HN]¶ The U.S. government's Energy Information Administration
(EIA) releases its data for the week ended June 20 later on Wednesday. [EIA/S]
Oil prices will decrease in the long run despite Iraq fighting
Deshpande 6/22 — Abhishek Deshpande, commodities analyst at London-based Natixis, 6-22-14,
“Crude oil outlook: Crude oil prices can rise above $120 if Iraq crisis escalates,” Business Standard,
http://www.business-standard.com/article/markets/crude-oil-outlook-crude-oil-prices-can-rise-above120-if-iraq-crisis-escalates-114062200772_1.html.
Over the past week, Brent crude prices have increased by close to $5 a barrel ($2.5 a barrel for WTI),
introducing a clear Iraq risk premium. The one-year high in oil prices was triggered by the sudden
eruption of an Al Qaeda-linked militant insurgency in northern Iraq last week, raising fears of supply
shortages and a civil war that might also draw in oil-rich neighbours. Iraq is the second largest producer
of crude oil in the Organization of The Petroleum Exporting Countries (Opec).¶ The successs in northern
Iraq of the Islamic State in Iraq and al-Sham (ISIS) clearly demonstrates the extent to which the country
is at risk of fracturing along religious and ethnic fault lines. ISIS poses a threat not only to Iraq's stability
but also to Iraq's oil supplies and energy infrastructure. The refinery at Baiji, near Mosul, is now under
ISIS control. With a capacity of 310,000 barrels a day, it is the country's biggest. It supplies oil products
to Baghdad and most of the northern provinces. Baiji is also a major provider of power to Baghdad. By
targeting Iraq's oil facilities, as it did with the Kirkuk-Ceyhan pipeline in the past and Baiji now, ISIS is
undermining both government revenue and essential energy supplies (fuel and power).¶ Nevertheless,
with the majority of Iraq's operational oil infrastructure located either in the Shia-dominated far south
or the northeastern Kurdish autonomous region (guarded by 190,000 troops), it is unlikely that Iraq's oil
supply will be materially affected, unless the conflict escalates substantially. What is more worrying is
the risk that ISIS might advance into Baghdad, threatening the potential breakdown of Iraq as a
sovereign entity.¶ We expect strong support for Brent prices over the next few weeks, due to the Iraqrelated risk premium. Were there to be a withdrawal of a substantial portion of Iraq's 3.3 million
barrels a day crude oil supply from the market, this could take global spare capacity dangerously close
to zero, suggesting an increase in crude oil prices well above $120 a barrel. Events in 2007-08 (see
chart) are clearly our closest guide to how high prices could go in such a scenario. In the summer
months, Opec's remaining spare capacity would be insufficient to meet peak demand. Saudi Arabia is
currently producing close to 9.75 mn barrels a day, with spare capacity of only 2.5 mn barrels a day.¶
High oil prices pose a significant threat to the Indian economy. Being heavily dependent on imported
crude oil, a rise in oil prices would damage the government's fiscal balance and widen its current
account deficit. The rupee would then weaken and the combination would result in higher inflationary
pressure.¶ Over the longer term, once the Iraqi crisis is resolved, there are good reasons why oil prices
should fall. The need for Western powers to work closely with Iran could lead to a swifter resolution
of the latter's nuclear ambitions, thereby releasing additional Iranian oil on global markets once the
US and European Union embargoes are lifted. There is also the prospect of greater autonomy for the
Kurdish regional government in Iraq, whose attempts to export crude via Turkey have so far been
thwarted by Baghdad.¶
Oil Prices are high and stable
Al-Katteeb 3/19 — Luay Al-Khatteeb, Brookings Institutions Fellow, executive director of Iraq Energy
Institute (nonprofit), 3-19-2014, “Why the World Oil Prices Should be High and Stable,” Brookings
Institution, http://www.brookings.edu/research/opinions/2014/03/19-world-oil-price-alkhatteeb.
After a decade of volatile prices, the past three years saw an unusual period of stability in the oil
market, with a barrel of crude oil averaging $110 each year. However, forecasts for 2014 predict a
decline to an average of $105, on the basis of expanding supply and a weaker-than-expected demand. A
combination of geopolitical events in Syria, Libya and Nigeria have prevented oversupply despite the
expanding entry of US shale oil into the market. The price has remained high thus far, but how long can
prices stay above $100?¶ This coming price drop arrives at a time when the world’s largest consumer is
nearing its long-held goal of energy self-sufficiency. The United States embarked on this quest in the
aftermath of the 1973 oil crisis, and in recent years has seen the country develop a comprehensive
nuclear program, develop biofuels and seek oil from ever-more-expensive sources: the tar sands of
Canada, the depths of the Gulf of Mexico and even the wilds of Alaska. Further afield, it drew on oil from
Brazil’s deep-water wells and West Africa’s low-sulfur oil deposits, all of which contributes to a reduced
dependency on oil from the Middle East.¶ More recently, the development of unconventional sources of
oil and gas back in the United States has led to a revolution in energy flows and policies, as the country
stands on the verge of becoming a gas exporter. The rapid development of shale oil and gas fields has
seemed miraculous at times, but like many of the conventional sources the US relies upon the
production is more expensive (costing $60-80 per barrel) and more risky, as output and depletion rates
seem less predictable than conventional sources. As a result US domestic and regional supply is quite
vulnerable to price fluctuations, as witnessed when work at the tar sands of Canada came to a standstill
in 2008 following a price drop.¶ Analysts have claimed that the age of “easy oil” is over, and we are
entering a period of expensive extraction and capital-intensive processing. With the shale oil and gas
sector currently requiring $1.5 in capital investment for $1 of revenue, several major oil companies have
turned their backs on shale in favor of expanding their operations in the “easy” oil fields of the Middle
East. Despite the risks involved, Iraqi oil pumped up at $20 a barrel seems like an attractive prospect, as
do sources in Libya and Iran when politics and security permit. Still, will dumping more “easy” oil on the
market lower prices to the point where shale oil production grinds to a halt?¶
Links
Negative
Oil Exploration — General
Increasing global oil supply would reduce prices
Moors 12 — Dr. Kent F. Moors, 12/14/2012, expert in global risk management, oil/natural gas policy
and finance, cross-border capital flows, emerging market economic and fiscal development, political,
financial and market risk assessment. Professor in the Graduate Center for Social and Public Policy at
Duquesne University. http://moneymorning.com/2012/12/14/2013-natural-gas-forecast-six-bullishreasons-why-now-is-the-time-to-buy\, December 14, 2012
A rise on the supply side would generally reduce prices , especially if the number of operators
continues to increase. More gas moving on the market from more suppliers results in a downward
pressure on prices .¶ The second dynamic, however, is moving in the other direction, enticing the
increase in drilling and expansion of infrastructure.¶ This factor considers the demand side, and there
are at least six major trends colliding to increase the prospects for gas usage as we move through
2013.¶ As a result, I expect natural gas prices to see a 25% increase from current levels... here's why.¶
2013 Natural Gas Forecast¶ 1) Winter Chill Increases Natural Gas Demand¶ The first factor driving price
increases will come from a colder winter throughout the United States. Traditionally, gas prices have
been quite sensitive to seasonal shifts. The overly mild winter in the East last winter was enough to
depress gas prices across the board. In 2011, NYMEX futures contracts declined to less than $2 per 1,000
cubic feet (or million BTUs).¶ The price has recovered to as much as $3.90 recently, although it is
currently down to about $3.50. Nonetheless, the recovery (largely a result of companies pulling drilling
rigs out of service and reducing the number of new wells) combined with a colder winter, will provide a
base pushing the price to $4 as we start the new year.¶ The other five elements are more directly
affecting demand increases moving forward. These will have primary effects on the gas balance
between anticipated needs and drilling volume.¶ 2/3) Industrial and Petrochemical Usage on the Rise¶
The second and third elements are increasing industrial and petrochemical uses for gas. Industrial use
has been building for a while, but it is one of the last demand factors to emerge during an economic
recovery. That is now beginning to kick in.¶ However, petrochemical usage is resulting in an appreciating
demand situation. Gas, natural gas liquids, and byproducts are replacing crude oil and oil products as
feeder stock for an entire range of petrochemicals - from solvents and polymers, to plastics and fibers.¶
The intense competition over where the next "crackers" will be located in the U.S. is clear testimony to
the added demand coming from petrochemicals. These facilities will break down gas flows, making the
feeder stock ingredients more accessible. This development is also putting some additional weight on
the processing of "wet" gas, raw material containing value-added byproducts.¶ 4) Natural Gas Fleets
Expand Across the U.S.¶ The fourth demand factor is the increasing use of natural gas as a vehicle fuel.
We have been witnessing a rise in interest here for several years, but the move to using liquefied
natural gas (LNG) and compressed natural gas (CNG) to replace gasoline and diesel has been gaining
strength.¶ Entire fleets of heavy-duty trucks have been retrofitted across Canada, while refueling
terminals have been popping up near interstates in the U.S. to service company-designated vehicles. The
cost savings in fuel is significant, usually representing more than two dollars per gallon.¶ The downside is
on the infrastructure side. It will take several years of heavy capital investment to provide the network
of transport pipelines, storage and terminal facilities, filling stations, and related requirements.¶ And we
must consider the cost of retrofitting engines. At an average of $35,000 per vehicle, it will remain an
obstruction for some.¶ I expect to see an increase in natural gas-as-fuel usage continuing, but remaining
on the truck side for 2013. Personal autos will stay a niche market in the near-term. Still, this will
comprise an improving demand area for natural gas.¶ 5) Electricity Consumption from Gas Set to Spike¶
Fifth is the massive transfer underway from coal to gas as the preferred fuel for generating electricity.
Coal will remain a fuel of choice in several sectors of the world and will still be cost effective in certain
regions in the U.S. But the days of "King Coal" in the generation of electricity are drawing to a close.¶ The
figures here are massive. The American market is replacing more than 90 gigawatts (GW) of generating
capacity by 2020, virtually all of this coal-fired. In addition, the phasing in of non-carbon regulations
(cutting mercury, sulfurous, and nitrous oxide emissions) will add another 20 GW to the retirement
agenda, once again coming almost exclusively from coal.¶ Each 10 GW transferred to natural gas will
require an additional 1.2 billion cubic feet of gas per day. If only 50% of the expected transition from
coal to gas occurs, the added demand will eliminate three times the current total gas in storage
nationwide.¶
Oil Exploration — U.S. Drilling
U.S. Oil exploration raises global prices
Strauch 13 — Nick Strauch, 11/15/2013, Studied engineering at the University of Pittsburgh,
“Economics of Offshore Oil” http://www.pitt.edu/~nps19/trends.html
Fuel prices can be greatly reduced by offshore oil drilling. If oil production increases, total supply
increases. However demand does not change. One of the most basic theories of economics states that
the more supply, the lower the price, and the more demand, the higher the price. If we drill more, only
supply changes so prices decrease. Also, we are producing this oil domestically. Naturally, when selling
anything a smart businessman wants to make money from the transaction just like foreign nations do
when they sell us their oil. If we produce more of our own oil we can sell to ourselves at a rate where
the producer is profiting but not at the same high expense to the purchaser. If we produce oil, we
create competition for other nations. When our foreign demand for oil decreases, foreign providers
will have a surplus of oil. To be able to sell it, they will have to decrease their prices [3]. Fuel prices
themselves will decrease, but what implications does this have for the American people and for me as
an engineer? Personal transportation will be cheaper. Gasoline will decrease from its current 3.50 to
$4.00 per gallon prices. This means we will be spending less of our money on just trying to get to work
to make money. My father works an hour from our house. Every week he spends about two percent of
earnings on driving. This does not sound like much, but when all other cost and taxes are accounted for
two percent is a large amount of money. If he only had to pay $2.00 per gallon of gasoline, our family
could have thousands of dollars more. The same goes for many Americans, and for companies. Lowering
fuel costs means shipping costs less. Food prices would drop. This could decrease poverty in America.
Cost of living would go down greatly. On a larger scale it will lessen the rate that America is deepening in
debt. It could help us to become a fiscally responsible nation once again. The stability of the American
economy will be improved if we expand offshore drilling. Oil prices have an enormous impact on the
economy. Offshore oil drilling can lessen our dependence on foreign oil and improve Americas financial
situation.
Increased US production lowers the global price of oil
Blackwill and O’Sullivan 14 — Robert Blackwill, Senior Fellow at the Council of Foreign Relations,
and Meghan O’Sullivan, Professor of the Practice of International Affairs and Director of the Geopolitics
of Energy Project at Harvard, 2/12/2014, “America's Energy Edge: The Geopolitical Consequences of the
Shale Revolution” Foreign Affairs, http://www.foreignaffairs.com/articles/140750/robert-d-blackwilland-meghan-l-osullivan/americas-energy-edge
The most dramatic possible geopolitical consequence of the North American energy boom is that the
increase in U.S. and Canadian oil production could disrupt the global price of oil -- which could fall by
20 percent or m ore. Today, the price of oil is determined largely by the Organization of the Petroleum
Exporting Countries, which regulates production levels among its member states. When there are
unexpected production disruptions, OPEC countries (primarily Saudi Arabia) try to stabilize prices by
ramping up their production, which reduces the global amount of spare production capacity. When
spare capacity falls below two million barrels per day, the market gets jittery, and oil prices tend to spike
upward. When the market sees spare capacity rise above roughly six million barrels a day, prices tend to
fall. For the past five years or so, OPEC’s members have attempted to balance the need to fill t heir
public coffers with the need to supply enough oil to keep the global economy humming, and they have
managed to keep the price of oil at around $90 to $1 10 per barrel. As additional North American oil
floods the market, OPEC’s ability to control prices will be challenged. According to projections from the
U.S. Energy Information Administration, between 2012 and 2020, the United States is expected to
produce more than three million barrels of new petroleum and other liquid fuels each day, mainly from
light tight oil. These new volumes, plus new supplies coming on line from Iraq and elsewhere, could
cause a glut in supply, which would push prices down -- especially as global oil demand shrink s due to
improved efficiency or slower economic growth. In that event, OPEC could have a hard time
maintaining discipline among its members, few of which are willing to curb their oil production in the
face of burgeoning social demands and political uncertainty. Persistently lower prices would create
short falls in the revenues they need to fund their expenditures.
Increase in U.S. Crude Oil exports would drive down the global market price
Bastasch 14 — Michael Bastasch, Reporter at The Daily Caller News Foundation, 04/04/2014, The
Daily Caller “Exporting US crude oil could LOWER gas prices” http://dailycaller.com/2014/04/04/reportexporting-u-s-crude-oil-could-lower-gas-prices/
The ICF study was done on behalf of the American Petroleum Institute, the main U.S. oil lobby, which is
pushing for the federal government to lift its ban on crude oil exports in the midst of a major oil and
natural gas boom. API and some lawmakers argue that allowing oil exports would boost economic
growth and lower oil prices because U.S. crude would increase the global supply, driving prices
downwards. Gasoline costs are tied to global markets and increasing supplies would save consumers
at the pump. “Consumers are among the first to benefit from free trade, and crude oil is no exception,”
said Kyle Isakower, vice president for regulatory and economic policy at the American Petroleum
Institute. “Gasoline costs are tied to a global market, and this study shows that additional exports
could help increase supplies, put downward pressure on the prices at the pump, and bring more jobs to
America,” Isakower added. The push on Capitol Hill for free trade in U.S. crude oil has been Alaska
Republican Sen. Lisa Murkowski. Alaska is the country’s fourth largest oil producing state, according to
government data. Right now, U.S. oil can only be exported if it’s refined first, this gives refiners access
to crude oil that is discounted because the export ban holds down domestic prices. This means
refiners enjoy a nice profit margin because they pay lower prices for crude than on international
markets while selling gasoline and other products at global market rates. Only a handful of major
refiners have opposed allowing crude oil exports. Led by major U.S. refiner Valero Energy, the
opposition has said that keeping crude oil in the U.S. would enhance energy independence and give the
country an economic advantage. “It makes more sense to keep crude oil here in the U.S.,” said Valero
spokesman Bill Day. “It has significantly reduced American dependence on foreign oil, kept U.S. refining
utilization high, and insulated American consumers from geopolitical shocks.” But the recent U.S. oil
boom has led to huge production increases, mainly of light crude oil and lease condensate. But U.S.
refineries are largely equipped to handle heavier crude coming from Saudi Arabia and Canada. This
means that “there is a mismatch between U.S. refinery capabilities and the country’s newfound supply,”
according to ICF. So there is a mismatch between what refineries can process and the type of oil coming
out of the ground in the U.S. This, along with lagging energy infrastructure development, means that
there is a growing glut of U.S. crude, which is driving down prices for refiners, but doing little to help
consumers of petroleum products. “U.S. international trade in petroleum products is not subject to
volume restriction for imports or exports and so U.S. product prices are set by international
markets,”ICF noted. “Allowing U.S. crude exports reduces U.S. and world petroleum product prices by
moderating world crude oil prices and allowing for more efficient refinery operations.”
OCS
Drilling in the OCS lowers prices
Medlock 8 — Kenneth B. Medlock III, 7/8/08, Fellow in Energy Studies at Rice University's James A
Baker III Institute for Public Policy and an adjunct assistant professor in the Economics Department at
Rice, “Open outer continental shelf”, http://www.chron.com/opinion/outlook/article/Open-outercontinental-shelf-1597898.php
A confluence of factors is responsible for the recent price run-up at the pump. One important factor
behind the strength of oil prices is the expectation of inadequate oil supply in the future. This has led to
a debate regarding the removal of drilling access restrictions in the U.S. Outer Continental Shelf (OCS).
According to the Department of Interior's Minerals Management Service (MMS), the OCS in the Lower
48 states currently under moratorium holds 19 billion barrels of technically recoverable oil. Some
analysts claim that opening the OCS will not matter that much, as the quantity of oil is only about two
years of U.S. consumption. But a more appropriate way to look at the issue is this: If the OCS could
provide additional production of 1 million barrels per day of oil, our import dependence on Persian Gulf
crude oil would be reduced by about 40 percent. Moreover, at 1 million barrels per day, the currently
blocked OCS resource would last about 50 years. Of course, opening the OCS will not bring immediate
supplies because it would take time to organize the lease sales and then develop the supply delivery
infrastructure. However, as development progressed, the expected growth in supply would have an
effect on market sentiment and eventually prices. Thus, opening the OCS should be viewed as a
relevant part of a larger strategy to help ease prices over time because an increase in activity in the
OCS would generally improve expectations about future oil supplies. Lifting the current moratorium
in the OCS would also provide almost 80 trillion cubic feet of technically recoverable natural gas that is
currently off-limits. A recent study by the Baker Institute indicates that removing current restrictions
on resource development in the OCS would reduce future liquefied natural gas import dependence of
the United States and lessen the influence of any future gas producers' cartel.
OCS drilling causes a price drop
Hastings 12 — Doc Hastings, 7/23/12, Republican representative, chairman of the House Natural
Resources Committee “President Obama's offshore drilling plan must be replaced”,
http://thehill.com/blogs/congress-blog/energy-a-environment/239529-president-obamas-offshoredrilling-plan-must-be-replaced
Though President Obama uses lofty rhetoric to claim support for American oil and natural gas
production, the administration chose to bury the announcement of this plan under mountains of news
coverage. It’s no surprise that during an election year the president doesn’t want to hype a plan that
represents a giant step backwards for American energy production and keeps 85 percent of our
offshore areas off-limits. Fortunately, Congress now has the responsibility to act and make clear that
the president’s plan is inadequate to meet the U nited S tates’ energy needs . Under current law, the
president must submit the five-year plan to Congress for a mandatory 60-day review before it goes into
effect. While in the past, this 60-day review has been treated as just a formality, it is an opportunity to
reject the president’s plan and offer a better alternative for job creation and energy production. H.R.
6082, the Congressional Replacement of President Obama’s Energy-Restricting and Job-Limiting
Offshore Drilling Plan, would replace President Obama’s plan with an environmentally responsible,
robust plan that supports new offshore drilling. This plan passed out of the House Natural Resources
Committee with bipartisan support and will be considered by the full House this week. It sets up a clear
choice between the president’s drill-nowhere-new plan and the Congressional replacement plan to
responsibly expand offshore American energy production. President Obama’s plan doesn’t open one
new area for leasing and energy production . The Atlantic Coast, the Pacific Coast and most of the
water off Alaska are all placed off-limits . This is especially frustrating for Virginians who had a lease
sale scheduled for 2011, only to have it canceled by President Obama. The president added further
insult to injury by not including the Virginia lease sale in his final plan, meaning the earliest it could
happen is late 2017. The president’s plan only offers 15 lease sales limited to the Gulf of Mexico and,
very late in the plan, small parts of Alaska. It doesn’t open one new area for leasing and energy
production. According to the non-partisan Congressional Research Service, President Obama’s 15 lease
sales represent the lowest number ever included in an offshore leasing plan. President Obama rates
worse than even Jimmy Carter. Thanks to President Obama, it’s as if the bipartisan steps to lift the
drilling moratoria in 2008 never happened. Crippling $4 gasoline prices sparked Americans’ outrage and
pressured the Democrat-controlled Congress to allow legislation to pass opening up new offshore areas
to drilling. Unfortunately, four years later, American families and small businesses are experiencing the
pain of higher gasoline prices and yet no progress has been made to expand production of our offshore
resources. The Congressional moratorium on drilling has simply been replaced by the “Obama
moratorium” on drilling. Gasoline prices were $1.89 when President Obama took office, and prices
today are nearly double. Americans will continue to face volatile price spikes as long as we continue to
keep the United States’ energy resources under lock-and-key. In stark contrast to the president, the
Congressional replacement plan includes 29 lease sales and opens new areas previously under
moratoria. It’s a targeted effort towards those areas where we know we have the most oil and natural
gas resources – like the mid-Atlantic, the Southern California Coast and Alaska. This is a drill smart plan
that would create thousands of new American jobs, help lower prices at the pump and strengthen our
national and economic security. Congress has a choice – to either support the president’s plan that reimposes the drilling moratorium and places the vast majority of offshore areas off-limits, or support
using American energy to create American jobs and strengthen America’s economy.
Natural Gas
Increase in natural gas exports lowers global oil prices
Deutch 11 — John Deutch, January/February 2011, Foreign Affairs, Former Director of Central
Intelligence and Former Undersecretary of Energy, The Good News About Gas, The Natural Gas
Revolution and Its Consequences, http://www.web.mit.edu/~chemistry/deutch/policy/2011TheGoodNewsAboutGas.pdf
Countries that import natural gas should anticipate more competing sources of it, which will lower
prices and reduce concerns about the security of the gas supply. No longer, it seems, will the world be
dependent on a few nations—Iran, Qatar, Russia, Saudi Arabia, and Turkmenistan—that control the
bulk of conventional natural gas reserves. Countries that produce natural gas will need to adjust to
lower revenues from natural gas exports; for some of them, the adjustment may be quite severe and
potentially destabilizing. As gas acts as a substitute for oil, demand for oil will fall, putting downward
pressure on oil prices. This will lessen, but certainly not eliminate, the geopolitical influence that major
oil-exporting countries enjoy today. It is perhaps a permissible exaggeration to claim a natural gas
revolution. But like all revolutions, whether and to what extent the benefits are realized will depend on
how rapidly the economic and political systems adapt to the change.
Increasing LNG exports tanks oil prices
Ratner, Parfomak and Luther 11 — Michael Ratner, Analyst in Energy Policy, Paul W. Parfomak,
Specialist in Energy and Infrastructure Policy, and Linda Luther, Analyst in Environmental Policy,
11/4/11, U.S. Natural Gas Exports: New Opportunities, Uncertain Outcomes, CRS Service,
http://assets.opencrs.com/rpts/R42074_20111104.pdf
If all the proposed U.S. LNG export projects were operational today, the United States would rank
second behind Qatar in global export capacity. However, U.S. LNG exports will face competition in the
global LNG market. Global liquefaction capacity is projected to almost double by 2020 (see Figure 7),
with many projects much further along than the U.S. projects. 16 LNG trade was up over 20% year-onyear in 2010, accounting for 30% of all natural gas traded internationally. 17 Most LNG sold in the world
is under long-term contracts, indexed to oil prices. The long-term contracts are needed to finance the
liquefaction facilities, usually the most expensive part of the LNG supply chain, which includes LNG
tankers, storage, and LNG import terminals. U.S. natural gas prices are market-based, which should
give U.S. LNG export projects an advantage as the differential with oil-indexed priced natural gas can
be more than double the U.S. price (see Figure 2). U.S. LNG exports could add to the pressure for other
countries to delink their natural gas exports—either as LNG or by pipeline—from oil-indexed prices.
However, U.S. LNG export projects will still need to enter into long-term supply contracts, usually 20 to
30 years, to obtain financing, which may be a difficult hurdle to get over given existing market and
financial conditions. Providing LNG to countries that use oil for heating or industrial processes could
also decrease demand for petroleum products, putting downward pressure on oil prices .
Renewables
US investments in alternative energy cause speculators to value oil lower—sharply
tanks prices globally immediately
Yetiv and Feld 7 — Steve and Lowell, Professor of political science at Old Dominion University and
senior international oil markets analyst at the U.S. Energy Information Administration until March 2006,
“America's Oil Market Power: The Unused Weapon Against Iran,” World Policy Journal, p. proquest
As is typical of world oil markets, this situation soon changed. Low oil prices and resurgent economic growth spurred rapid oil demand growth
in Asia and elsewhere. But supply couldn't keep up with demand.
Oil companies' under-investment in world capacity and
a series of oil crises in Venezuela, Nigeria, and Iraq led to a reversal of the spare capacity situation by
2003. Predictably, oil prices rose sharply, approaching $40 per barrel by the end of 2004, $60 per barrel by late 2005-when
spare capacity bottomed out at 1-1.5 MMBD, the lowest it had ever been relative to total world oil supply-and close to $80 per barrel by the fall
of 2007.
If oil prices rise when spare capacity falls, what about the opposite? In fact, history shows that
when spare capacity increases, as it did in the mid-1980s and in the late 1990s, oil prices fall. When spare
capacity spikes, oil prices can even collapse, as occurred after-appropriately enough-the revolution in Iran during 1978 and 1979. The oil price
collapse of 1985-86 resulted from the major oil price shock of the late 1970s, combined with a severe recession in the early 1980s. This
concurrence slashed U.S. oil consumption by 3.6 mmbd in just five years, from 18.8 MMBD in 1978 to 15.2 mmbd in 1983. As a result, world
spare oil production capacity surged, eventually leading to the collapse in oil prices-from nearly $40 per barrel in 1980 to just $10 per barrel by
there is strong reason to believe that an increase in world spare oil production capacity
would cause oil prices to decline once again (if not to the same dramatic degree). Imagine that the United States
cut its oil consumption from currently projected levels of 24 MMBD by 2020 by 3 MMBD over the next decade.1
Eventually, the American cut in consumption would increase world spare capacity from its current level of around 2 MMBD
(almost all of which is in Saudi Arabia and Kuwait) to more than 5 MMBD. This would return world spare oil production
capacity to levels not seen since late 1998 and early 1999, when oil prices plummeted to $10 per
barrel. True, it is unlikely that we will see $ 10 per barrel again, but with a major reduction in the trajectory of U.S. oil demand and a
concomitant increase in world spare capacity, we would likely see a sharp decrease from the $80-100 per barrel
prices we are currently experiencing.2 How could the United States develop its latent oil market power? First and foremost,
achieving this goal would require a serious shift in U.S. energy policy. Such a shift is achievable and
could sharply decrease U.S. (and world) oil consumption, dramatically altering oil market psychology . Oil
futures traders who largely set the price of oil would have to consider that demand for oil would drop
from current expectations. As a result, they would likely decrease the purchase of oil futures, thus
causing a drop in the price of oil . Even before the impact of America's new energy policies would be
early 1986. Today,
felt, oil prices would almost certainly fall on the expectation by oil traders of declining future U.S. oil
demand. A major policy shift by the United States could also move world oil markets out of the high anxiety
state they have been operating in for several years now: increase spare capacity and market anxiety almost inevitably will
subside, because of the creation of a margin of error in the event of perceived threats to supply or actual disruptions.
A shift towards alternative energy causes a drop in Oil prices
DeCiantis 8 — Devin DeCiantis, Masters candidate in Public Policy at Harvard’s JFK School of
Government, specializing in development economics and international trade, March, “Speculations on
an Oil Tariff” http://www.freedom24.org/rationalpost/2008/03/25/speculations-on-a-25-oil-tariff/
In the mid-term, as industries and generators begin to shift away from higher-cost imported oil,
domestic oil producers might begin building out untapped Arctic capacity and utilities might begin
diversifying their energy portfolios into lower-cost fossil fuels and alternative energy technologies.
Together, these processes should cause a more substantial decline in import volumes. In the long-run,
a more fundamental shift away from a high-carbon, high-cost, oil-dependent economy is likely to
unfold, at which point oil imports would begin to decline more precipitously as demand for energy is
almost completely replaced with lower-cost substitutes. This progression is an example of a typical
“adjustment lag”. b. The world price of oil? Again, in the very short-term we might expect a modest
decline, partially offsetting the cost of the tariff. Given that America is one of the world’s largest energy
importers (importing roughly 2/3rds of its annual consumption), it would still need to source oil
externally or risk seizing up its industrial capacity. Thus, aggregate import demand would remain
relatively stable and prices would likely settle somewhere between $75 and $100. Over the mid-to-longterm, major OPEC suppliers would have room to lower prices given their lower relative cost of production,
while growing demand from China and India would partially offset declining American demand. Finally,
as the U.S. begins to substitute away from oil as a key energy input in the long-run, global aggregate
demand for oil will inevitably decrease, assuming that emerging market demand doesn’t continue to
grow at its current pace in perpetuity. This will put considerable downward pressure on prices over
time as oil exporters adjust to a situation of extended excess supply-at least while total global oil
reserves remain relatively plentiful.
Small shifts matter — oil prices are determined at the margin
Isidore 8 — Chris Isidore, Senior Writer at CNN Money, "Is OPEC becoming irrelevant?”
http://money.cnn.com/2005/09/19/news/economy/opec_future/index.htm
The current oil prices are enough to cause some nations, particularly in Europe, to be looking at oil price regulation and other
controls, as well as more significant government investment in alternative energy , said Fadel Gheit, oil analyst at
Oppenheimer. That's got the potential to hurt some OPEC countries more than the current prices are
helping, he said. "They don't want to trigger projects that take even 1 or 2 percent off of demand," he said.
He and Alhajji said even that small percentage of current oil usage being by alternative energy can have a
serious effect on long-term oil prices. "Prices are determined at the margin. We don't need a lot of
alternative energy to depress prices," he said. While some economists and traders now believe that $40 a barrel is the new
floor for oil prices, Gheit said prices still have the potential to fall below those levels, and that could cause
some regimes to fall. "These governments are totally unpopular and repressive. The only thing they have going for
them is buying stability, throwing money at their friends and enemies," said Gheit.
Renewable Energy would cause a decrease in Oil Prices by creating competition
UCS 5 — UCS, Union of Concerned Scientists, Citizens and Scientists for Environmental Solutions,"
2005, www.ucsusa.org/clean_energy/our-energy-choices/renewable-energy/public-benefits-ofrenewable.html
Renewables offer benefits not only because they can reduce pollution, but because they add an
economically stable source of energy to the mix of US generation technologies. Depending on only a
few energy resources makes the country vulnerable to volatile prices and interruptions to the fuel
supply. As the figure shows, the United States relies heavily on coal, with nuclear power and natural gas
supplying most of the rest. Natural gas is generally considered the fuel of choice for new power
generation, because it is cleaner than coal and sometimes less expensive. But overreliance on natural
gas could also create problems. Fossil fuels are susceptible to supply shortages and price spikes.[29]
Since most renewables do not depend on fuel markets, they are not subject to price fluctuations
resulting from increased demand, decreased supply, or manipulation of the market. And since fuel
supplies are local, renewable resources are not subject to control or supply interruptions from outside
the region or country. Some industrial customer trade groups have supported new renewable energy
development primarily for their diversity benefits. For example, Associated Industries of Massachusetts,
a trade group of manufacturers, testified in support of a utility restructuring settlement including a
renewables fund, stating: "Fuel diversity is important to the Commonwealth's future. It would not be
advisable to place all our eggs in the natural gas basket."[30] An additional benefit of increased
competition from renewables-and thus reduced demand for fossil fuels-could be lower prices for
electricity generated from fossil fuels. Several analyses reviewed in Chapter 2 show that competition
from increasing renewables could reduce natural gas prices. A comprehensive modeling project of the
New England Governors' Conference found that an aggressive renewables scenario, in which
renewables made up half of all new generation, would depress natural gas prices enough to lead to a
slight overall reduction in regional electricity prices compared with what prices would be if new
generation came primarily from fossil fuels.[31] The nation's fossil fuel dependence also has serious
implications for national security, since the United States could again be forced to protect foreign
sources of oil to meet our energy needs. During the Persian Gulf War in 1991, US troops were sent in
partly to guard against a possible cutoff of the US oil supply. The public continues to pay taxes to
support the protection of overseas oil supplies by US armed forces. Reliance on foreign oil also makes
the United States vulnerable to fuel price shocks or shortages if supply is disrupted. In 1997, about a
third of US oil came from the Middle East. By 2030, if energy policy does not change, the country may be
relying on Middle Eastern, and possibly Central Asian, oil for two-thirds of its supply. Some analysts
believe that oil discovery peaked in the early 1960s and that a decline in global oil production, and the
beginning of increasingly high prices, will occur within 10 to 12 years.[32] Some regions, especially New
England, still use significant amounts of oil for electricity generation even though nationwide most oil is
used for transportation. Electric vehicles, especially if powered from renewable sources, could also
play an increasingly important role in reducing oil use and emissions from the transportation sector.
And higher oil prices, absent sufficient fuel competition, could lead to higher prices for other fossil fuels.
Alternative energy lowers oil prices
Strand 7 — Jon Strand, 8/1/07, Senior economist, expert in environmental energy policy, The Energy
Journal, “Technology treaties and fossil-fuels extraction” http://goliath.ecnext.com/coms2/gi_01997309937/Technology-treaties-and-fossil-fuels.html
Assume that a treaty will lead to increased international funding of technology developments, which in
turn implies a likelihood that a new energy technology will be developed. Assume that the alternative
technology, once developed, implies a constant marginal energy cost, lower than the (assumed
constant) cost of extracting fossil fuels. (3) Fossil fuels will then become redundant once the new
technology is adopted, and no more fossil fuels will be extracted from then on. (4) We assume that the
time it takes to develop such a technology is stochastic, modeled in a very simple way, as exponentially
distributed with constant parameter [lambda](with expected period until development equal to
1/[lambda]). One so far overlooked implication of such a scenario is that the prospect of developing a
new and more efficient energy technology will affect incentives of fossil-fuel producers to extract and
market the resource, in both the short and the longer run. In the model, dealt with in Sections 2-3
below, we assume that the fossil-fuel market is competitive on a global scale, there is no market
uncertainty, and there is initially a zero probability of developing an alternative technology replacing
fossil fuels. The initial resource price (prior to any technology treaty) can then be shown to evolve
according to the so-called Hotelling rule, whereby the growth rate for the real resource price (net of
extraction cost) equals the real rate of interest, r, in the economy. (5) In Section 2 below we first show
that, when the technology treaty is in place, the equilibrium price and extraction path for the resource
will both shift as a result. Along the new price path, the net resource price will grow at the higher rate
r+[lambda]. The entire resource price path shifts down, resulting in a higher volume of extraction at
any given date until the resource is fully extracted, or until the new technology is developed.
Intuitively, when fossil-fuel producers are made aware of an increased likelihood that their resource
may become redundant within a limited future time period, the incentive will be to extract it more
quickly. For a given demand function directed toward fossil fuels, with global fossil-fuel demand a
decreasing function of the price, this must mean a lower market price of fuel
A push towards alternative energy will drive down oil prices — OPEC will flood the
market
Kole 7 — William Kole, “Despite rising prices, OPEC appears to be in no rush to raise its output targets,”
September 8th, http://www.nwitimes.com/business/local/article_65239e6b-bf00-5602-b6a4036eb072ef56.html
If you remember what happened in the 1970's (look it up if you don't) you will find the biggest fear
OPEC has. It is that oil prices will go up and stay high long enough to fuel investment into conservation
and alternative energy sources to the point that a critical mass is reached and the need for their oil is
greatly diminished or replaced by other energy sources they don't control. That's exactly what started
happening in the 1970's and it took OPEC opening up the tap to make oil cheap again over a decade
to reverse the trends. The result was that interest in conservation and alternative energy waned and
investments dried up in the face of cheap oil again. We are once again nearing that point and you can
expect to see OPEC flood the market again if they see us getting serious with conservation and
alternative energy sources that compete with, or worse yet, actually replace demand for their oil.
OPEC walks the fine line between price and demand and wants to keep us hooked up to their oil like a
bunch of junkies on drugs while making as much money as possible.
Generic Decline in Oil Consumption
Reductions in US oil consumption cause speculators to value oil lower. This drastically
cuts global prices.
Yetiv and Feld 07 (Steve and Lowell, Professor of political science at Old Dominion University and
senior international oil markets analyst at the U.S. Energy Information Administration until March 2006,
“America's Oil Market Power: The Unused Weapon Against Iran,” World Policy Journal, p. proquest)
As is typical of world oil markets, this situation soon changed. Low oil prices and resurgent economic growth spurred rapid oil demand growth
in Asia and elsewhere. But supply couldn't keep up with demand.
Oil companies' under-investment in world capacity and
a series of oil crises in Venezuela, Nigeria, and Iraq led to a reversal of the spare capacity situation by
2003. Predictably, oil prices rose sharply, approaching $40 per barrel by the end of 2004, $60 per barrel by late 2005-when
spare capacity bottomed out at 1-1.5 MMBD, the lowest it had ever been relative to total world oil supply-and close to $80 per barrel by the fall
of 2007.
If oil prices rise when spare capacity falls, what about the opposite? In fact, history shows that
when spare capacity increases, as it did in the mid-1980s and in the late 1990s, oil prices fall. When
spare capacity spikes, oil prices can even collapse, as occurred after-appropriately enough-the revolution in Iran during
1978 and 1979. The oil price collapse of 1985-86 resulted from the major oil price shock of the late 1970s, combined with a severe recession in
the early 1980s. This concurrence slashed U.S. oil consumption by 3.6 mmbd in just five years, from 18.8 MMBD in 1978 to 15.2 mmbd in 1983.
As a result, world spare oil production capacity surged, eventually leading to the collapse in oil prices-from nearly $40 per barrel in 1980 to just
there is strong reason to believe that an increase in world spare oil
production capacity would cause oil prices to decline once again (if not to the same dramatic degree). Imagine
that the U nited S tates cut its oil consumption from currently projected levels of 24 MMBD by 2020 by 3 MMBD over the
next decade.1 Eventually, the American cut in consumption would increase world spare capacity from its current level of
around 2 MMBD (almost all of which is in Saudi Arabia and Kuwait) to more than 5 MMBD . This would return world spare
oil production capacity to levels not seen since late 1998 and early 1999, when oil prices plummeted
to $10 per barrel. True, it is unlikely that we will see $ 10 per barrel again, but with a major reduction in the trajectory
of U.S. oil demand and a concomitant increase in world spare capacity, we would likely see a sharp
$10 per barrel by early 1986. Today,
decrease from the $80-100 per barrel prices we are currently experiencing .2 How could the United States
develop its latent oil market power? First and foremost, achieving this goal would require a serious shift in U.S. energy
policy. Such a shift is achievable and could sharply decrease U.S. (and world) oil consumption, dramatically
altering oil market psychology. Oil futures traders who largely set the price of oil would have to
consider that demand for oil would drop from current expectations. As a result, they would likely
decrease the purchase of oil futures, thus causing a drop in the price of oil. Even before the impact of
America's new energy policies would be felt, oil prices would almost certainly fall on the expectation
by oil traders of declining future U.S. oil demand. A major policy shift by the United States could also move
world oil markets out of the high anxiety state they have been operating in for several years now:
increase spare capacity and market anxiety almost inevitably will subside, because of the creation of a margin of error in the event of perceived
threats to supply or actual disruptions.
AT: US Not Key
Big reductions in US oil consumption drastically reduce world oil prices
Carey 3 — (John, Business Week, 2/24/03, lexis)
Yet reducing oil use has to be done judiciously. A drastic or abrupt drop in demand could even be
counterproductive. Why? Because even a very small change in capacity or demand ''can bring big swings
in price,'' explains Rajeev Dhawan, director of the Economic Forecasting Center at Georgia State
University's Robinson College of Business. For instance, the slowdown in Asia in the mid-1990s reduced
demand only by about 1.5 million bbl. a day, but it caused oil prices to plunge to near $ 10 a barrel. So
today, if the U.S. succeeded in abruptly curbing demand for oil, prices would plummet. Higher-cost
producers such as Russia and the U.S. would either have to sell oil at a big loss or stand on the sidelines. The effect would be to concentrate
power -- you guessed it -- in the hands of Middle Eastern nations, the lowest-cost producers and holders of two-thirds of the known oil
reserves. That's why flawed energy policies, such as trying to override market forces by rushing to expand supplies or mandating big fuel
efficiency gains, could do harm.
U.S. demand is key to global oil prices – the Aff eliminates the cause of current high
prices
Zakaria 4 — Fareed, phD in political science from Harvard and former managing editor of Foreign
Affairs, Newsweek, “Don't Blame the Saudis “, 9/6,
http://www.fareedzakaria.com/ARTICLES/newsweek/090604.html
But the more lasting solution to America's oil problem has to come from energy efficiency. American
demand is the gorilla fueling high oil prices--more than instability or the rise of China or anything
else . Between 1990 and 2000 the global trade in oil increased by 9.5 billion barrels. Half of that was
accounted for by the rise in U.S. imports. America is consuming more because it is growing more--but
also because over the past two decades, it has become much less efficient in its use of gasoline, the
only major industrial country to slide backward. The reason is simple: three letters--SUV. In 1990 sport
utility vehicles made up 5 percent of America's cars. Today they make up 55 percent. They violate all
energy-efficiency standards because of an absurd loophole in the law that allows them to be classified
as trucks.
Reductions in US oil consumption cause massive ripples in the oil market
Roberts 4 — Paul Roberts, Columnist @ Harper’s, The End of Oil, p. 95
Within the oil world, no decision of any significance is made without reference to the U.S. market, nor is
anything left to chance. Indeed, the oil players watch the American oil market as attentively as palace
physicians once attended the royal bowels: every hour of every day, every oil state and company in
the world keeps an unblinking watch on the United States and strains to find a sign of anything —
from a shift in energy policy to a trend toward smaller cars to an unusually mild winter — that might
affect the colossal U.S. consumption . For this reason, the most important day of the week for oil traders anywhere in the world
is Wednesday, when
the U.S. Department of Energy releases its weekly figures on American oil use, and when, as
one analyst puts it, “the market makes up its mind whether to be bearish or bullish.”
American oil demand is the key factor driving oil markets
Roberts 4 — Paul Roberts, Columnist @ Harper’s, The End of Oil, p. 95
At the same time, however, the sheer extent of American demand
production (the United States is still the number three oil producer),
coupled with the country’s own booming
gives Uncle Sam a degree of influence over world oil
markets and world oil politics that goes well beyond anything the U.S. might achieve militarily.
America is not only the biggest oil market in the world, but the fastest-growing: in the 199os, American oil
imports grew by 3.5 million barrels a day, more than the total oil consumption of any country except China and Japan, and that trend has
continued in the first decade of the new millennium. After
the United States, no other market offers exporters like
Russia or Saudi Arabia the same opportunities for both growth and volume of sales, and no oil
producer, whether country or company, can afford to miss out. Today, a producer’s share of the U.S.
market is a critical measure of that producer’s political standing and future prospects. Saudi Arabia, for
example, is so desperate to maintain its share of the U.S. market that it sells oil to Americans at a discount. Even oil states with profoundly antiAmerican sentiments — Venezuela, Libya, and until recently Iraq — are exceedingly cordial when it comes to selling or trying to sell oil to
Americans.
On the Brink
Oil prices are on the brink — production increases and Iraq disruptions are balanced,
but small changes in production cause major price swings
Bawden 6/16 — Tom Bawden, Environmental Editor for The Independent (London), 6/16/2014, “Long
years of oil price stability are at risk, BP’s top economist warns,” The Independent,
http://www.independent.co.uk/news/business/news/long-years-of-oil-price-stability-are-at-risk-bpstop-economist-warns-9540548.html, [Cristof Rühl is BP’s top economist]
“This is an eerie quiet. This is a market on edge and it will remain eerily quiet until it becomes clear
who gets the upper hand in these things that are completely unrelated – the disruptions or steady
production growth in the US,” said Mr Rühl, pointing out that so far this year we have seen both
elements continuing to increase. “This is a sheer coincidence: they have nothing to do with each other.
There is no conspiracy theory. And that means it won’t last forever – it will fall off a cliff either side.”
Asked whether problems in Iraq would end the price stability, Mr Rühl said: “It’s another piece in the
picture which I outlined. You have this tension between rising disruption and rising new production.
What eventually will happen is that we will see these disruptions get out of hand or we will see the
picture dominated by increases in production. Every kind of disruption which becomes bigger can tilt
the balance in a certain way and Iraq is no exception to that.”
Future expectation makes the link immediate
Feldstein 8 — Martin Feldstein, Professor of Econ at Harvard, president emeritus of the National
Bureau of Economic Research, chairman of the Council of Economic Advisers under President Reagan,
“We Can Lower Oil Prices Now”, The Wall Street Journal, 7/1/2008,
http://online.wsj.com/news/articles/SB121486800837317581
Unlike perishable agricultural products, oil can be stored in the ground. So when will an owner of oil reduce production or increase inventories
instead of selling his oil and converting the proceeds into investible cash? A simplified answer is that he will keep the oil in the ground if its price
is expected to rise faster than the interest rate that could be earned on the money obtained from selling the oil. The actual price of oil may rise
faster or slower than is expected, but the decision to sell (or hold) the oil depends on the expected price rise. There are of course
considerations of risk, and of the impact of price changes on long-term consumer behavior, that complicate the oil owner's decision – and
therefore the behavior of prices. The Organization of Petroleum Exporting Countries (the OPEC cartel), with its strong pricing power, still plays a
role. But the fundamental insight is that owners
of oil will adjust their production and inventories until the price
of oil is expected to rise at the rate of interest, appropriately adjusted for risk. If the price of oil is expected to
rise faster, they'll keep the oil in the ground. In contrast, if the price of oil is not expected to rise as fast as the rate of interest, the owners will
extract more and invest the proceeds. The
relationship between future and current oil prices implies that an
expected change in the future price of oil will have an immediate impact on the current price of oil.
Thus, when oil producers concluded that the demand for oil in China and some other countries will grow more rapidly in future years than they
had previously expected, they inferred that the future price of oil would be higher than they had previously believed. They responded by
reducing supply and raising the spot price enough to bring the expected price rise back to its initial rate. Hence, with no change in the current
demand for oil, the expectation of a greater future demand and a higher future price caused the current price to rise. Similarly, credible
reports about the future decline of oil production in Russia and in Mexico implied a higher future global price
of oil – and that also required an increase in the current oil price to maintain the initial expected rate of increase in the price of oil. Once this
relation is understood, it is easy to see how news stories, rumors and industry reports can cause substantial fluctuations in current prices – all
a rise in the spot price of oil triggered by a change in
expectations about future prices will cause a decline in the current quantity of oil that consumers
demand. If current supply and demand were initially in balance, the OPEC countries and other oil producers would respond by reducing
without anything happening to current demand or supply. Of course,
sales to bring supply into line with the temporary reduction in demand. A rise in the expected future demand for oil thus causes a current
decline in the amount of oil being supplied. This is what happened as the Saudis and others cut supply in 2007. Now here is the good news.
Any policy that causes the expected future oil price to fall can cause the current price to fall , or to rise less
than it would otherwise do. In other words, it is possible to bring down today's price of oil with policies that will
have their physical impact on oil demand or supply only in the future. For example, increases in
government subsidies to develop technology that will make future cars more efficient, or tighter
standards that gradually improve the gas mileage of the stock of cars, would lower the future demand
for oil and therefore the price of oil today. Similarly, increasing the expected future supply of oil would also reduce today's
price. That fall in the current price would induce an immediate rise in oil consumption that would be matched by an increase in supply from the
OPEC producers and others with some current excess capacity or available inventories. Any steps that can be taken now to increase the future
supply of oil, or reduce the future demand for oil in the U.S. or elsewhere, can therefore lead both to lower prices and increased consumption
today.
Even small changes in the oil market have large price effects
Nerurkar 11 — Neelesh Nerurkar, 4-1-2011, specialist in energy policy, “U.S. Oil Imports: Context and
Considerations” CRS, http://www.fas.org/sgp/crs/misc/R41765.pdf
Domestic supply disruptions can also shift trade flows. After hurricanes Katrina and Rita shut in oil
production in the U.S. Gulf of Mexico, U.S. imports increased by around 0.7 Mb/d between July and
October 2005. The increase was in refined products; hurricanes shut down more refining capacity than
crude oil production. Crude imports fell. Supply disruption in countries that are not traditionally major
sources of U.S. imports may still have significant implications for the United States because they raise
the price of oil worldwide. The oil market is globally integrated, refiners can shift the crude they use,
and refined products are interchangeable commodities; so a disruption anywhere can affect oil prices
everywhere. For instance, the United States imported only around 0.1 Mb/d of oil from Libya in 2010.
(For context, the U.S. consumed about 19.2 Mb/d in 2010.) Most of Libya’s crude supply went to Europe.
But when unrest shut down Libya’s exports in February 2011, global prices rose, including prices for oil
imported into the United States from elsewhere and oil produced domestically. Global supply was
reduced and European refiners had to look to other oil sources, bidding up those oil prices to secure
substitute supplies. 10 The price of oil may rise until it makes up for the amount of supply no longer
available due to the disruption. This can occur by price rising enough that some consumers no longer
demand oil and/or suppliers bring additional production to market. 11 Many oil producers and
consumers are inelastic to price changes when considering how much to supply or consume, especially
in the short run, so seemingly small disruptions can lead to more significant percent changes in the
price of oil. Even anticipation of disruptions can contribute to higher oil prices. Buyers and sellers of oil
make risk-weighted decisions now about future commercial and financial needs. Anticipated disruption
risks affect the price at which they are willing to buy and sell oil. Arguably, a significant portion of the
increase in oil prices from unrest in Libya, Egypt, Bahrain, and elsewhere is attributable to concerns that
unrest could spread to other oil exporters in the Middle East and North Africa. For more on this, see CRS
Report R41683, Middle East and North Africa Unrest: Implications for Oil and Natural Gas Markets, by
Michael Ratner and Neelesh Nerurkar. Disruptions to oil production reduced supply, slowed supply
growth in recent years, and created concerns about future supply. This combined with rising oil demand,
resulting from rapid economic growth in several countries, as well as other financial, geologic,
commercial, and political factors, contributed to the rise in oil prices during the 2000s. Some selected
events that played a role in recent price developments are presented in Figure 4
Perception of future declines in demand cause immediate selloffs — drives process
even lower
Shiller 4 — Robert Shiller, Professor of Econ at Yale, “Are we running out of oil (Again)?” Project
Syndicate, 10/26/2004, http://www.project-syndicate.org/commentary/are-we-running-out-of-oil-again--)
But what matters for oil prices now and in the foreseeable future is the perception of the story, not the ambiguities
behind it. If there is a perception that prices will be higher in the future, then prices will tend to be higher
today. That is how markets work. If it is generally thought that oil prices will be higher in the future, owners of oil reserves will tend to
postpone costly investments in exploration and expansion of production capacity, and they may pump oil at below capacity. They would rather
sell their oil and invest later, when prices are higher, so they restrain increases in supply. Expectations
become self-fulfilling, oil
prices rise and a speculative bubble is born. But if owners of oil reserves think that prices will fall in the
long run, they gain an incentive to explore for oil and expand production now in order to sell as much
oil as possible before the fall. The resulting supply surge drives down prices, reinforces expectations of
further declines, and produces the inverse of a speculative bubble: a collapse in prices.
Affirmative
US Production Not Key
US oil exports have little to no impact on oil price or markets
Worstall 6/25 — Tim Worstall, Contributor to Forbes Online, Fellow at the Adam Smith Institute in
London, 6/25/2014, “The US To Allow Crude Oil Exports; Not That It Will Make Much Difference,”
Forbes, http://www.forbes.com/sites/timworstall/2014/06/25/the-us-to-allow-crude-oil-exports-notthat-it-will-make-much-difference/
We’ve the news that the US is to allow some crude oil exports for the first time since the ban on them
was set in place in the 1970s. This is good news as it removes an economic inefficiency (and removing
economic inefficiencies is always good news) but it’s not going to make all that much difference to the
nation as a whole. It’s really all a fight between the independent crude producers and the independent
refiners. They, obviously, care about how this goes, crude exports or no crude exports, but it makes very
little difference to the rest of us.
The news isn’t that all crude exports are to be allowed, sadly, but that certain sorts of condensates are
being, well, really they’re being redefined as being not crude and thus exportable:
The US government has moved towards lifting a 40-year ban on oil exports by allowing two
companies to sell ultra-light oil to foreign buyers.
Pioneer Natural Resources PXD -0.82%, of Irving, Texas, and Enterprise Products Partners, of
Houston, have been told by the Bureau of Industry and Security that they can export the oil,
known as condensate, which can be turned into gasoline, jet fuel and diesel.
Some people seem to be rather over-hyping this:
Oil shipments could begin as soon as August, in a move that energy research group IHS believes
could add more than $1 trillion (£590bn) to government revenues through 2030, trim fuel prices
and create an average of more than 300,000 jobs a year.
No, not really, that’s not what’s about to happen. As background you need to understand that US
produced crude cannot be exported but refined products (gasoline, avgas, heating oil, all those sorts of
things) produced from US crude can be exported. The second thing you need to know is that all of these
things, both the crude and the refined products, are what is known as “fungible”. There are slight
differences between African, Middle East and US crude, between the products of different refineries,
but they’re all pretty much substitutes for each other. Thus Ricardo’s Iron Law of One Price comes into
play and their prices will be the same around the world minus their costs of transport.
So, we would thus expect the price of US produced crude to be the same as the price of North Sea crude
(minus any small technical details like sulphur content and so on). But one of the things you might have
noticed is that for several years now they have not been at the same price. WTI (which is US oil
delivered Cushing, OK) has been trading much lower, 10 to 15% lower, than Brent which is the
benchmark for N Sea oil. The reason being that the supply of US crude has been rising strongly but no
one is allowed to export it. So, the Iron Law cannot come into play: it’s not possible to export that extra,
newly produced, oil.
So what does happen? It gets refined into that gasoline and avgas and so on (not entirely, but this is the
driver of prices). Those products are freely exportable and given that they will command the world
price, be able to compete against the same products made from the higher priced N Sea, African and so
on oil, they will be exported. What doesn’t happen, not to any great extent that is, is that Americans
get lower gasoline prices. Because the refined products are exportable and fungible to they will still
trade at those world prices, whatever the price of US produced crude.
This isn’t entirely exact as there will always be some leakage in such schemes. But essentially what the
ban on crude exports has meant is that refiners get higher profit margins and crude producers lower
ones. For the refiners get to buy US crude at the depressed inside the US price, refine and then receive
the world price for their products. By allowing exports this artificial boost to refining margins disappears.
Crude producers can either export at the world price or sell to domestic refiners at again that world
price. The refiners don’t have the law bending the market into giving them a fatter margin.
This doesn’t make much difference to us as consumers , either inside or outside the US. It also
doesn’t make much difference to the oil majors as they own both crude production and refining
capacity. It affects which division makes the profits, yes, but not the profits of the overall company. So
whether or not crude exports should be allowed is really a fight down in the second and third tiers of the
independent companies. Who gets the profit, the crude producers or the refiners?
This is only the start of course, this is only about condensates, but it bodes well for relaxing the ban on
all crude exports soon enough. There’s no good reason why the law should favour the refiners over the
crude producers at all.
High US Production won’t reduce oil prices — 7 reasons
Helman 13 — Christopher Helman, energy staff writer for Forbes, 4-29-2013, “7 Reasons Why Oil
Prices Won’t Plunge,” Forbes, http://www.forbes.com/sites/christopherhelman/2013/04/29/7-reasonswhy-oil-prices-wont-plunge/.
The United States is in the midst of a miraculous supply boom that has seen domestic oil output soar
by more than 1 million barrels per day in the past year to the highest levels in decades. U.S. oil output
is now at 6.5 million bbl per day, in third place after Saudi Arabia and Russia (both at roughly 9.8 million
bpd). And the growth shows no sign of slowing down.¶ Add to that the slow and steady recovery of the
Iraqi oil industry, plus the likelihood that the shale-cracking techniques perfected in the U.S. will be
exported to the likes of China and Russia, and it looks like the world’s oil demand will be easily met for
years to come.¶ So it’s little wonder that oil prices have been falling in recent months, with WTI at $93
and Brent crude down to $103 from a peak of $116 in February. Which way from here?¶ Well, analysts
Oswald Clint and Rob West at Sanford Bernstein, though not wildly bullish on oil prices, believe there
are seven good reasons why we will not see a sustained plunge in crude (but they call them “seven
sources of hidden oil market elasticity”).¶ 1. Decline rates at mature fields¶ It’s conventional wisdom
that the output of mature oil fields declines at a rate of 5% to 10% a year, slowly fading away over time
but never giving up the ghost entirely. The Bernstein analysts earlier this year conducted a study of
3,100 oil fields that debunked that myth. They found that some fields decline much faster. The decline
rate in the Gulf of Mexico, for instance, is 23%, with the North Sea is about 10%. Russian fields fare a
little better, at a 3.5% decline rate. Even if the average decline rate worldwide is just 5%, that means the
industry needs to develop a new Saudi Arabia every two years, just to stay even.¶ 2. Motorists are
sensitive to gasoline prices¶ Data from the Dept. of Energy and the Federal Highway Administration
shows that the number of miles that American motorists drive is inversely correlated wtih gasoline price
increases. As gas prices rose 25% in early 2008, the number of miles driven dropped by roughly 3.5%.
When gas prices fell 35% into the 2009 recession, miles driven jumped up 2%, year over year. There’s
not enough new Priuses or Teslas on the road to change this yet: if gas prices fall, demand for gas will
increase.¶ 3. European imports¶ Despite weak markets, European refiners can be expected to buy
more when prices fall. This is what they did when prices dipped last year — buying an additional 1.2
million bpd. Europe’s crude oil inventories are also about 10 million barrels below 5-year averages, so
importers there would likely be buyers on a price dip.¶ 4. China inventories¶ The Bernstein analysts
note that in 2012 China increased the rate at which it built up its oil inventories, adding 240 million
barrels in 2012 after 140 million in 2011. When oil peaked in February China cut back its oil imports to
the lowest level in five months, indicating that if prices fall they’ll pick up the pace.¶ 5. Rising marginal
costs¶ Despite the enormous growth in the U.S., the costs of getting that oil out are growing at
unprecedented rates. Bernstein figures that the cost of producing the last barrel rose from $89 in 2011
to $114 in 2012. About 95% of U.S. production was done at a marginal cost of $71 a barrel. Part of the
marginal cost calculation involves non-cash expenses like depreciation, but over the longer term a
corporation will not survive if its marginal production costs are higher than the going price of crude.¶ 6.
U.S. stripper wells¶ The first to go will be stripper wells. These are marginal wells that produce less than
15 barrels per day. But there’s a lot of them, enough to produce 1 million bpd when the price is high.
Production costs are often high on stripper wells because they often bring up a lot of water along with
the oil, and water can be expensive to treat and get rid of, especially when you don’t have economies of
scale. Most of these wells become uneconomic at oil prices less than $90.¶ 7. OPEC¶ The cartel has a
stated production cap of 30 million barrels per day. But member states are producing more like 30.4
million today. But the OPEC nations need prices of $90 to $100 to balance their budgets and keep their
people happy with government spending. They will adhere to quotas in order to get prices back up. The
Saudis have proven that they can be very disciplined when it comes to cutting output. In 2009 when oil
prices crashed they scaled back by 1.5 million barrels per day. They also tend to export less when prices
are low, and keep the oil in the kingdom.¶ Overall, the Bernstein guys believe that these seven criteria
would be enough to tighten global oil supplies by 1.5 million barrels per day if Brent crude were to fall to
$90 — that would be enough tightness to bring prices back above $100. Invest accordingly.
No impact on oil prices — U.S. drilling doesn’t cause global declines
McAuliff 11 — Michael McAuliff is a Senior News Correspondent on Capitol Hill for The Huffington
Post. “More U.S. Oil Drilling Won't Lower Gas Prices, Experts Say” 05/06/11
http://www.huffingtonpost.com/2011/05/06/more-us-oil-drilling-wont-help-gas-prices_n_858473.html
WASHINGTON -- Republicans used the politically potent argument about the cost of gas Thursday to
pass a bill expanding offshore oil and gas exploration. But analysts say there's a major flaw in their case:
More drilling will barely budge prices. The Restarting American Offshore Leasing Now Act, which passed
266 to 144 with 33 Democrats buying into the scheme, orders the Department of the Interior to move
quickly to offer three leases to drill in the Gulf of Mexico and one off the coast of Virginia. The bill
demands that the leases be executed by next year. But the legislation won't reduce the price at the
pump, experts said. Nor would a vastly more ambitious effort have much impact. "It's not going to
change the price of oil overnight, and it's probably not going to have a huge impact on the price of oil
ever," said Mike Lynch of Strategic Energy and Economic Research, Inc. referring not just to those four
leases, but to expanding all U.S. drilling. Yet House Republicans -- backed by nearly three dozen
Democrats -- held out their push for exploitation of the four tracts as a panacea for the weak economy
and high gas prices. "Republicans are standing with the American people, who want us to increase the
supply of American energy that will lower costs, reduce our dependence on foreign oil, and create jobs
here in America," House Speaker John Boehner (R-Ohio) proudly declared. "And I’m certain –- with $4
per gallon gas -– the American people will remember who listened to them, and who didn’t." "I think
high gas prices and high energy costs are crushing jobs and are just unnecessary," Rep. Glenn Thompson
(R-Pa.) told The Huffington Post. "When we have access to domestic resources, gas prices go down.
That’s what happened in 2008 when Bush opened up the outer-continental shelf." Rep. Doc Hastings (RWash.), the bill's lead sponsor, made the same argument Wednesday. "If we send a signal to the
markets that we’re going to go after the resources that we have in this country," he told bloggers on a
conference call, "I think that will have a positive impact on driving the price of gasoline down. As a
matter of fact, that happened in 2008." But people who study oil markets for a living say they are
wrong. "I would really doubt that that [2008 price drop] would have been because we committed to
more drilling," said Phyllis Martin, an analyst with the U.S. Energy Information Administration (EIA),
which just released its detailed, annual outlook on energy supply and prices. "It was most likely the
recession," Martin explained. "When demand cuts back, the production cuts back and the prices fall."
As for opening four new drilling leases, that's not even a drop in the bucket. Analyst Lynch said that, if
the nation took an extremely vigorous stance on oil exploitation -- and relaxed restrictions on the Gulf
and drilled in the Arctic National Wildlife Refuge in Alaska and off the coast of California, where
America's most easily accessible offshore oil is located -- it still would not have much of an impact.
"With the exception of the deep Gulf, where there are restrictions, people are drilling as fast as they
can," said Lynch, who regards himself as a moderate Republican. He is bearish on oil prices and believes
the cost of crude will drop soon, regardless of an government policies. "You might, under really
optimistic scenarios, over five or six years, add 2 million barrels a day of production," said Lynch, who
favors more drilling, even if he rejects the politicians' arguments. "On a global scale, it's significant. But
we would still be big importers -- we would still be dependent on foreign oil." And prices would not
move much because of it, the analysts explained. Oil is traded on a world market, and the United States
does not have enough petroleum to increase the global supply, which would reduce demand -- and
thus the price -- for fuel. "In 2009, the U.S. produced about 7 percent of what was produced in the
entire world, so increasing the oil production in the U.S. is not going to make much of a difference in
world markets and world prices," said the EIA's Martin. "It just gets lost. It's not that much." And
boosting drilling in the outer continental shelf? "What comes out of the OCS is about 1 percent of the
world total, and that's not enough to affect world prices," Martin said, even noting that she believes
there are even more untapped reserves than officials can estimate at the moment.
*Note this article cites several experts on international oil prices.
U.S. drilling doesn’t affect oil prices — demand, time lag
Weiss 8 — Daniel J. Weiss, a Senior Fellow and Director of Climate Strategy at the Center for American
Progress, 1-3-08, “Time to Diversify Energy Resources as Oil Hits $100 a Barrel,”
http://www.americanprogress.org/issues/green/news/2008/01/03/3846/time-to-diversify-energyresources-as-oil-hits-100-a-barrel/
All of these factors are likely to continue throughout in 2008. Yet in the wake of these near record prices, oil
industry allies are likely to
for more oil drilling off U.S. coastal
areas and in the Arctic National Wildlife Refuge. These tired proposals have been rejected time and again because
they would do little to reduce the price of oil in the short run or offset higher demand in the long run.¶
First off, additional offshore oil drilling in the eastern Gulf of Mexico, or off the Atlantic and Pacific coasts,
would not produce any oil for five to seven years. It would take at least 10 years to produce any oil
from the Arctic. Such plans will not reduce the spot market price for oil. In fact, we already tried this and
it failed to reduce prices. In December 2006 Congress and President Bush opened new areas to drilling off the Florida Coast when the
price of oil was $62 per barrel. The price is one-third higher today.¶ Second, oil companies hold over 4,000 undeveloped
leases in the western Gulf of Mexico. If oil companies want to increase oil supplies, it would be much
faster to develop these leases rather than plod through the laborious process to get Congress to
approve offshore drilling in currently protected places. Interestingly, the Big Five oil companies—BP plc, Chevron Corp.,
haul out the lobbying equivalent of a Christmas fruit cake. They will once again push
Conoco Phillips Inc., ExxonMobil Corp., and Royal Dutch Shell plc—have been spending a huge amount of their half trillion dollars in recent
profits buying back their own stock. Perhaps they should invest some of their record profits in developing these leases before they greedily ask
for access to more protected places.¶ Most importantly, the
U.S. oil supply-demand balance is insurmountable. We
have less than 2 percent of the world’s known reserves, yet use 25 percent of its oil. Even if we drilled off of
every beach, and inside every national park, refuge, and forest, the United States does not possess enough oil to
significantly offset our growing demand.
U.S oil doesn’t affect global prices — Saudi Arabia has overstated its supply
Luft 13 — Gal Luft, Senior adviser to the United States Energy Security Council and co-author of
"Petropoly: The Collapse of America's Energy Security Paradigm, “American oil boom is bad news for
Saudi Arabia”, Newsday, 5/28/2013, http://www.newsday.com/opinion/oped/american-oil-boom-isbad-news-for-saudi-arabia-gal-luft-1.5355333
Another potential explanation for Naimi's reluctance to grow capacity is that he knows what Sadad alHusseini, the former head of exploration at Saudi Aramco, allegedly told the U.S. consul general in
Riyadh in 2007. According to a leaked cable published by WikiLeaks, Husseini said that Saudi Arabia
may have overstated its oil reserves by as much as 40 percent, meaning that production at current
levels is unsustainable.¶ If Husseini's claim is true, it means there is only one way for the kingdom to
make ends meet: Keep prices high by stalling the development of new capacity while adjusting the
production of oil downward to offset any growth in supply emanating from the American oil boom. It
also means, contrary to popular belief, that the current rise in U.S. domestic production will have
minimal impact on global crude prices, and hence on the price we pay for gasoline at the pump. Oil is a
fungible commodity and its prices are determined in the global market. If the United States drills
more, Saudi Arabia will simply drill less, keeping the supply/demand relationship tight and prices
high.¶
Impacts
High Prices Good
Investor Confidence
High Oil Prices Maintain Investor Confidence
Helman 6/24 — Christopher Helman, Forbes staffer, 6/24/13, “Why Cheap Gasoline Could Be Bad for
America’s Economic Comeback”, Forbes,
http://www.forbes.com/sites/christopherhelman/2013/06/24/would-cheaper-gasoline-be-good-or-badfor-america/
America is, of course, in the midst of an unprecedented oil boom. Thanks to advances in drilling and
fracking, oil companies have figured out how to develop massive reserves in fields like the Bakken and
Eagle Ford. Since 2008 U.S. oil output is up 43%, including a massive 1 million barrel per day gain in
2012. This year, for the first time in decades, the U.S. relies less on imported oil than on domestic
supplies. According to IHS IHS -1.06%-CERA, the boom in unconventional oil and gas supports 1.7
million jobs, generates some $70 billion in federal, state and local taxes, and adds roughly $250 billion
a year to the U.S. gross domestic product. And all those numbers are set to grow in the years to come.
But only if oil prices stay high. It’s high prices that incentivized drillers to develop the Eagle Ford and
Bakken — the two biggest contributors to oil growth. The average costs of getting a barrel of oil out of
those fields is between $60 and $65 a barrel, according to Morgan Stanley MS +0.62%. That includes the
costs of surveying, drilling, fracking, processing, transporting, taxes and royalties (but excludes costs of
land acquisition). At current prices companies will go right on drilling. But if for any reason oil were to
drop to $60, activity would quickly dry up. And considering that the average unconventional oil well
declines in volume by more than 50% in its first year, it wouldn’t take long for domestic supplies to
slump — and for jobs to slump with it.
High Oil Prices key to long term growth — stability creates capital investment
Al Khatteb 3/16 — Luay Al Khatteb, founder and director of Iraq Energy institute, 3/19/14,
Huffington Post, “Why World Oil Prices Should Be High and Stable”
http://www.huffingtonpost.com/luay-al-khatteeb/why-world-oil-prices-shou_b_4992593.html
Contrary to popular wisdom, a lower oil price would only damage the economic prosperity of the U.S.
and the major oil-producing nations, most of whom are developing nations acutely vulnerable to the
damaging aspects of oil price volatility, which slowed their economic development to date. Critics
might argue that such a high, stable price would slow down economic growth and recovery but in the
long run it would do much to moderate the boom and bust aspects of the economic cycle, and
reducing the risk to future, necessary capital investment. Building economic recovery on
unrealistically cheap energy sets the system up for even greater failure when inevitable price shocks
occur. What the global economy needs are stable, sustainable prices that can provide the basis for
effective planning.
High Oil Prices good for stock market
Our Energy Policy 12 — Administrator at Our Energy Policy, 3/6/12, “Economist: High Oil Prices Not
(Necessarily) Bad for the Economy”, Our Energy Policy, http://www.ourenergypolicy.org/economisthigh-oil-prices-not-necessarily-bad-for-economy/
In a Yardeni Research blog post highlighted by an article in the New York Times, economist Ed Yardeni
argued that rising oil prices “may actually be good for the stock market, up to a point.” This is due, in
part, to energy sector companies like Chevron and Exxon making up more than 12% of the S&P 500’s
market capitalization. Yardeni notes that since late 2008 there has been “a strong positive correlation
between energy prices and the stock market.”
Low oil prices kill investor confidence
DeMarban 13 — Alex DeMarban, reporter at AlaskaDispatch, 1/20/2013, “Will Arctic offshore oil
drilling prove uneconomic in wake of US shale oil boom?” AlaskaDispatch
http://www.alaskadispatch.com/article/will-arctic-offshore-oil-drilling-prove-uneconomic-wake-usshale-oil-boom
Five years ago, oil prices settled around $100 a barrel and heavily reignited Shell's interest in the Arctic
Ocean: The company plunked down more than $2 billion for a chance to drill into the relatively shallow
floor of the Chukchi Sea. In the early 1990s, low oil prices led Shell to abandon its original foray into
the offshore Arctic, despite having punched more than 20 holes, including some that found oil. Fastforward to 2013 and it's hard not to wonder if history will repeat itself. In total, Shell has spent $5 billion
on leases, operational costs and other expenses, but the current exploration phase of that effort might
just be the easy part. To get any discovery to market in the years to come, Shell will have to clear more
regulatory hurdles, fend off additional legal battles, and spend billions more to create concrete or
steel production platforms, essentially remote islands to process crude. The company also will need
hundreds of miles of pipeline to ship oil across one of the planet's most inhospitable and
environmentally protected regions. Shell spokesman Curtis Smith said it's too early to speculate on how
the Kulluk grounding will impact Shell's ongoing exploration program off Alaska. "We will first complete
an assessment of the Kulluk, but our confidence in the strength of this program remains," he said. At
what oil price -- or at what point in time -- does the project become uneconomic? Smith said he couldn’t
answer. And what will happen to oil prices in the coming years is anyone's guess.
Employment
High oil prices lead to energy employment
The Financial Daily 13 — economist newscast, 12/6/13, “Shale Gas and Oil Boom Gains &
Vulnerabilities” Lexis Nexis
Rising oil and gas prices since the early 2000s prompted a resurgence of energy employment.
Increased use of horizontal drilling and hydraulic fracturing led to further gains in oil and gas hiring. As
of 2011, the states with the highest shares of energy employment were Alaska, Louisiana, New Mexico,
North Dakota, Oklahoma, Texas, West Virginia, and Wyoming. As shown in Figure 2, energy employment
shares increased in all eight of these states from 2000 to 2011.5 Although there is little oil and gas
activity in West Virginia, its coal production grew because coal prices followed the upward trend in oil
prices in the 2000s. Despite these gains, however, almost every one of these states depends less on the
five main energy-related industries than they did in 1982.
High Oil Prices led to Economic Performance
Financial Daily 13 — The Financial Daily, economist newscast, 12/6/13 “Shale Gas and Oil Boom
Gains & Vulnerabilities” Lexis Nexis
Fossil fuel production has been important to these states' recent economic performance. Since the
early days of the shale boom in 2006, the four states with the highest rates of employment growth are
the states with the highest shares of oil and gas employment (Figure 3). The greatest growth has been
in Texas and North Dakota, states with production from shale and the largest production increases. As
seen in Figure 3, between 2006 and 2012, U.S. employment declined 0.05 percent per year on average,
while employment in North Dakota and Texas grew by 3.4 and 1.5 percent, respectively, the fastest
growth in the country.
Extraction
Low Oil prices prevent investment in extraction
Travberg 13 — Gail Travberg, editor of The Oil Drum, 12/18/13, OilPrice.com, “How Low Oil Prices
could Cause the Death of Oil”, http://oilprice.com/Energy/Oil-Prices/How-Low-Oil-Prices-could-Causethe-Death-of-Oil.html
Because of diminishing returns, the cost of oil extraction keeps rising. It is hard for oil prices to increase
enough to provide an adequate profit for producers. In fact, oil prices already seem to be too low. Oil
companies have begun returning money to stockholders in increased dividends, rather than investing
in projects which are likely to be unprofitable at current oil prices. See Oil companies rein in spending
to save cash for dividends. If our need for investment dollars is escalating because of diminishing returns
in oil extraction, but oil companies are reining in spending for investments because they don’t think
they can make an adequate return at current oil prices, this does not bode well for future oil
extraction.
Producer Economies
High prices benefit producing economies — resulting increased production moderates
spikes
Neuhauser 6/24 — Alan Neuhauser, energy, environment and STEM reporter for U.S. News & World
Report, 6/24/2014, “Data Mine: As Turmoil in Iraq Boosts Oil Prices, Who Benefits the Most?,” USNews,
http://www.usnews.com/news/blogs/data-mine/2014/06/24/data-mine-as-turmoil-in-iraq-boosts-oilprices-who-benefits-the-most
High prices mean high profits, right?
Well, not always.
As violence in Iraq forced crude oil prices past a nine-month high of $115 late last week, it wasn't
necessarily the producers who were reaping huge rewards, but instead the traders – the folks who
spend each day selling high and buying low.
Newly recruited Iraqi volunteers, wearing police forces uniforms, take part in a training session on June
17, 2014, in the central Shiite Muslim city of Karbala. Faced with a militant offensive sweeping south
toward Baghdad, Prime Minister Nuri al-Maliki announced on June 15, 2014, that the Iraqi government
would arm and equip civilians who volunteer to fight, and thousands have signed up.
“The real beneficiaries of what we would call this short-term volatility is traders,” says Jamie Webster,
senior director of global oil markets for IHS, a consulting firm. “Anybody that benefits from not high
prices or low prices, but rather moving prices, they’re the ones who really benefit.”
These traders can be your bankers on Wall Street or uncle on eTrade, but most often it’s the
independent oil companies, refineries and others who are constantly looking to pickup oil at the lowest
prices possible, and then sell it at the highest.
Producers can also benefit – at least as long as their operations remain untouched by turmoil.
“For an existing producer who doesn’t change anything about how they’re producing, they will make
more money on an existing barrel than they would have otherwise,” says Julie Carey, director of the
consulting firm Navigant Economics. “Other producers might also try to increase production: Can I
now produce something that was not economic at a price that was $10-per-barrel lower, but now is
more economic with prices that are higher? As we see prices rising, we see more production coming
online.”
Economy
High Oil Prices don’t tank economy, they just show the economy is bad — current
economy can withstand oil spike
Burrows 12 — Dan Burrows, contributing financialist at CBS MoneyWatch, 2/28/12, “Why Higher Oil
and Gas Prices are good”, CBSNews, http://www.cbsnews.com/news/why-higher-oil-and-gas-prices-aregood-news/
True, oil price spikes preceded the 1973, 1980, 1991, 2001 and 2007 recessions, but the spike in early
2011 did not lead to one, Sonders notes -- and she doesn't believe the current spike will also be an
exception. "U.S. consumers are now much better positioned to weather higher energy prices, with
well-improved job growth and consumer confidence, credit growth picking up, aggressive Fed
stimulus and record-low natural gas prices," Sonders says. Additionally, total U.S. spending on energy
as a percentage of disposable personal income currently stands at less than 6 percent, down from the 8
percent of the early 1980s. But most important is the fact that last year's rise in energy prices was
largely spurred by the second round of quantitative easing by the Federal Reserve, Sonders says,
whereas today's driver of higher oil and gas prices is global growth.
High prices follow economic growth — they don’t prevent it
Hyman 13 — Sean Hyman, financial insider at Money News, 7/19/2013, “Rising Oil and Gasoline
Prices: A Blessing and a Curse”, Money News, http://www.moneynews.com/SeanHyman/oil-gas-priceeconomy/2013/07/19/id/515961/
You see, when economic growth is waning, there is less demand placed upon the supplies of oil. And
when the global economy is expanding, yes even more so than the increased supplies, the demand
increases upon the supplies of oil and oil's price rises. I watch oil a lot because it's a great barometer of
how the global economy is faring. And what I like best about it is that it's more of a real-time indicator
than watching delayed gross domestic product reports, etc. So oil's rise proves to us that the global
economy still has its footing and is strengthening overall. And that's a good thing. When economies
are expanding, jobs will be created.
Low prices don’t help the economy – the difference is marginal at best
Washington Post 12 — Byline Brad Plumer, “Cheap oil won’t save the world’s economy,”
Washington Post, 6/25/12, http://www.washingtonpost.com/blogs/ezra-klein/wp/2012/06/25/cheapoil-wont-save-the-worlds-economy/)
Earlier this year, oil prices spiked upward, and observers worried that high prices could pinch the global economy. Then the global economy
stumbled on its own — with slowdowns in the United States, China, Europe, and elsewhere — and oil prices slumped again. Crude traded in the
United States sunk from $108 per barrel back in February down to $78 per barrel today. So will the reverse be true? Can
low oil prices
provide a stimulus?¶ A little, but not much . According to Andrew Kenningham, a senior economist with Capital Economics, a
$20 fall in oil prices basically transfers about 1 percent of global GDP from countries that mainly
produce oil (such as Russia and Saudi Arabia) to countries that mainly use oil (lots of places). Since oil-consuming
countries tend to spend a bit more money on goods and services, this wealth transfer will likely boost
the global economy by about 0.5 percentage points. That helps. But it’s not nearly enough to solve the
world’s problems.¶ “Cheaper oil may cushion the fall in demand, particularly in the U.S., where the pass-through from crude oil to
gasoline prices is high,” Kenningham told Housing Wire. “But it cannot reverse the slowdown.”¶ James Hamilton, an economist and
oil expert at the University of California San Diego, concurs. He notes that gasoline prices have always tightly followed oil prices, so prices at the
pump in the United States are likely to drop by quite a bit in the months ahead. That will put a little more money in the pockets of drivers. But
that’s not enough of a boost to overcome all the other problems in the world:¶ If gasoline prices do fall from
their value in April near $3.92 to $3.12, that would be an 80 cents/gallon swing. With Americans buying about 140 billion gallons of gasoline
each year, that translates into an extra $112 billion over the course of a year that consumers would have available to spend on other things
besides gasoline.¶ So should we be celebrating? I’m afraid not. The primary reason that oil prices have come down is because of growing signs
of weakness in the world economy. I am very concerned about where events in Europe are going to lead, and recent U.S. data indicate some
weakening. Cheap
gas helps, but not so much if you don’t have a job.¶ The world just can’t win with oil lately. When
times are good and the global economy is expanding, the world bumps against what appears to be a
ceiling in the production of “easy” oil. At that point, prices tick up, threatening to squelch the
recovery. Conversely, when times are bad, falling oil prices don’t appear to be enough to prop up the
economy again.
Renewable Energy
Low Oil Prices Turn the Case – only sustained high prices lead to long term investment
in renewable energy
Akst 6 — Daniel Akst, contributing editor at the NYT and various other publications, 9/17/06, “The
Good Thing about Oil Prices Is the Bad News”, NYT,
http://www.nytimes.com/2006/09/17/business/yourmoney/17cont.html?ref=yourmoney)
Don’t kid yourself. Anything that reinforces the role of fossil fuels — particularly oil — as the industrial
world’s primary energy source is bad, not good. Anything that prolongs the life of the internal
combustion engine is a negative, not a positive. Anything that makes it cheaper to pump greenhouse
gases into the atmosphere is cause for mourning rather than celebration. What we need is not lower oil
prices but higher ones — significantly higher, enough to deter consumption and make us look seriously
at alternatives. Of course, it would be nice not to have to rely on cartels and circumstances to make us
moderate our consumption. Hefty taxes on carbon-based energy, the proceeds of which could fuel
research into nonfossil alternatives, would be a much better approach, since then at least we’d be
paying ourselves instead of our friends at the Organization of the Petroleum Exporting Countries. As a
bonus for saving the planet, we might even undermine the intolerance and autocracy that are abetted in
many places by oil money. The sad fact is that just as oil is the lifeblood of Western economies, oil
revenue often is the lifeblood of tyranny. Oil-rich regimes that trample the rights of women, finance
terrorism and preach intolerance are sustained by what we spend on gasoline and heating oil. The
unfortunate paradox is that moderating oil prices, while they may reduce the earnings of despots in the
short run, will only support our harmful addiction — and the power of those same despots — in the long
run. If that were the only bad thing resulting from lower oil prices, it would be sufficient. Ah, but there’s
so much more. Lower oil prices would promote more driving, for instance, a dismal outcome that
would increase air pollution and, in all likelihood, highway fatalities. More than 43,000 people were
killed on United States roads last year, and 2.7 million were injured. Many thousands die annually from
airborne pollutants as well. Then there’s sprawl. Cheaper gas will mean more far-flung, automobiledependent communities. That will bring more driving still, which will result in even more pollution and
accidents. This is to say nothing of the health effects associated with driving everywhere instead of
walking. All that driving brings us back to global warming. Fossil fuels are implicated in what appears
to be significant human-induced climate change. Everyone I know professes to worry about this, but
let’s face it: nothing but drastically higher prices will deter most of us from consuming more carbonbased energy. Meanwhile, oil prices remain distressingly low. Adjusted for inflation, remember, prices
peaked some 25 years ago. HIGHER prices have worked wonders before. Today, Americans can
generate a dollar of gross domestic product using just half the energy required in 1973, that
watershed year of the oil embargo and lines at gas stations. In countries where energy is more
expensive, a dollar of G.D.P. requires considerably less energy still. Unlike a tax, moreover, higher
prices have the advantage of applying all over the world, to everyone. The burden of higher oil prices,
unfortunately, will fall most heavily on the world’s poor — but then again, so would the burden of
climate change. And surely the poor would benefit from technologies that provide alternatives to fossil
fuels.
High Oil Prices help renewable energy
Frangoul 14 — Anmar Frangoul, reporter at CNBC, 5/8/14, High oil prices will boost renewables: Pro,
CNBC, http://www.cnbc.com/id/101653990#.
Higher oil prices would help to incentivize research and development into renewable energy,
according to Mark Lewis, senior analyst of sustainability research at Kepler Cheuvreux. Brent crude
futures traded just below $108 a barrel around midday on Thursday, up some $8 a barrel from this time
last year. "You've got security of supply concerns, raised most recently…with the tensions in the east of
Europe with Ukraine that has brought to the fore Europe's dependence on imported fossil fuels, and
you've got continuing high oil prices," Lewis said. Only recently Elon Musk, CEO of Tesla Motors,
announced ambitious plans to build a $5 billion 'giga factory' that will produce up to 500,000 lithium
batteries annually by 2020. And with ongoing tensions between Ukraine and Russia highlighting
Europe's dependency on imported fossil fuels, Lewis told CNBC that such a climate could make the
development of renewables, such as lithium ion batteries, a more attractive proposition. "I think oil
importing countries…really should be looking at battery technology, storage of energy, as the 'holy
grail'," Lewis added. "This really is it, because if you can make the big breakthrough there, we really do
start to see a change." With oil prices high and major oil companies cutting back on capital
expenditure levels, Lewis predicted that the appetite for renewables will gain momentum. "I think this
is a real issue," Lewis said. "The oil companies are failing to make enough money even at current
record high price levels, we've seen the oil companies start to cut back on their cap ex (capital
expenditure) levels from the beginning of this year… which kind of tells you oil prices have to go
higher, and that's where the incentive for developing this technology will come through," he added.
High Oil Prices Force Use of Alternative Energy
Travberg 13 — Gail Travberg, editor of The Oil Drum, 12/18/13, OilPrice.com, “How Low Oil Prices
could Cause the Death of Oil”, http://oilprice.com/Energy/Oil-Prices/How-Low-Oil-Prices-could-Causethe-Death-of-Oil.html
Climate Change. There is no limit on oil production within the foreseeable future. Oil prices can be
expected to keep rising. With higher prices, alternative fuels and higher cost extraction techniques
will become available. The main concern is climate change. The only reason that oil production would
drop is because we have found a way to use less oil because of climate change concerns, and choose not
to extract oil that seems to be available.
High Prices Bad
Low prices inev/no impact
No impact to low prices and its inevitableTsafos 14- writer for the National Interest, MA, Int’l Relations & Int’l Economics, Johns Hopkins SAIS
(Nikos, June 30th, 2014 “Could Lower Oil Prices Bring Chaos to Oil Exporters?”
http://nationalinterest.org/feature/could-lower-oil-prices-bring-chaos-oil-exporters-10767 DA: 7/19/14)
//MB
The growth in oil production in the U nited S tates is forecasted to cause financial strain on oil exporters
by lowering oil prices; as Edward Morse put it, “Lost market share and lower prices could pose a devastating
challenge to oil producers dependent on exports for government revenue.” Such statements are common, but
they are not very credible. Even if we assume that oil prices will fall (they have not yet), the financial impact
on oil exporters will vary—and many oil exporters are much better prepared to cope with lower oil
prices than in the 1980s. The reference point for much of this discourse is a country’s fiscal break-even
oil price—the price at which the budget is balanced (some analysts also look at current account breakevens). According to the International
Monetary Fund, the Middle Eastern oil exporters in 2013 balanced their budgets at an oil price that was $38 per barrel higher than in 2008.
Such trends are read to mean “financial trouble.” Robert Blackwill and Meghan O'Sullivan, for instance, referenced the $40 per barrel increase
in Saudi Arabia’s fiscal break-even oil price between 2008 and 2014 as proof that the country is “already facing growing fiscal constraints.” But
this is not the only or even the most appropriate way to interpret fiscal break-even prices and their growth in recent years. If we take the
Middle Eastern oil exporters as a sample, we see that governments hesitated to spend much more after oil prices rose in 2004, partly because
they remembered the 1980s and wanted to ensure the windfall would last before spending it. In fact, government expenditures as a share of
GDP from 2004 to 2007 were on average two percentage points lower than from 2000 to 2003 as countries spent cautiously, saved and repaid
debt. Lowering debt, in particular, was a core objective: by 2007, public debt to GDP averaged 13 percent versus 40 percent in 2000. The
Middle East oil exporters boosted expenditures at different points, for different reasons and for
different ends, but by 2010-13, most counties spent about as much as a share of GDP as they did a decade earlier (except Algeria and
Libya, which had civil wars at the start or end of the period). Thus, the rise in fiscal break-even prices reflects the correction in government
spending as governments trusted that high oil prices were here to stay and recognized that they could no longer afford, politically, to wait. It is
ironic that what would otherwise be considered prudent fiscal policy—wait before you spend, repay debt—is in retrospect interpreted as a
problem.
This is so different than the 1970s and 1980s, which still frames how people think about lower
oil prices . OPEC production fell by 50 percent from peak to trough in the late 1970s and 1980s, exports fell by 60 percent, and prices
declined by 70 percent in real terms over an eight-year period. Meanwhile, many OPEC countries had not only spent their oil windfall but had
also borrowed to finance their development programs—debt-to-GDP levels doubled or tripled in many countries in the decade after the first oil
shock. When oil production and prices fell, countries had to adjust spending as well as dealt with a debt overhang that took decades to resolve.
Even so, oil exporters today do need higher prices to balance their budgets, and this affects their economies and for pricing strategies (for OPEC
members). But this
is not the same as equating lower oil prices with serious financial strain. For one, many
countries have sizeable buffers; the Middle East oil exporters, for example, had $1.4 trillion in official
reserves in 2013, and hundreds of billions of dollars in sovereign wealth funds. Low public debt also
means that these countries can borrow more easily—including from each other. And their current account
break-evens are far below their fiscal break-evens (on average $28 per barrel less), meaning a shortage of hard
currency is not as high a concern—meaning they can finance deficits through inflation. Nor is it clear that lower oil
prices will cause budget deficits right away or force governments to make “draconian budget
reductions” (to quote Blackwill and O'Sullivan’s words on Russia ). Governments can muddle through
when money is tight, and they first cut spending in politically easier areas. When oil prices fell in the 1980s, for
instance, Saudi Arabia exhausted capital spending (which fell by 85 percent from 1981 to 1988) before touching current expenditures (which
stayed flat). Other oil exporters behave similarly—as do developed economies that tend to protect spending geared to special interests or
powerful constituencies. Governments
can also redistribute the oil pie to raise more revenue. Malaysia, for
example, increased six-fold the dividend paid out by PETRONAS, its national oil company, between 2003 and 2008.
Russia, too, has changed export duties or mineral extraction taxes many times, as have other jurisdictions in
order to offset lower revenues or to finance greater expenditures. Of course, these adjustments can be painful and carry short- and longterm repercussions—but they can delay and cushion the impact on government finances from lower oil
exports.
General Global Economy
High oil prices prevent global economic growth — $120 a barrel causes global
recessions
Kennedy 6/26 — Simon Kennedy, reporter for Bloomberg News in London, 6/26/2014, “Rising Oil
Prices Loom Over World Economic Recovery,” BloombergBusinessweek,
http://www.businessweek.com/articles/2014-06-26/rising-oil-prices-loom-over-world-economicrecovery
The global economy faces a new threat from an old enemy: oil. A spike in the price of crude
foreshadowed economic slumps in each of the last four decades. So economists are worrying because
the price of Brent crude, considered the benchmark for the industry, recently reached its highest point
in nine months—above $115 a barrel. The jump in price came amid fresh violence in Iraq, the
Organization of the Petroleum Exporting Countries’ second-biggest producer after Saudi Arabia. Brent
started the year about $6 cheaper.
The rule of thumb favored by many economists is that every $10 increase in the price of a barrel of oil
ends up reducing global growth by about two-tenths of a percentage point. That’s not an
inconsequential amount for an already lackluster expansion. The World Bank on June 10 cut its outlook
for 2014 global growth to 2.8 percent from 3.2 percent in January. “There is no doubt that, beyond a
certain point, higher prices become a major constraint on global economic activity, particularly if the
price reflects supply problems, rather than buoyant demand,” says Julian Jessop, chief global
economist at Capital Economics in London. Energy importers such as China and Japan would suffer the
most from any jump in price, though exporters in the Middle East would benefit, according to Neil
MacKinnon, a global macro strategist at VTB Capital in London. Oil now has the probability of all-out civil
war in Iraq baked into its price, as well as the prospect of more violence in Ukraine. Those two risks add
$10 to $15 to the price of a barrel of crude.
Things could still turn around if the Iraq crisis dissipates. And OPEC says it’s confident it can pump
enough extra oil to make up for a shortfall in Iraqi production. The world is also more energy-efficient
than it once was, and the U.S. has larger domestic supplies, which can put a cap on price rises.
Even at $100 a barrel, though, oil can act as a drag on global growth. Worldwide economic activity was
already weakening in the early precrisis days of 2008, when oil breached $100 a barrel. Oil then slumped
with the crash but rebounded to $100 in 2011, hampering the recovery. Capital Economics suggests
there is a 20 percent risk of the fighting in Iraq pushing oil up to $120, which it says is the danger
point: That price is associated with previous global economic slowdowns. “What’s more,” says Jessop,
“a strong and sustained recovery seems unlikely as long as oil is above $100.”
High oil prices threaten global economic recovery — India and Europe particularly at
risk
International Business Times 6/23 — International Business Times, Byline Meagan Clark,
6/23/2014, “7 Global Consequences Of Soaring Oil Prices,” International Business Times
Crude oil prices in the U.S. and around the world are hitting highs last seen in September amid the
ongoing crisis in Iraq as terrorist group Islamic State in Iraq and Syria (ISIS) seizes cities and oil refineries
in their march toward Baghdad.
Here are seven ways that rising oil prices will impact global economies:
1. Growth in the euro zone, dragged down by France and Germany, is grinding to its slowest pace in
six months , according to a June survey released Monday. About 5,000 companies across the currency
area and in the manufacturing and services sectors reported higher input prices and specifically higher
oil prices as “a key cause of rising costs,” according to survey compiler Markit. Apparently, oil prices are
not yet high enough to weigh down manufacturing and service sectors in the U.S. and China, where
Markit surveys found conditions are reviving despite fears of a slowdown.
2. India is dependent on oil imports for more than three-fourths of its needs, and about 13 percent of
its imports come from Iraq. That means Asia’s third-largest economy , whose stock market has
performed among the best in the world this year, could see an economic crisis unfold if oil prices don’t
fall again. Since India subsidizes many fuels like diesel and kerosene, aiming to shield the poor from
price fluctuations, the government must compensate losses to fuel retailers. Every dollar increase in the
oil price raises the subsidy burden by about $997 million, an Indian oil official told the Wall Street
Journal.
3. The price of gasoline in the U.S. is closely pegged to the international price of oil. In general, a $10
increase in the oil price will cause a 25 cent rise in gas prices. (This is known as the Hamilton-to-aQuarter Rule, a $10 bill with Alexander Hamilton’s face to a quarter.) This rule only roughly estimates
the national average price of gasoline, and prices always vary by region. For example, gas prices soared
past $4 a gallon in California on Sunday, but are around $3.80 in Michigan.
4. Another handy rule: a 1 penny shift in U.S. gas prices generally leads to a $1 billion increase in
American household energy consumption. If gas prices rise by a dime, that’s a $10 billion increase in
household energy consumption. Analysts have said gas prices could rise 5 cents to 10 cents this summer
if the turmoil in Iraq continues.
5. Since energy, particularly oil, is about 10 percent of the consumer price index, a 10 percent
increase in energy prices increases inflation by an additional 1 percent (added to an economy’s
inflation from other factors), according to Deutsche Bank Chief U.S. Economist Joseph LaVorgna.
6. Rising oil prices also hits gross domestic product. In general, a $10 increase in the price of oil cuts
0.2 percent to 0.3 percent from GDP. That means, so far the uptick in oil prices is causing about a 0.15
percent decline in global GDP. The International Monetary Fund estimated in January that global GDP
would grow at about 3.7 percent this year.
7. The global economic recovery will be weak and unsustainable as long as oil prices remain above
$100 per barrel, according to the macroeconomic think tank Capital Economics. Julian Jessop, head of
commodities research, said June 20 that if the unrest in Iraq drags on like the civil war in Syria has, he
expects even with Western oil reserves and increased output from Saudi Arabia adding to global oil
supply, prices could settle at $120 per barrel “for an extended period.”
“This would be the level at which global growth has faltered in the past,” he added.
High oil prices due to Middle East conflicts threaten the global economy
Chapman 6/26 — David Chapman, Technical Analyst & Investment Manager with Economics Degree,
6-26-14, “Rising Oil Prices – A Problem for the World Economy”, Gold Seek,
http://news.goldseek.com/GoldSeek/1403805389.php
Oil prices appear to be forming a potential ascending triangle over the past few years. The high thus far
in this pattern was at $114 in April 2011. The current top of the pattern is near $111 and a breakout
above that level could suggest a major move to the upside. If the pattern is correct as an ascending
triangle a breakout over $111 could suggest a move towards the top of the major channel currently near
$148/$150. If oil prices were to move those levels it could be suggesting that the situation in Iraq
deepens. Persistent high oil prices would also threaten the fragile global recovery. The huge pattern
from 1980 appears as a huge ascending wedge triangle. Normally that is a bearish pattern. The top of
the channel hooks the 1980 top up with the top of 2008. The bottom channel starts with the 1998 low
and runs along the low of 2008. The top of the channel is currently near $190 while the bottom of the
channel is currently near $80. There appears to be considerably more latitude for a sharp rise in oil
prices as opposed to any down move. If the ascending triangle pattern is correct there appears to be
considerably more ability for oil prices to rise within the triangle. The turmoil in Iraq and Syria are civil
wars that are threatening to spread into other countries and drag in foreign powers. In the middle of
this sits some of the largest oil reserves in the world and one of the major choke points for the
shipment of oil. If oil prices were to rise further because of a further deterioration of the conflict in
the Middle East it could become a major problem for the world economy.
High oil prices threaten the global economy
Rugaber & Crutsinger 11 — Christopher S. Rugaber & Martin Crutsinger, Christopher: reporter for
AP, International Trade at Bureau of National Affairs & Martin: reporter for AP, 03-10-11, “Higher oil
prices threaten global economy”, The Washington Post, http://www.washingtonpost.com/wpdyn/content/article/2011/03/10/AR2011031004708.html?sid=ST2011031006222
Higher oil prices are slowing global economic growth, and the impact is likely to spread in coming
months. Stocks sink amid concerns out of China and Europe, continued turmoil in Arab world.
Unemployment rate slipped in Md. and Va. in January, held steady in D.C.
Oil prices helped raise the U.S. trade deficit to a seven-month high in January, when crude prices were
$87.50 a barrel. Oil is now trading at more than $100 a barrel, suggesting the gap will widen in coming
months. Even fast-growing China isn't immune - higher oil prices contributed to a rare trade deficit
there in February. "It's a bad start, because we all know the oil shock is still coming," said Paul
Ashworth, an economist at Capital Economics.
Pricier oil dampens consumer spending and that cuts into economic growth. Surging oil prices can also
stir up inflation fears, triggering higher interest rates that cut into household and business spending.
In January, America's foreign oil bill rose 9.5 percent, or $3.04 billion, to $34.9 billion. That's the highest
monthly total since October 2008. Since then, political turmoil in Libya, Egypt and Tunisia have sent oil
prices surging. At the same time, accelerating economic growth in Asia and Latin America has also
boosted demand. The impact is visible in bold numbers each morning on gas station marquees across
the United States. Pump prices have risen 13 percent in the past month to a national average of $3.53 a
gallon, according to AAA, Wright Express and Oil Price Information Service. Airlines have also been
rapidly raising their fares to offset higher fuel costs. American Airlines said Thursday it is increasing its
base fares by $10, the seventh price hike this year by U.S. airlines. Jay Bryson, global economist at Wells
Fargo Securities, said he has cut his U.S. growth estimate for the January-March period to 2.9 percent,
down from about 3.3 percent last month. Much of that reduction is due to the impact of higher oil and
gas prices. The $46.3 billion trade deficit in January also will subtract from economic growth. Higher
prices for oil helped drive imports up at the fastest rate in 18 years, as did rising demand for foreign
cars, auto parts and machinery. Imports rose at nearly twice the pace of exports, to $214.1 billion, the
Commerce Department said. Exports rose to an all-time high of $167.7 billion. That isn't all bad news. A
wider deficit is partly a sign of greater spending by businesses and consumers. But it also means that
more of that spending is going overseas, reducing U.S. economic growth. Imports of foreign-made
autos and auto parts increased 14 percent, or $2.67 billion, as auto production rose in the U.S. and
Canada. Demand for big-ticket capital goods such as industrial machinery and computers increased 5.2
percent. Imports of consumer goods, such as clothing, shoes, electronic appliance and toys and games,
were up 2.2 percent. "To the extent that this surge reflects the strength of domestic demand ... it isn't
necessarily a disaster," Ashworth said. Rising oil prices can slow the economy in another way: by
spurring central banks to raise interest rates. Few economists expect the U.S. Federal Reserve to take
such a step. But that's a potential problem in Europe. Both the European Central Bank and the Bank of
England appear to be preparing interest rate hikes in the next couple of months, in an effort to keep
inflation in check. Many analysts fear that could bring a faltering economic recovery in Europe to a
halt. Though Germany, Europe's economic powerhouse, is growing strongly, a number of countries,
notably the highly indebted nations such as Greece and Portugal, are expected to contract further this
year. Europe is a major source of U.S. exports and a slowdown there could weigh on the U.S. recovery.
The turmoil in the Middle East could have a bigger impact on Europe's economy than the U.S.,
economists at Bank of America Merrill Lynch wrote in a research note. The U.S. has a lot of natural gas,
which serves as alternative energy source, and can refine a wider variety of crude oil, the economists
said. European countries are more exposed to rising oil prices because they primarily consume the
"sweet crude" produced by Libya. Refineries in Europe are not as well equipped as those in the U.S. to
process other varieties of oil. Still, the impact on both the United States and Europe will likely be limited,
economists said. Mark Zandi, chief economist at Moody's Analytics, recently cut his forecast for
economic growth in 2011 from 3.9 percent to 3.5 percent. He cited rising oil prices and expected
spending cuts in Washington as the reasons for the downward revision. Zandi also boosted his estimate
of the average price of oil this year from $90 to $100. Oil prices would have to top $150 a barrel to truly
threaten the recovery in the U.S. and around the world, most economists say. Pricey oil is hurting even
the strongest economies. China, which typically runs huge trade surpluses with the rest of the world,
reported a surprise deficit of $7.3 billion for February. Higher prices for oil and other commodities
pushed imports up 19.4 percent while its exports dropped 2.4 percent. The export decline reflected
the fact that Chinese businesses were idled for the weeklong Lunar New Year holiday. Analysts said the
rare trade deficit for China was likely to be temporary and not the start of a trend. More expensive oil
isn't bad news for everyone. Saudi Arabia, Iran and Venezuela and other OPEC members, as well as
Russia and Mexico, benefit from the rise in prices.
Oil prices need to decrease to allow economic growth
Katusa 11 — Marin Katusa, Investment Analyst, Senior Editor of Casey Energy Dividends, Casey Energy
Confidential, & Casey Energy Report, 09-23-2011, “What Low Oil Prices Really Mean”, Money Show
Network, http://www.moneyshow.com/articles.asp?aid=GURU-24618
Oil prices in large part reflect global sentiment towards our economic future—prosperous, growing
economies need more oil while slumping, shrinking economies need less, and so the price of crude
indicates whether the majority believes we are headed for good times or bad. That explains the
worry—those worried investors and economists are using oil prices as an indicator, and falling prices
indicate bad times ahead. But oil prices have to correct when economies slow down, or else high
energy costs drag things down even further. And the current relationship between oil prices and global
economic output is not pretty. In fact, every time the cost of oil relative to global production has hit
current levels—and that’s after the sharp corrections earlier this month—an economic slump, if not a
recession, has followed, according to a Reuters article. The “warning signal” that is currently flashing
red is the Oil Expense Indicator, which is the share of oil expenses as a proportion of worldwide gross
domestic product (specifically, it is oil price times oil consumption divided by world GDP). Since 1965,
this indicator has averaged roughly 3% of GDP, and has only exceeded 4.5% during three periods: in
1974; between 1979 and 1985; and in 2008. Each period saw severe global recessions. In 1973 and …74,
the Arab oil embargo sent oil prices rocketing skywards in the world’s first “oil shock.” In 1979, a
revolution in Iran knocked out much of that country’s oil output and catalyzed the world’s second oil
shock.
And, of course, in 2008 the housing bubble collided with speculative buying of new debt instruments
and a commodities boom to propel oil prices to a record high of US$147 a barrel, which helped to
trigger the global financial crisis and the worst slump since World War II. So where are we right now?
Well, Brent crude prices would have to fall to the low $90s per barrel for the Oil Expense Indicator to
drop below 4.5%. Instead of that, Brent prices have been above $100 per barrel for more than six
months (aside from an intraday low of $98.97 on August 9) and are still hovering between $105 and
$110. Oil prices play a major role in global economic growth because oil is crucial to every part of the
economy. It powers manufacturing as well as food and commodities production, it fuels
transportation, and it is a building block for industries like plastics and electronics. When oil prices
stay too high for too long, they choke out economic growth. Merrill Lynch analysts agree, writing in a
recent note: “The last two times that energy as a share of global GDP neared…the current level, the
world economy experienced severe crises: the double-dip recession of the 1980s and the Great
Recession of 2008.” So we face two options: oil prices come down sharply, or we enter a recession,
which will drag oil prices down. Either way, crude has to get cheaper.
High oil prices will devastate the world economy
Gordon 12 — Greg Gordon, Correspondent at McClatchy Newspapers, 08-12-12, “Will high oil costs
permanently ruin world’s economy?”, McClatchy DC,
http://www.mcclatchydc.com/2012/08/12/160935/will-high-oil-costs-permanently.html
Many experts now believe that, absent the discoveries of numerous new giant oilfields or
breakthroughs in development of alternative fuels, oil demand will persistently push global prices to
unaffordable levels, shackling economic growth indefinitely.
Even if discoveries somehow keep pace with demand, extracting oil from increasingly harsh conditions,
such as beneath the Arctic Ocean or other deep ocean waters, will put upward pressure on prices.
Despite the potentially huge economic consequences, no full-scale, multinational energy conservation
effort has been launched to buy time for development of alternatives, such as electric cars, that would
ease pressure on oil supplies and prices. When oil prices eclipsed $100 a barrel in 2011 and early this
year, they were edging toward the “breaking point” – the threshold where economies can no longer
expand, said Charles Hall, a professor in the School of Environmental Sciences and Forestry of the State
University of New York. Hall, a co-author of the book “Energy and the Wealth of Nations: Understanding
the Biophysical Economy,” said that the economy has stalled in the past when U.S. energy costs have
approached 13 percent of the gross domestic product. Annual global expenditures on raw energy have
climbed to an estimated $8 trillion to $9 trillion, exceeding 10 percent of the $70 trillion world gross
domestic product. Those figures, however, omit the succession of price up-charges along the
manufacturing, marketing and delivery chain for energy-related components of goods and services. “I
don’t think the economy is ever going to grow again . . . not on a sustained basis,” Hall said in an
interview. Since last spring, oil prices have retreated below $100 a barrel, and global supplies are flush,
even despite trade sanctions that have curbed petroleum exports from Iran, the world’s second largest
producer.
But Christine LaGarde, chief of the International Monetary Fund, said recently that high oil prices
remain “a major threat” that could tip the global economy into recession, especially if Iran triggers a
“price shock” by retaliating with further export cuts. Researchers at her agency have predicted that oil
prices will permanently double to about $200 a barrel over the next decade. The soaring prices, up
from less than $24 a barrel a decade ago, are expected to cost European nations $500 billion this year,
nearly triple the average they paid for imported oil from 2000 to 2010, partly because of the sunken
value of the euro, Maria Van der Hoeven, executive director of the Paris-based International Energy
Agency, said recently. Energy costs also can share blame for crimping American workers’ standard of
living. Adjusted for inflation, median weekly earnings over the last quarter-century rose less than $10,
while crude oil prices nearly tripled and net U.S. gasoline prices doubled. In a paper published in 2009,
Hamilton reported that the price of crude oil has jumped sharply in advance of 10 of the 11 U.S.
recessions since World War II. His bigger discovery was that the sharp rise in prices before the economic
collapse of 2008 didn’t stem from an Arab oil embargo, military conflict or other Middle East supply
disruption, as occurred before five other major economic downturns. Instead, it was largely “booming
demand and stagnant production” that briefly sent the price to a record $145 a barrel in July 2008,
probably accelerating the crisis that sank the world economy, he found. Sure enough, after oil prices
pulled back in 2009 and 2010, consumption shot up by more than 5 percent last year, and prices
spurted above $100 a barrel again. The world economy soon slumped into its current doldrums. Now
scientists and economists are fretting about the implications if oil becomes so unaffordable that it
leads to a chain-reaction surge in the costs of other fuels. What if oil prices get so high that it’s
economically attractive to convert natural gas and coal supplies to liquid fuels? Will prices for those
resources rocket into the stratosphere, too? Is there no way out of energy’s grip?
The kinds of tradeoffs that lie ahead might be exemplified by the sudden North American natural gas
rush, which has led to a supply glut and plummeting gas prices. The bargain prices sparked a burst of
interest in converting cars and trucks to cheaper, cleaner-burning natural gas. But only 130,000 natural
gas-powered vehicles are on U.S. roads, and replacing a sizable share of the nation’s 250 million vehicle
fleet with specially built natural gas-powered models would take decades and require installation of
thousands of refueling stations. Further, Sadad Al Husseini, a former top officer of the Saudi Arabian
national oil company Aramco, told McClatchy that an intensive conversion to natural gas would make “a
global (natural) gas crunch almost inevitable in the next decade.” While there are vast deposits of
natural gas in the United States and worldwide, “inexpensive gas reserves are finite,” he said. “The more
oil is displaced by gas on a crash basis, the faster the low-cost reserves are depleted.” Leading
advocates of a theory that global oil production will soon peak and begin a potentially economically
disastrous decline are standing firm, although they’ve had to push back their doomsday dates several
years. “The first half of the age of oil saw this rampant expansion of industry, transportation, trade,
agriculture,” said Colin Campbell, an 81-year-old retired Irish petroleum geologist who founded the peak
oil movement. “The population went up six times in parallel over 100 to 150 years . . . triggered by the
cheap, easy energy that made everything possible. “Now we face the second half, which is about to
dawn, which just undermines this whole world system under which we’re now living,” he said.
“Naturally, no one wants to admit that.” The global economy is “premised on expansion, where what
we face is contraction,” Campbell said.
High oil prices hurt global economic growth
Rubin 12 — Jeff Rubin, former chief economist and chief strategist at CIBC World Markets Inc., 09-2312, “How High Oil Prices Will Permanently Cap Economic Growth”, Bloomberg,
http://www.bloomberg.com/news/2012-09-23/how-high-oil-prices-will-permanently-cap-economicgrowth.html
For most of the last century, cheap oil powered global economic growth. But in the last decade, the
price of oil has quadrupled, and that shift will permanently shackle the growth potential of the
world’s economies. The countries guzzling the most oil are taking the biggest hits to potential
economic growth. That’s sobering news for the U.S., which consumes almost a fifth of the oil used in the
world every day. Not long ago, when oil was $20 a barrel, the U.S. was the locomotive of global
economic growth; the federal government was running budget surpluses; the jobless rate at the
beginning of the last decade was at a 40-year low. Now, growth is stalled, the deficit is more than $1
trillion and almost 13 million Americans are unemployed. And the U.S. isn’t the only country getting
squeezed. From Europe to Japan, governments are struggling to restore growth. But the economic
remedies being used are doing more harm than good, based as they are on a fundamental belief that
economic growth can return to its former strength. Central bankers and policy makers have failed to
fully recognize the suffocating impact of $100-a-barrel oil. Running huge budget deficits and keeping
borrowing costs at record lows are only compounding current problems. These policies cannot be longterm substitutes for cheap oil because an economy can’t grow if it can no longer afford to burn the
fuel on which it runs. The end of growth means governments will need to radically change how
economies are managed. Fiscal and monetary policies need to be recalibrated to account for slower
potential growth rates.
Energy Source Oil provides more than a third of the energy we use on the planet every day, more than
any other energy source. And you can draw a straight line between oil consumption and gross-domesticproduct growth. The more oil we burn, the faster the global economy grows. On average over the last
four decades, a 1 percent bump in world oil consumption has led to a 2 percent increase in global GDP.
That means if GDP increased 4 percent a year -- as it often did before the 2008 recession -- oil
consumption was increasing by 2 percent a year. At $20 a barrel, increasing annual oil consumption by
2 percent seems reasonable enough. At $100 a barrel, it becomes easier to see how a 2 percent
increase in fuel consumption is enough to make an economy collapse.
Fortunately, the reverse is also true. When our economies stop growing, less oil is needed. For example,
after the big decline in 2008, global oil demand actually fell for the first time since 1983. That’s why the
best cure for high oil prices is high oil prices. When prices rise to a level that causes an economic crash,
lower prices inevitably follow. Over the last four decades, each time oil prices have spiked, the global
economy has entered a recession. Consider the first oil shock, after the Yom Kippur War in 1973, when
the Organization of Petroleum Exporting Countries’ Arab members turned off the taps on roughly 8
percent of the world’s oil supply by cutting shipments to the U.S. and other Israeli allies. Crude prices
spiked, and by 1974, real GDP in the U.S. had shrunk by 2.5 percent. The second OPEC oil shock
happened during Iran’s revolution and the subsequent war with Iraq. Disruptions to Iranian production
during the revolution sent crude prices higher, pushing the North American economy into a recession
for the first half of 1980. A few months later, Iran’s war with Iraq shut off 6 percent of world oil
production, sending North America into a double-dip recession that began in the spring of 1981. Kuwait
Invasion When Saddam Hussein invaded Kuwait a decade later, oil prices doubled to $40 a barrel, an
unheard-of level at the time. The first Gulf War disrupted almost 10 percent of the world’s oil supply,
sending major oil-consuming countries into a recession in the fall of 1990. Guess what oil prices were
doing in 2008, when the world fell into the deepest recession since the 1930s? From trading around
$30 a barrel in 2004, oil prices marched steadily higher before hitting a peak of $147 a barrel in the
summer of 2008. Unlike past oil price shocks, this time there wasn’t even a supply disruption to blame.
The spigot was wide open. The problem was, we could no longer afford to buy what was flowing
through it. There are many ways an oil shock can hurt an economy. When prices spike, most of us have
little choice but to open our wallets. Paying more for oil means we have less cash to spend on food,
shelter, furniture, clothes, travel and pretty much anything else. Expensive oil, coupled with the
average American’s refusal to drive less, leaves a lot less money for the rest of the economy. Worse,
when oil prices go up, so does inflation. And when inflation goes up, central banks respond by raising
interest rates to keep prices in check. From 2004 to 2006, U.S. energy inflation ran at 35 percent,
according to the Consumer Price Index. In turn, overall inflation, as measured by the CPI, accelerated
from 1 percent to almost 6 percent. What happened next was a fivefold bump in interest rates that
devastated the massively leveraged U.S. housing market. Higher rates popped the speculative housing
bubble, which brought down the global economy. Unfortunately, this pattern of oil-driven inflation is
with us again. And world food prices are being affected. According to the food-price index tracked by
the United Nations Food and Agriculture Organization, the cost of food rose almost 40 percent from
2009 to the beginning of 2012. And since 2002, the FAO’s food-price index, which measures a basket of
five commodity groups (meat, dairy, cereals, oils and fats, and sugar), is up about 150 percent.
Food Prices A double whammy of rising oil and food prices means inflation will be here sooner than
anyone would like to think. Rising inflation rates in China and India are a clear signal that those
economies are growing at an unsustainable pace. China has made GDP growth of more than 8 percent a
priority but needs to recalibrate its thinking to recognize the damping effects of high oil prices. Growth
might not stall entirely, but clocking double-digit gains is no longer feasible, at least without triggering a
calamitous increase in inflation. If China and India, the new engines of global economic growth, are
forced to adopt anti-inflationary monetary policies, the ripple effects for resource-based economies
such as Canada, Australia and Brazil will be felt in a hurry.
Triple-digit oil prices will end the lofty economic hopes of India and China, which are looking to
achieve the same sort of sustained growth that North America and Europe enjoyed in the postwar era.
There is an unavoidable obstacle that puts such ambitions out of reach: Today’s oil isn’t flowing from the
same places it did yesterday. More importantly, it’s not flowing at the same cost. Conventional oil
production, the easy-to-get-at stuff from the Middle East or west Texas, hasn’t increased in more than
five years. And that’s with record crude prices giving explorers all the incentive in the world to drill.
According to the International Energy Agency, conventional production has already peaked and is set to
decline steadily over the next few decades. That doesn’t mean there won’t be any more oil. New
reserves are being found all the time in new places. What the decline in conventional production does
mean, though, is that future economic growth will be fueled by expensive oil from nonconventional
sources such as the tar sands, offshore wells in the deep waters of the world’s oceans and even oil
shales, which come with environmental costs that range from carbon-dioxide emissions to potential
groundwater contamination. And even if new supplies are found, what matters to the economy is the
cost of getting that supply flowing. It’s not enough for the global energy industry simply to find new
caches of oil; the crude must be affordable. Triple-digit prices make it profitable to tap ever-moreexpensive sources of oil, but the prices needed to pull this crude out of the ground will throw our
economies right back into a recession. The energy industry’s task is not simply to find oil, but also to
find stuff we can afford to burn. And that’s where the industry is failing. Each new barrel we pull out of
the ground is costing us more than the last. The resources may be there for the taking, but our
economies are already telling us we can’t afford the cost. Today, the world burns about 90 million
barrels of oil a day. If our economies are no longer growing, maybe we won’t need any more than that.
We might even need less. Maybe the oil trapped in the tar sands or under the Arctic Ocean can stay
where nature put it.
High oil prices hinder the global economy and its recovery
The Guardian 11 — Associated Press, 12-14-11, “High oil prices threaten global economy, IEA warns”,
The Guardian, http://www.theguardian.com/business/2011/dec/14/iea-high-oil-prices-global-economy
High oil prices threaten to worsen a global economic slowdown and crude producers should consider
boosting output, the chief economist for the International Energy Agency said on Wednesday. "The
current high oil prices have the potential to strangle the economic recovery in many countries," Fatih
Birol said in a speech in Singapore. "I hope that high oil prices don't slow down Chinese economic
growth and the negative effect that would have on the global recovery." Crude has jumped to $100 a
barrel from $75 in October amid signs the US economy will likely avoid a recession. Most economists
expect global growth to slow next year as Europe's debt crisis threatens to drag the continent into
recession. Birol suggested crude producers should boost output amid growing demand in developing
countries and falling inventories in wealthy nations. The Organisation of Petroleum Exporting Countries
is meeting later on Wednesday in Vienna to decide whether to change the cartel's output quotas. "I'm
sure Opec knows much better than me what to do," Birol said when asked if Opec should raise output.
"But seeing that oil prices are still high today and the negative effect that has on the recovery of the
global economy, I hope the energy producing countries will take these things into account and make
their decision accordingly." Birol said crude prices could rise to $150 by 2015 if oil-producing countries
in the Middle East and North Africa don't invest $100bn a year to maintain existing fields and develop
new ones. More than 90% of global crude production growth during the next 20 years will come from
that region, led by Saudi Arabia, Iran, Iraq, Kuwait, Algeria and United Arab Emirates, Birol said. "Recent
developments, including the Arab spring, have changed the mindset of many governments," Birol said.
"In some countries, oil investments have been diverted to social spending. Oil policies are taking on a
more nationalistic tone, which means not to increase production as much as is needed in the world
market."
IMF says high oil prices threaten the global economy
Huffington Post 12 — Reuters, 02-24-12, “IMF: Global Threat of Rising Oil Prices ‘Right In Front Of
Us’”, Huffington Post Business, http://www.huffingtonpost.com/2012/02/24/oil-prices-rising-promptimf-warning-global-economy_n_1299637.html
The International Monetary Fund flagged higher oil prices as a rising threat to the global economy on
Friday, urging policymakers to keep a close eye on western tensions with Iran, which is facing punitive
measures against its crude supplies. Looming U.S. sanctions on Iran's oil buyers, as well as an
impending European Union oil embargo, have forced countries to cut back on purchases from the
world's fifth-largest exporter of crude, pushing up the price of the commodity. Policymakers from
around the globe are converging on Mexico City for a meeting of finance ministers and central bankers
from the Group of 20 economic powers, and several of them raised concerns over the spiralling crude
costs. "A new risk on the horizon, or maybe not on the horizon, maybe right in front of us, is high oil
prices," David Lipton, First Deputy Managing Director of the International Monetary Fund, said in a
presentation at the G20 gathering. "The situation in Iran is a risk that we have to be thinking about. Our
assessment is that the global economy is not really out of the danger zone," Lipton added, noting,
however, that it was too early to revise down the Fund's growth forecasts. Lipton was speaking just after
U.S. Treasury Secretary Timothy Geithner said Washington was weighing the circumstances that could
warrant tapping the U.S. strategic oil reserve to counter the supply disruptions from Iran. The fear of
tightening supplies, exacerbated by a threat from Tehran to close the Strait of Hormuz - the main Gulf
oil shipping lane - have lifted prices to new highs. Western powers are increasingly at loggerheads with
Iran over its efforts to generate nuclear power. Iran insists it wants to harness atomic energy for
peaceful ends, but the West suspects it is trying to acquire nuclear weapons. A day after hitting a record
high in euro terms, Brent crude jumped above $124 a barrel, raising worries that a run of sharp price
gains could stymie the euro zone's growth prospects, making it harder for governments to meet
budget targets and pull the currency bloc out of its debt crisis. Mexico, which is hosting the G20
meeting, has been pushing for the euro zone to take further steps to solve the debt crisis and for
policymakers to make progress on increasing the IMF's firepower, lest it be needed to help in Europe.
But some countries have said there can be no talk of more IMF resources without a stronger European
firewall, which is to be discussed among European Union leaders next week. Angel Gurria, the SecretaryGeneral of the Organisation for Economic Co-operation and Development, followed up on Geithner's
comments by saying the jump in oil prices were due to politics and would not be solved by releasing
reserves. "These prices are due to a great extent ... because there is a lot of tension, these discussions
every day over the Straits of Hormuz and Israel," Gurria told Reuters in Mexico City. Gurria said there
was no distortion in markets and oil prices of up to $100 per barrel were "the new normal". "We are not
seeing a situation today where there is something wrong with (market) fundamentals, in fact, we are
seeing a slowdown in the global economy. There should be a reduction in consumption," he said. The
weak dollar also was cited by analysts as a supportive factor for oil. The dollar index weakened and the
euro hit a fresh 2-1/2 month high against the dollar.
Empirics
High oil prices negatively impact global economic growth
Li 12 — Dr. Mingqi Li, associate professor of economics at University of Utah, 3-14-2012, “The Global Is
Now More Vulnerable to Oil Prices than Ever”, Oil Price, http://oilprice.com/Energy/Oil-Prices/TheGlobal-Economy-is-Now-More-Vulnerable-to-Oil-Prices-than-Ever.html
This paper examines the impact of oil price changes on global economic growth. Unlike some of the
recent studies, this paper finds that oil price rises have had significant negative impact on world
economic growth rates. A time-series analysis of the data from 1971 to 2010 finds that an increase in
real oil price by one dollar is associated with a reduction of world economic growth rate by between
0.04 and 0.1% in the following year. Therefore, an increase in real oil price by 10 dollars would be
associated with a reduction of world economic growth rate by between 0.4 and 1% in the following year.
For a global economy that in average grows at about 3.5% a year, a reduction of this size is very
significant. Moreover, the regressions seem to have suggested that the impact of oil price on economic
growth may have increased over the last one or two decades. This is in contradiction with the widely
held belief that the global economy has become less vulnerable to oil price shocks. These findings
suggest that if the world oil production does peak and start to decline in the near future, it may
impose a serious and possibly an insurmountable speed limit on the pace of global economic
expansion.
High oil prices damage the global economy
Warner 13 — Jeremy Warner, assistant editor of The Daily Telegraph & business and economics
commentator, 11-21-2013, “Oil is both the lifeblood and the poison of the global economy”, The Daily
Telegraph, http://www.telegraph.co.uk/finance/oilprices/10465340/Oil-is-both-the-lifeblood-and-thepoison-of-the-global-economy.html
Ever since the price shocks of the Seventies, oil has had an unerring ability to play havoc with the
world economy. This shouldn’t entirely surprise, for oil is the basic feedstock, or energy source, for
much of today’s economic prosperity and wealth. Without it, we would still be manually drawing water
from well and stream, or riding to market in a horse and cart. For all the well-intentioned talk of
decarbonisation, oil remains the lifeblood of most gainful economic activity. There is no chance of that
changing in the foreseeable future. Yet in performing this service, hydro-carbons have also become a
key driver of the economic cycle itself. A rising oil price is both deflationary and inflationary at the
same time – a poisonous economic mix if ever there was one. If the price goes too high, it will depress
the economy while simultaneously adding to inflation. More money spent on oil means less for
spending on everything else. Fortunately, there is also a benign reverse effect. Eventually, weakened
demand will cause the price to start falling, at which point oil becomes a powerfully reflationary force.
At least, that’s how it used to work. Over the past decade, this pattern has changed. Fast growth in
emerging markets has undermined the old rules, so that, despite economic stagnation in high income
nations, we still have what are by historic standards very high oil prices. Opec has also got better at
manipulating supply to sustain the price. The reflationary effect that Western nations used to enjoy
from a falling oil price no longer occurs. No one would suggest that this is the whole or even primary
explanation for the permanent stagnation that seems to have settled like a pall on many advanced
economies, but it is undoubtedly part of the story. Energy prices are simply too high to allow for the
resumption of more normal levels of growth. Indeed, the real surprise is that the damage hasn’t been
greater still. Even 10 years ago, the persistence of $100 a barrel oil would have had a devastating effect
on high-income economies. Today, we’ve had to learn to live with it.
High oil prices risk global recession — empirics prove
Hodges 12 — Paul Hodges, Chairman of International eChem, 12-15-2012, “High oil prices present
recession risk”, ICIS, http://www.icis.com/blogs/chemicals-and-the-economy/2012/12/high-oil-pricespresent-recess/
Oil prices are heading for a second successive year of record annual prices. Last year, Brent averaged
$111/bbl and it is averaging similar levels so far in 2012. History suggests this is very bad news for
consumers, for companies and for the global economy. The reason is that consumers in most major
economies are now paying record or near-record prices for gasoline and diesel, and for heating or
cooling their homes. But their incomes have not risen to match these higher prices. So they have been
forced to cut back on other spending. In turn, this is now reducing corporate earnings and risks tipping
the world into recession. The chart explains the issue in its historical context. Since 1970, oil prices have
mostly been below 3% as a share of global GDP. The exceptions when it was above this level in 1973/4,
1979/80, 1989/90 and 2007/8 were all followed by recession. The impact is not immediate though, due
to the inefficiency of the mechanisms by which higher oil prices are passed through to end-users in
the major industry sectors. Crude oil itself is traded in real-time on electronic exchanges and in physical
markets. But buyers cannot then immediately increase their own prices. Typically, prices downstream
are set for 6 months or even a year ahead, in line with the needs of consumer industries such as retail
and autos. Thus when oil prices start rising, buyers down the chain have to rush into the market and
buy furiously, in as large a quantity as possible, in order to protect their margins. This then creates the
perception of shortages and drive prices still higher. In turn, it gives the outside world the illusion of
robust demand. ‘Why else’ thinks the complacent observer, ‘would people be buying in such volume?’ It
is only when prices finally stop rising that reality begins to dawn. Value chains are notoriously complex
in this area, and it takes time for players to fully recognise that the perceived shortages were mainly
driven by inventory changes. And only then do companies finally discover demand was actually reducing
over the period, as cash-strapped consumers cut back on discretionary spending. Worryingly, this seems
to be the point we are reaching today. It is therefore probably no real surprise that companies are
reporting increasing pressure on margins and volumes, and analysts are hastily starting to revise their
2013 growth forecasts.
Lower oil prices benefit consumers, stocks, and the economy overall
La Monica 11 — Paul R. La Monica, Assistant Managing Editor of CNN Money, 05-12-2011, “Oil’s
down and so are stocks? That’s silly”, CNN Money,
http://money.cnn.com/2011/05/12/markets/thebuzz/
Oil prices have taken a hit in the past few days, and so have stocks. The market did bounce back a bit
Thursday afternoon as oil prices edged from their lows, but apparently investors are still worried about
what lower crude will mean for profits in the energy sector. The big five oil companies -- whose CEOs
testified in front of Congress Thursday about energy prices and tax breaks -- have been notable losers
lately. That makes sense. The party may be over for the likes of Exxon Mobil (XOM, Fortune 500),
Chevron (CVX, Fortune 500), Royal Dutch Shell (RDSA), BP (BP) and ConocoPhillips (COP, Fortune 500).
Still, why has the entire market fallen just because oil prices are down? And why did it recover from its
losses when oil rebounded? Well, there is also chatter that the sharp pullback in commodities could be
a sign that the global economy -- particularly emerging markets -- are slowing down. But that is such a
short-sighted, anti-consumer point of view. It's no wonder why so many average Americans think there
is a disconnect between Wall Street and Main Street. Let me explain it to traders with a Foghorn
Leghorn-ian rebuke. "No no no! You've got it all wrong!. Lookit here son. Boy, I say, boy, lower oil prices
are good for consumers and the economy. Good, I tell ya!" People are anxious about gas being this close
to $4 a gallon.. That could lead to lower amounts of spending on other goods. That's not an encouraging
sign for retailers or any company that makes consumer products. So the fact that oil prices may finally
be heading back toward normal levels -- assuming that gas prices eventually follow suit -- is
undeniably a good thing for consumers. And that's good for the economy and the broader market.
"Higher oil prices are a sign of contraction, not inflation. If commodity prices are coming down, that's
bullish for consumers and stocks, not bearish," said Max Bublitz, chief strategist with SCM Advisors, a
money manager based in San Francisco owned by asset manager Virtus Investment Partners (VRTS).
Keep track of oil and other commodities; Even big businesses (that aren't in the energy sector of course)
should be rejoicing. Fuel costs have the potential to eat into the profits of many firms. Airlines, truckers
and other transportation companies obviously get hurt by higher oil prices. But so do leisure companies
like cruise line operators Royal Caribbean (RCL) and Carnival (CCL), automakers GM (GM, Fortune 500)
and Ford (F, Fortune 500) and big purchasers of plastic like Coke (KO, Fortune 500) and Pepsi (PEP,
Fortune 500). "Historically, oil prices are inversely correlated with stock prices because oil is such a big
input cost for companies," said Kate Warne, market strategist with Edward Jones in St. Louis. "At some
stage, we should begin to see lower oil prices as a catalyst for stocks to go up." Keep in mind that even
though oil has "plunged" in the past week, prices are still uncomfortably high. It wasn't that long ago
that prices were consistently in the $80 to $90 a barrel range. The only thing that's really changed in the
past few months to justify the huge spike in oil is that there are more fears about supply due to the
"Arab Spring" revolts in the petroleum-rich nations of the Middle East and North Africa. It seems odd to
suggest that demand for oil in China, India, Brazil and other developing nations is falling off a cliff just
because oil has pulled back to below $100. Unless crude actually plummets below the $80 to $90 range
it was in before events in Egypt, Tunisia and Libya became fodder for daily headlines, all that appears to
be going on now is a reversion back to where prices arguably should be absent any speculative froth.
Warne said some investors may also be making the mistake of reading too much into what is
happening in the markets on a short-term basis. Commodities plunge in one-week? Must be the
beginning of a double-dip recession! "There is often an overreaction to information. There is this
tendency where each new piece of data is viewed as having much bigger implications than it should,"
she said. Bublitz agreed that people may be overanalyzing the volatility in oil and other commodities.
There may not be a real rhyme or reason behind the big swings because it could simply be due to
program trading. Or to quote Pink Floyd: Welcome to the Machine. "I don't want to sound all 'grassy
knoll' here but I think a lot of what's going on with the commodity markets is about algorithmic trading
and computer systems seeking momentum," Bublitz said, "To a certain degree, that's been feeding
things on the way up and the way down." So if oil prices keep falling, resist the urge to declare that it's
the start of a new bear market for stocks. Instead, you'd be better off breathing a sigh of relief because
it just might mean gas prices won't hit a new record high after all.
Manufacturing
High oil restrains global economic activity — manufacturing is key to growth
Parkinson 13 — David Parkinson, The Globe and Mail Columnist and Economy Lab Editor, 3-22-13,
“Oil prices crippling to manufacturing activity – and economic recovery”, The Globe and Mail,
http://www.theglobeandmail.com/report-on-business/economy/economy-lab/oil-prices-crippling-tomanufacturing-activity-and-economic-recovery/article10196577/
The long-overdue retreat in crude oil prices may provide a welcome break for consumers. But it isn’t
enough to get oil’s foot off the throat of the global economy, Julian Jessop argues. Mr. Jessop, chief
global economist at London-based Capital Economics, wrote in a research note this week that Brent
crude – the North Sea crude grade that serves as a key global benchmark for oil pricing – remains at
levels where, historically, the world’s energy-intensive manufacturing sector stalls. This despite Brent’s
pullback in the past six weeks from nearly $120 (U.S.) a barrel to $108 – a consequence of global
demand concerns as well as investor risk aversion amid the Cyprus banking crisis. (The North American
benchmark grade, West Texas intermediate, also fell nearly $8 a barrel between the end of January and
early March, but has since recovered almost half that decline.) Mr. Jessop said recent history indicates
that oil is a hindrance to manufacturing activity – and, by extension, economic recovery – whenever
Brent is more than $100 a barrel. “The global manufacturing PMI [purchasing managers index] fell
below 50 in early 2008 when Brent first climbed above $100, and before the global crisis hit hard. The
PMI also started to weaken in early 2011 when Brent rose above $100 again. Oil prices have been
relatively stable above $100 for most of the last two years, but the recovery has been lacklustre
throughout this period, too.” “High oil prices are themselves a major constraint on economic activity,”
he said. “Every $10 increase in the price of a barrel of crude represents a transfer equivalent to
around 0.5 per cent of global income from oil consumers to oil producers.” While global GDP would be
constrained by less than that – “oil producers will spend some of their windfall” – Mr. Jessop still
estimated that a $10 rise in the oil price reduces global GDP by about 0.2 per cent. “Oil prices rose by
about $12 in just two months between early December and early February (sufficient to knock around
0.25 per cent from global GDP). It seems unlikely that it is entirely a coincidence that the recovery in the
global manufacturing PMI has stalled again this year,” he said. “Our view is that this is evidence of
‘demand destruction,’ where high oil prices undermine the global recovery and hence prove to be
unsustainable. Either oil prices have to fall a lot further, or demand will need to find new momentum
from another source.” But even if Brent crude retreated into the $90-$95 range – consistent with
Capital Economics’ forecast for the next two years – “we don’t expect cheaper oil alone to provide
enough of a boost to global demand to offset fiscal headwinds,” he said. “The cumulative fiscal
tightening planned in advanced economies adds up to at least 2 per cent of their GDP over the next two
to three years, or 1 per cent of global GDP,” Mr. Jessop wrote. “To offset this … oil prices would have to
slump by $50, taking Brent to $60. This is not inconceivable, but it is unlikely, providing another reason
to expect the recovery to remain sluggish.”
Poverty
Study shows high oil prices exacerbate poverty and hurt economic growth
Naranpanawa & Bandara 9 — Athula Naranpanawa & Jayathileka S. Bandara, Naranpawa: BSc,
PhD, Lecturer at Griffith University Business School, 2009, “Poverty and Growth Impacts of High Oil
Prices: Evidence from Sri Lanka”, Purdue University,
https://www.gtap.agecon.purdue.edu/resources/download/5514.pdf
In this study, two CGE models, the Global Trade Analysis Project (GTAP) model and a
poverty-focused Sri Lankan CGE model, were linked in the “top-down” mode to examine the poverty
and growth impacts of high oil prices on the Sri Lankan economy. The results suggest that in the short
run, high oil prices would have an overall negative impact on Sri Lanka‟s economic growth and also
exacerbate poverty. Furthermore, results suggest that urban low income households are the most
adversely affected group followed by rural low income households who are predominantly employed
in the agricultural sector. In contrast, estate low income households are the least affected out of all low
income households. Moreover, energy intensive manufacturing and services sectors would be affected
most compared to the agricultural sector. The overall results suggest that it would be necessary to
implement complementary policies that would ease out the burden of high oil prices on low income
groups in the short run. These complementary policies should include the continuation of the currently
operating fuel subsidy scheme, better targeting vulnerable low income groups. The IMF has also been
advocating this argument in recent weeks (see The Island, April 5, 2011). There is a need for a proper
fuel pricing policy and targeted subsidies within the context of post-war development and poverty
alleviation in Sri Lanka.
Political Instability
High oil prices cause political instability
Global Risks Insights 13 – (Political risk analysis for businesses and investors, 08-15-2013, “The Real
Reason High Oil Prices Lead to Instability”, Oil Price, http://oilprice.com/Energy/Oil-Prices/The-RealReason-High-Oil-Prices-Lead-to-Instability.html)
Businesses rarely gain from political instability so trying to predict unrest is a critical activity for any
entity investing in a volatile corner of the world. One of the factors most often cited as contributing to
unrest is high oil prices. Drawing a link between rising oil prices and political instability is not particularly
novel. Indeed, it has been pointed out by countless observers who see anger with rising costs leading
to political activism. They note that oil is linked to higher costs across the board. The most direct
interaction with oil for many people is at a gas station. But oil prices affect the cost of nearly everything
else. For example, the price of diesel fuel for farming equipment alters food prices. This was a major
source of concern in Egypt during the revolution, where food inflation has hit double digits multiple
times in the past several years. But if oil prices are really to blame for instability then Egypt also offers a
tricky puzzle. Oil prices peaked at $140 per barrel in 2008, before crashing during the Great Recession.
They remained at less than $100 per barrel during the start of the revolution in January 2011. The fact
that the Arab Spring timeline does not match the rise and fall of oil prices might cause some to discard
petroleum as a critical factor in the revolutions. However, that would be to miss the real political cost of
high oil prices. High oil prices have a delayed political effect, particularly in countries that heavily
subsidize petroleum. If oil prices spike sharply and governments are unwilling to reduce subsidies for
fear of political ramifications, it can lead to an increase in national debt and a crowding out of public
services as an increasing percent of public resources are diverted to petroleum costs. Egyptian energy
subsidies are estimated at $16.8 billion and the Petroleum Ministry is reported to lose roughly 66
percent on each barrel of oil they produce. In more individual terms, Egyptians spend 18 cents USD per
liter for diesel fuel at pump stations, while Americans spend over a dollar. These subsidies were a critical
factor in exploding Egypt’s budget. At the start of the revolution, Egyptian national debt was 73.2
percent of GDP and the budget deficit stood at 8.1 percent of GDP. Given such numbers, it is little
wonder the government was unable to make significant gains in healthcare, education or
infrastructure. Oil subsidies were not the only driver of this debt burden, but they were a key
contributor. This toxic combination of subsidies, rising petroleum prices, and exploding debt is not
unique to Egypt. Pakistan and Venezuela are just two examples of other countries facing a similar
situation. The lesson here for companies seeking to avoid instability is twofold. First, rising oil prices can
have an indirect political impact through increasing debt and crowding out other government
services. Second, this effect may be delayed and not fully felt until repayments become due in later
years.
US Economy – Generic
U.S. markets are strong now, but sustained high oil prices will stall the economy
MarketWatch 6/22 — Wall Street Journal’s MarketWatch, Byline Anora Mahmudova, MarketWatch
markets reporter, 6/22/2014, “$50 jump in oil prices could stall U.S. economy,” MarketWatch,
http://www.marketwatch.com/story/50-jump-in-oil-prices-could-stall-us-economy-2014-06-22
The weekly gains now resemble daily gains of yesteryear. In fact, the benchmark index has not had a
daily move of more than 1% for more than two months. Still, the stock market is on track for solid
monthly and quarterly gains barring a catalyst that may result in a long-awaited pullback.
Several such catalysts, such as sectarian war erupting in Iraq and consequently a sharp rise in oil prices,
continued tensions between Ukraine and Russia and the Federal Reserve policy meeting were brushed
off by investors in equity markets in the past week.
However, if oil prices continue to climb, stock markets will take notice, according to analysts at
Morgan Stanley. Also read: U.S. oil hits 9-month high as Iraq worries simmer
Rising oil prices translate to rising gasoline prices, but there is lag of several weeks. Given recent jump
in oil prices, gas prices in the U.S., which have remained stable since the beginning of May, are poised to
increase in coming weeks. Higher prices at the pump will be taxing for consumers, whose purchasing
power is still questionable.
The good news is that a temporary price increase of $10 a barrel will have no impact on the economy a
year out, according to Morgan Stanley analysts. That’s primarily due to increased efficiency of cars
consumers’ change of behavior when gas prices rise – Americans just drive less.
The not so good news is that a permanent rise of a $10 a barrel price increase would knock down real
GDP growth by 0.4 percent four quarters out.
“A sustained $50 a barrel jump in oil prices would be enough to stall the U.S. recovery,” the Morgan
Stanley note said.
If situation in Iraq escalates further, markets will be jittery.
Rising oil prices worry the Fed officials too. Federal Reserve Chairwoman Janet Yellen said escalation of
war in Iraq and a jump in oil prices “would be listed as something in the category of risks to the outlook”
during her press conference Wednesday following the FOMC meeting.
Low oil prices are good for US economic growth and stability — most recent evidence
proves
Levi 3/26 — Michael A. Levi, David M. Rubenstein Senior Fellow for Energy and the Environment in the
Council on Foreign Relations, 03-26-14, “The Geopolitical Potential of the U.S. Energy Boom”, US House
of Representatives Meeting Report,
http://docs.house.gov/meetings/FA/FA00/20140326/101956/HHRG-113-FA00-Wstate-LeviM20140326.pdf
The main geopolitical consequences from the U.S. oil boom will also result from dynamics unrelated to
exports. Rising U.S. oil production will restrain oil price increases. How much so is highly uncertain, and
depends on oil production decisions by Saudi Arabia and, to a lesser extent, other major oil producers;
the long-run impact of higher U.S. oil production could be as little as a few dollars a barrel (perhaps the
most likely case) and as much as twenty dollars a barrel or more. At a minimum, rising U.S. oil
production reduces the risk of substantially higher oil prices. Lower oil prices are good for U.S.
economic growth, reduce U.S. exposure to oil market disruptions overseas and thus increase U.S.
freedom of action in the world, harm oil exporters (some but not all of which are hostile or unfriendly
to the United States), and help oil importers.
Lower oil prices benefit the US Economy
Unger 13 — David J. Unger, Staff Writer for Christian Science Monitor with a Masters Degree in
Journalism, 10-25-2013, “Oil prices fall below $100. Still good for the US economy?”, CS Monitor,
http://www.csmonitor.com/Environment/Energy-Voices/2013/1025/Oil-prices-fall-below-100.-Stillgood-for-US-economy
High supply and low demand are pushing US oil below the $100 mark after months of prices clinging
to triple digits – and prices could fall further still. Robust oil inventories are driving prices down, along
with hopes that easing relations with Iran could bring additional oil onto the global market. Falling oil
prices typically boost US economic growth as cheaper energy helps consumers and industry's bottom
lines. And, despite the hit that the booming US oil industry will take, it's still true that cheaper oil is a
net positive for US growth. It would take a much bigger price plunge to derail the boom. That isn't likely
to happen anytime soon, most analysts suggest. "The oil market remains well-supplied as production in
the US has increased to just shy of 7.9 million barrels per day, the highest level since 1989," Andrew
Lipow, president of Lipow Oil Associates in Houston, says in a telephone interview. Mr. Lipow also cited
"record production out of Saudi Arabia and the market anticipating that some progress might be made
between Iran and United Nations on their nuclear program." Prices dipped below $100 Monday for the
first time since July, hitting a low of $95.95 Thursday. They have since rebounded a bit, rising 37 cents
Friday to $97.48 in midday trading. Average US gas prices dropped a cent to $3.32 per gallon Friday,
according to AAA, the national motor club based in Heathrow, Fla. That's down four cents from a week
ago. The drops came as US crude oil stocks jumped a larger-than-expected 5.23 million barrels for the
week ending Oct. 18, according to the US Energy Information Administration (EIA). That puts inventories
at 10 percent above the five-year average, according to an analysis by Platts. A tepid September jobs
report released this week curbed optimism about US economic growth, putting added downward
pressure on oil prices on projections of lower demand. The US economy added 148,000 jobs in
September, according to government data, less than the 180,000 many economists expected. Iran's
Tuesday announcement that it has halted uranium enrichment to bomb-grade levels improved the
outlook for US-Iran relations. Sanctions have crippled Iran's oil industry, and investors hope an easing of
tensions could open up Iran's vast oil reserves to the West. The country has the world's fourth-largest
proven oil reserves and the world's second-largest natural gas reserves, according to EIA. Oil prices
remain historically high, but the recent drop is a boost for consumers and companies who have been
waiting for prices to reflect increased production in North Dakota, Texas, and other shale formations
across the US. Those sites are at risk if prices drop too low, however. "Fracked oil is high cost oil,"
Morgan Downey, a commodities trader based in New York, writes in an e-mail. "There is a cost curve,
with some able to produce under $50 and some only if oil prices are above $75 per barrel. That's what
many forget: the boom in US tight oil supply exists only because oil prices are high. If prices drop to $50
or less for an extended period, we could see US oil production contract and the boom would be over."
Oil could dip to $93 a barrel by the end of the year, Lipow projects, with retail gasoline hitting $3.20.
Even then, prices would remain well above the break-even point, in a sweet spot that helps
consumers while keeping domestic oil production profitable."Low oil prices are still a good thing for
the US economy," Jamie Webster, an energy analyst with IHS PFC Energy, a global consulting firm,
writes in an e-mail. "While unconventional oil is relatively expensive oil to produce, we are still not in
the range where investment slows measurably, so you still have strong support for oilfield jobs."
US GDP
Lower oil prices increase GDP, lower inflation, and help demand recovery
Ranasinghe 13 — Dhara Ranasinghe, CNBC Senior Writer, Reuters correspondent and sub editor, 0417-2013, “Growth Worries? Asia Should Hail That Oil Price Fall”, CNBC,
http://www.cnbc.com/id/100651177#.
As worries over the outlook for the global economy resurface, analysts tell CNBC that Asia can take
comfort from one fact – the sharp fall in oil prices. According to Credit Suisse, a sustained 10 percent
drop in oil prices would add 10-20 basis points to gross domestic product (GDP) growth in non-Japan
Asia and knock 50-90 basis points off headline inflation. Oil prices have fallen almost 7 percent in the
last five days on expectations of sluggish demand from the U.S. and China, the world's two biggest
economies. The price of Brent crude oil has tumbled 18 percent from a peak of $118 a barrel in February
to below $98 this week. Weaker-than-expected economic data from the U.S. and China over the past
week have heightened concerns that the global economic outlook is not as strong as many expected just
a couple of months ago. But the fall in oil prices provides a silver lining, say analysts. Mizuho Corporate
Bank's market economist Vishnu Varathan says there are three reasons why the oil price slide is
positive for Asian economies. "Most Asian countries are oil importers, so lower oil prices translate
into more positive economic dynamics in terms of consumer and investor sentiment because it will
lower inflation," he said. "It's also good for manufacturers because Asia by-and-large is a net exporter
of goods to the rest of the world so there are less cost pressures." "The bigger picture good news is
that lower oil prices shift some of the resources from oil producers to consumers, aiding the global
demand recovery," he added. He said one caveat is that for net oil exporters in Asia such as Malaysia,
government coffers could suffer from the fall in oil prices. Lower Oil Equals Lower Inflation: Analysts
pointed to the positive impact lower oil prices would have on Asia's inflation outlook. "Given the
importance of the global oil price in driving inflation in Asia, this development will reduce upward price
pressure," Credit Suisse said in a research note published late Wednesday. "China, Thailand and
Singapore are likely to be the biggest beneficiaries in terms of lower headline inflation." Price pressures
in countries such as China and India have been seen as an obstacle to further monetary easing, although
latest data suggest inflation has started to ease. In China, annual consumer inflation eased to 2.1
percent in March from 3.2 percent in February, while data this week showed India's key inflation gauge
eased to below 6 percent in March for the first time since 2009. "There's been good news for the Indian
economy in recent weeks, that gold prices, crude oil prices have come off," Patrick Bennett, currency
strategist at CIBC in Hong Kong told CNBC's "Asia Squawk Box" on Thursday. "This will have a positive
impact on the trade and current account deficit and the RBI [Reserve Bank of India] will be able to cut
interest rates again early next month." Credit Suisse adds that because India, as well as Indonesia,
subsidizes fuel heavily the fall in oil prices is good news for the public finances in those countries. It says
the lower inflation pressure from lower oil prices supports its view that central banks in India, South
Korea and Taiwan will lower interest rates in the months ahead. The Bank of Korea took markets by
surprise last week by leaving its benchmark rate unchanged at 2.75 percent in the face of government
pressure to give the economy a boost via a rate cut. It has kept monetary policy steady for the past six
months.
Low oil prices encourage GDP growth
Colten 13 — Katie Colten, Communications and Membership Manager at FAS, co-editor of the Public
Interest Report, 05-21-13, “Energy and World Economic Growth”, Federation of American Scientists,
http://fas.org/pir-pubs/energy-and-world-economic-growth/#footnote_plugin_reference
These events are not surprising because oil has a very low elasticity of demand and supply with respect
to price. That means very large price changes are required to increase supply or decrease demand. In
addition, oil has a very high elasticity of demand with respect to income. That means economic growth
strongly increases oil demand. Lastly, oil expenditures can be a large enough component of GDP to
adversely affect economic growth if they grow too large. Added together, these interactions can
produce the following cycle: High GDP growth drives oil prices to high levels since high income elasticity
increases oil demand while low price elasticities require high oil prices to balance demand and supply 2)
The resulting high share of GDP spent on oil reverses GDP growth; With lower GDP growth, high income
elasticity reduces oil demand;
With lower oil demand, low oil price elasticities sharply lower oil prices; and Low oil prices reduce oil
production investments but encourage high GDP growth. Oil prices are only one factor affecting the
world economy. Nonetheless, world GDP growth and oil prices are periodically engaged in the cycle
described above. Oil prices can also stabilize at levels that are not high enough to cause a downturn in
GDP growth, while GDP growth is not high enough to push oil prices past the level where the share of
GDP spent on oil reverses GDP growth. 3)
Lower oil prices help economic growth, metal markets
Richter 13 — Joe Richter, 11-25-2013, “Copper Rises as Lowe Oil Prices Hel Buoy Demand Outlook”,
Bloomberg News, http://www.bloomberg.com/news/2013-11-25/copper-drops-amid-speculationfederal-reserve-to-slow-stimulus.html
Copper futures rose to the highest in two weeks in New York on speculation that a drop in crude-oil
prices will help underpin economic growth, brightening demand prospects for the metal. West Texas
Intermediate crude futures for January delivery fell as much as 1.9 percent today on the New York
Mercantile Exchange, after Iran and world powers reached an initial deal on the nation’s nuclear
program. Copper gained 1.1 percent last week amid signs of stronger demand in China, the world’s
biggest user. “The drop in oil prices is positive for the health of the consumer and for economic growth
overall,” Bill O’Neill, a partner at Logic Advisors in Upper Saddle River, New Jersey, said in a telephone
interview. “It’s more support for the demand side of the equation, after copper had a nice little run
last week.” Copper futures for delivery in March added 0.4 percent to settle at $3.23 a pound at 1:07
p.m. on the Comex in New York after reaching $3.2685, the highest for a most-active contract since Nov.
11. Money managers almost tripled their copper net-short positions, or bets on falling prices, to 24,067
futures and options contracts in the week ended Nov. 19, U.S. Commodity Futures Trading Commission
data showed. The figures may indicate the market “got a little oversold” after prices declined earlier this
month, O’Neill said. Inventories monitored by the Shanghai Futures Exchange fell 11 percent last week,
the most since December 2011, data showed. Stockpiles monitored by the London Metal Exchange
dropped to a nine-month low today. On the LME, copper for delivery in three months increased 0.1
percent to $7,099 a metric ton ($3.22 a pound). Nickel, zinc, lead and aluminum fell in London. Tin rose.
US Consumer Confidence
Low gas prices boost the economy — consumer confidence
Geewax 13 – (Marilyn Geewax, NPR Senior Business Editor, Cox News Correspondent, Nieman Fellow
at Harvard, Masters from Georgetown, 10-18-2013, “Declining Gas Prices Pump Up A Shaky Economy”,
NPR, http://www.npr.org/2013/10/18/236222110/declining-gas-prices-pump-up-a-shaky-economy)
In recent weeks, economists have been worrying about the negative impact of the now-ended
government shutdown and potential debt crisis. But away from Capitol Hill, the economy has been
getting a big boost: Gasoline prices have been declining, week after week. In some parts of the
country, a gallon of unleaded regular gasoline is now down to less than $3 a gallon — a price most
Americans haven't seen in three years. And any time the pump price starts dropping, consumer spirits
start rising. "When it falls, everyone has a smile on their face, and when it goes up, nobody is happy,"
said Mike Thornbrugh, spokesman for QuikTrip, a Tulsa, Okla.-based company that operates nearly 700
gas stations nationwide. Dozens of them are located in the Tulsa area, where many stations sell gas for
around $2.99 a gallon, thanks to low fuel taxes and nearby refineries. Chuck Mai, spokesman for the
AAA auto club in Oklahoma, says the lowering of geopolitical tensions involving Iran, Syria, Egypt and
other places in the Middle East has helped cut prices. "Tensions seem to have cooled there," Mai said.
"And no hurricanes threatening the Gulf [of Mexico], so everything looks good for continued lower
prices." Mai's assessment is shared by most economists, who are predicting prices will be heading even
lower over the next several months. Analysts point to a number of triggers that shot down gas prices,
allowing the average price of a gallon to slide from $3.74 in March to $3.37 a gallon this week.
Low oil prices increase consumer confidence and benefit the economy
Fahey & Wiseman 12 – (Jonathan Fahey & Paul Wiseman, Fahey: Associated Press Energy Writer &
Wiseman: Associated Press Economics Writer, 05-16-2012, “Lower oil prices good news for motorists,
Obama”, The Washington Times, http://www.washingtontimes.com/news/2012/may/16/lower-oilprices-good-news-for-motorists-obama/)
A threat that’s been hanging over the economy is starting to look a lot less menacing.
Oil and gasoline prices are sinking, giving relief to businesses and consumers who a few weeks ago
seemed about to face the highest fuel prices ever. President Obama’s re-election prospects could also
benefit, especially if prices keep falling as some analysts expect. A majority of Americans disapproved of
Mr. Obama’s handling of gas prices in an AP-GfK poll early this month. But that was before the full effect
of the recent drop had reached drivers. The average U.S. retail gasoline price has dropped 21 cents a
gallon to $3.73 since hitting a 2012 peak of $3.94 on April 6. The economy could gain, too. Consumers
who spend less on fuel have more to spend on other purchases, from autos and furniture to appliances
and vacations, that could help drive economic output and job growth. The price drop will likely boost
consumer confidence. It also comes at a timely moment: Ahead of the Memorial Day weekend, a busy
one for travel and entertainment spending. “It’s extra money in the wallets of most American
consumers, and that’s going to help,” said James Hamilton, an economist at the University of California,
San Diego who studies oil prices. Lower oil prices also mean cheaper diesel and jet fuel for shippers
and airlines. Crude oil, which is used to make gasoline, is at a seven-month low of $92.81 a barrel. It’s
down nearly 13 percent since May 1. Behind the steady drop are larger fuel stockpiles, easing fears
about Iran and expectations of lower demand as the global economy slows. The average national
gasoline price is expected to fall as low as $3.50 a gallon this summer. It could even dip near $3 in some
states. The national average is being propped up by refinery problems in California that have lifted
prices well above the national average there, according to Tom Kloza, chief oil analyst at the Oil Price
Information Service. A 50-cent drop in the gasoline price would save consumers roughly $70 billion over
a year. Earlier this year, oil and gasoline prices were jumping from already high levels. Global demand
was rising. And production outages were reducing supplies. Tensions between Iran and the West over
Iran’s nuclear ambitions raised fears that output from the world’s third-biggest exporter would plunge.
US Transportation Costs
Oil price decline benefits consumers, airlines, shippers, and the economy
Fahey 13 – (Jonathan Fahey, Associated Press Energy Writer, 04-22-2013“Lower Oil Prices Boost U.S.
Drivers, Economy”, The Columbian, http://www.columbian.com/news/2013/apr/22/lower-oil-priceshelp-drivers-economy/)
A sharp decline in the price of oil this month is making gasoline cheaper at a time of year when it
typically gets more expensive. It’s a relief to motorists and business owners and a positive
development for the economy. Over the past three weeks, the price of oil has fallen by 9 percent to $89
a barrel. That has helped extend a slide in gasoline prices that began in late February. Nationwide,
average retail prices have fallen by 27 cents per gallon, or 7 percent, since Feb. 27, to $3.52 per gallon.
Analysts say pump prices could fall another 20 cents over the next two months. The price of oil is being
driven lower by rising global supplies and lower-than-expected demand in the world’s two largest
economies, the United States and China. As oil and gasoline become more affordable, the economy
benefits because goods become less expensive to transport and motorists have more money to spend
on other things. Over the course of a year, a decline of 10 cents per gallon translates to $13 billion in
savings at the pump.Diesel and jet fuel have also gotten cheaper in recent weeks, which is good news
for truckers, airlines and other energy-intensive businesses. “It makes a big difference to my bottom
line,” says Mike Mitternight, owner of a heating and air conditioning service company in Metairie, La. He
has five pickup trucks that can burn $1,000 of gas per week when prices are near $4 a gallon. Lately he’s
been paying as little as $3.19, and saving $200 a week. Gasoline prices typically rise in the late winter
and spring as refiners shut down parts of their plants to perform maintenance and begin making more
costly blends of gasoline required by federal clean-air regulations. The trend was earlier and less
dramatic this year. Pump prices only came within 15 cents of last year’s peak. Oil production is growing
quickly in the U.S. and Canada, helping boost global supplies. And some of the factors that pushed prices
higher the two previous years — political turmoil in North Africa and the Middle East and refinery
disruptions in the U.S. — haven’t materialized this spring. At the same time, demand for fuels is growing
slower than expected. China, the world’s biggest oil importer, is experiencing slower-than-expected
economic growth. And much of Europe is in recession. In the U.S., wintry weather in the Midwest and
Northeast has kept more drivers off the roads this spring, analysts say. The typical U.S. household will
spend an estimated $326 on gasoline this April, the equivalent of 7.8 percent of median household
income, according to Fred Rozell, an analyst at GasBuddy.com. That’s $38 less than last April, when
households spent 8.8 percent of their income on gas. “It’s the difference between going out to dinner
one more time or not,” says Diane Swonk, chief economist at Mesirow Financial. “It matters.” The U.S.
government releases its initial estimate of economic output during the first three months of 2013 on
Friday. Economists forecast the economy grew at an annual rate of 3.1 percent, compared with 0.4
percent in the final three months of 2012. Philip Verleger, an economist who studies energy prices, says
that many monthly household expenses are fixed, but gasoline is one of the few big expenses that
varies. That means when gasoline prices rise — or fall — people notice. “This is the equivalent of a pay
raise,” he says. Shippers and airlines are also benefiting. Fuel is by far airlines’ biggest and most
volatile cost. A one-cent decline in the price of jet fuel saves the U.S. airline industry $180 million over a
year, according to the industry group Airlines for America. Lower energy prices also give potential
customers more money to spend on air travel.
Venezuelan Instability
Low oil prices lead to Venezuelan instability
Hargreaves 13 — Steve Hargreaves, reporter for CNN, 7/18/13, CNN Money, “Falling oil prices could
spark global turmoil” http://money.cnn.com/2013/07/18/news/economy/opec-oil/
The pain won't be evenly spread. Iran, Venezuela and Nigeria are already thought to be exceeding
spending relative to what oil revenues bring in, and are particularly vulnerable to a fall in oil prices in
the next few years. "In Iran, it could be a factor in regime change," said Steffen Hertog, an assistant
professor of Middle East policy and economy at the London School of Economics. "It could certainly
instigate a wave of popular unrest." In Venezuela, where previous attempts to bring pennies-a-gallon
gas prices closer to market rates preceded deadly riots and the toppling of the government, falling oil
revenue could also bring about a change in regime, according to Hertog -- although he thinks the
change would probably occur at the ballot box instead of the streets
Canadian Economy
High oil prices help Canadian economy — oil industry and government royalties
Canadian Press 6/24 — The Canadian Press, 6/24/2014, “Rising oil prices: Bad news for consumers,
good news for Canadian oil industry,” CTVNews, http://www.ctvnews.ca/business/rising-oil-prices-badnews-for-consumers-good-news-for-canadian-oil-industry-1.1884029#ixzz35xR3KNsQ
CALGARY -- Economists see more good than bad for Canada's economy as recent tensions in Iraq drive
up global crude oil prices.
Scotiabank commodity market specialist Patricia Mohr says the increase has a "two-pronged impact,"
but the benefits should outweigh the drawbacks.
"Of course on the positive side, it really bolsters earnings for Western Canada's oil industry, but also
the oil industry in Newfoundland and Labrador," she said. That, in turn, brings more tax and royalty
revenues to government coffers.
On the downside, crude is a big factor in gasoline prices. So the higher it goes, the more consumers are
pinched.
"But I would guess that the positive impact on earnings and also on our merchandise trade
performance would offset the negative impact on consumers of higher gasoline prices," said Mohr.
Todd Crawford, senior economist at the Conference Board of Canada, agrees the higher prices will be
good for the bottom line of industry and government alike, but not necessarily on a sustained basis
Asian Economies
Asian economies resilient to oil prices — strong balance of payments create prevent
impact
Bajoria 6/26 — Rahul Bajoria, regional economist for Asia-Pacific at Barclays, 6/26/2014, “Asia’s Rising
Resilience to Oil Prices,” Wall Street Journal, http://blogs.wsj.com/economics/2014/06/26/asias-risingresilience-to-oil-prices/
India, China and South Korea are among the Asian economies that rely heavily on oil from Iraq, but
spillovers will affect the entire region, as Asia’s industrialized, exporting countries are large net
importers of oil. Malaysia is the region’s only net exporter of energy commodities, making it a
beneficiary of higher oil prices (note that we do not adjust our analysis for the possibility that demand
could fall as oil prices rise).
The immediate impact of higher oil prices will be felt in current-account balances – and, against a
backdrop of Fed tapering, persistently higher prices could create financing issues.
Even so, the resilience of Asia’s balance of payments has strengthened in recent years, along with the
“brand premium” of many of the region’s exports. If oil averages $130 per barrel in the second half or
the year, versus our base case of $110 per barrel, we estimate that the region’s cumulative currentaccount surplus would fall by $60 billion — to a still-hefty $293 billion.
That means oil prices would need to rise dramatically before Asia’s external surplus came under
pressure; indeed, we estimate oil prices would need to average $190 a barrel for a full year to cut
Asia’s current account surplus to zero. By way of comparison, in 2011 it would have required a terminal
oil price of just $120 per barrel to wipe out Asia’s current-account surplus.
Indian Economy
A. Oil prices will rise, threatening India’s economic recovery
Reuters, 6/28/2014, “Oil prices to rise as high as $120 per barrel: report,” Deccan Chronicle,
http://www.deccanchronicle.com/140618/business-latest/article/oil-prices-rise-high-120-barrel-report
Mumbai: The government expects oil prices to rise as high as $120 per barrel for several months
because of fighting in Iraq, potentially driving a hole of at least 200 billion rupees ($3.3 billion) in the
budget, two government sources told Reuters.
Prime Minister Narendra Modi won last month's general election by a landslide with promises of
faster economic growth and new jobs, tapping into voter anger over India's longest slowdown in a
quarter of a century. Ahead of his maiden budget next month, Finance Minister Arun Jaitley is grappling
with a food inflation scare, and now faces the risk that higher oil prices could swell the government's
subsidy bill.
"If oil prices remain high even for three to four months around $120 a barrel, it could have a significant
impact on the fiscal deficit and economic growth ," a senior Finance Ministry official told Reuters on
condition of anonymity. The official added that this could increase subsidy costs by 200-225 billion
rupees in the fiscal year to March 31, 2015.
That would threaten the deficit target of 4.1 per cent of gross domestic product inherited from the last
government. "If oil prices remain high, it would not be easy to meet the fiscal deficit target," the
source added.
India, the world's fourth-largest oil consumer, imports around 4 million barrels a day of crude oil costing $165 billion a year at current prices, or more than a third of its total import bill. The last
government based its interim budget in February on an assumption that India's basket of oil imports
would cost around $105 per barrel on average in the current fiscal year.
Prices for Brent crude, an international oil benchmark, have risen by $3 to $113 over the past week,
during which Islamic militants have taken control over tracts of northern Iraq and threatened the
authority of the Baghdad government.
For every dollar that oil prices rise, the government incurs annual costs of 70-75 billion rupees (around
$1.2 billion) to compensate state oil firms for selling diesel, kerosene and other fuels at below cost.
Subsidies are assessed quarterly, based on the average oil price in the preceding quarter. That means
that the higher expected oil price would feed through into subsidy costs in the second half of the fiscal
year.
B. India’s economy is critical to world economic order
Gordon Brown, former UK Prime Minister, 11-20-10, “India has a critical role in new world economic
order: Gordon Brown,” (Speech to delegates at the Hindustan Times Leadership Summit), Hindustan
Times, http://www.hindustantimes.com/india-news/newdelhi/india-has-a-critical-role-in-new-worldeconomic-order-gordon-brown/article1-628888.aspx2.
India could be the fastest growing economy in the world in the next ten years as the mass of economic
activity shifts from the US and Europe to Asia entrusting greater responsibility on India in the new
global economic world order, former UK prime minister Gordon Brown said on Saturday.¶ "The Indian
economy will double in size in the next seven, certainly by 2020," former Brown told delegates at the
Hindustan Times Leadership Summit in New Delhi.¶ India's gross domestic product (GDP) is set to grow
by 8.5% in 2010-11, and a 10% growth rate was achievable in the near term, Brown said during a special
address Lessons from the Last Global Crisis.¶ "Your (India's) role at G-20 is absolutely critical. India is
right at the centre of the discussions," Brown said.¶ "It is in India's interest that the world economy
grows fast."¶ India has a crucial role to play in driving investment, trade and consumption to push
growth in the world economy.¶
High oil prices threaten the “Fragile Five” — India and Brazil are at risk
Wall Street Journal, Byline Chiara Albanese, market reporter for the Wall Street Journal, and Jake
Maxwell-Watts, 6/26/2014, “Oil Prices Cast a Shadow Over Emerging Markets,” Wall Street Journal,
http://online.wsj.com/articles/oil-prices-cast-a-shadow-over-emerging-markets-1403824507
The "Fragile Five" are looking brittle again.
The recent run-up in global oil prices has reawakened worries about emerging economies already
struggling with a slowdown in growth. High energy prices are shining a spotlight on the vulnerabilities
of the Fragile Five—Turkey, India, Indonesia, South Africa and Brazil—and the big oil importers in its
ranks, investors and analysts say.
Members of the Fragile Five import more than they export and rely on capital flows to make up the
difference. Higher import costs fueled by rising oil prices could spur rapid inflation, which tends to
repel investors.
The Turkish lira rose 3.9% against the dollar from the start of 2014 to its high for the year in mid-May
but has since weakened by 2.7%. Indonesia's currency, the rupiah, strengthened 8.2% against the dollar
from January to early April but has since erased most of those gains. India's rupee was up 6% year to
date through May 22 but then lost 3.1%.
Benchmark stock indexes in Turkey, Indonesia and India are also off recent highs.
Some investors are concerned that the recent weakness could deteriorate into yet another selloff,
especially if oil prices continue rising or if Federal Reserve officials strike a more hawkish tone. The
recovery in emerging markets came on the heels of lackluster performance last year, triggered largely by
the Fed signaling it would rein in some easy-money policies. The Fragile Five were among the biggest
laggards.
"Countries with current-account deficits relying on energy imports are most vulnerable," said James
Kwok, portfolio manager at Amundi Asset Management, which managed $1.1 trillion as of March 31.
"We will monitor closely," Mr. Kwok said, adding that the fund hasn't cut exposure yet but could do so if
oil prices keep rising back toward last year's highs.
The price of Brent crude, the global benchmark, has jumped more than 5% since June 10, when
Islamist militants took the Iraqi cities of Mosul and Tikrit. Iraq is the second-largest producer in the
Organization of the Petroleum Exporting Countries, and oil traders are worried that Iraq's exports could
be threatened if violence spreads.
High oil prices threaten India’s economic recovery
Wall Street Journal, Byline Anant Vijay Kala, Economics Reporter, The Wall Street Journal, and
Saurabh Chaturvedi, Reporter, Wall Street Journal, 6/20/2014, “Rising Oil Prices Could Derail India's
Economic Comeback,” Wall Street Journal, http://online.wsj.com/articles/rising-oil-prices-could-derailindias-economic-comeback-1403268133
NEW DELHI—India's heavy reliance on imported oil, especially from Iraq, makes it more vulnerable
than most countries to the conflict there, with surging oil prices threatening to derail the new prime
minister's plans to resuscitate the economy.
Crude-oil prices have shot up to a nine-month high of about $115 per barrel. India imports most of its
oil and subsidizes fuel so higher oil prices are particularly painful for Asia's third-largest economy.
They could exacerbate the country's fiscal and current account deficits as well as its already-high
inflation rates.
India's benchmark stock price index has slipped from record highs while the rupee has lost ground
against the dollar since June 10. New Prime Minister Narendra Modi has mobilized his ministers to try to
contain the fallout from what is evolving into his first economic crisis since taking office less than a
month ago.
"For an energy-deficit country like India, the oil crisis is a negative," Onno Ruhl, the World Bank's India
head, said Friday.
Indian markets were feeling a bit bubbly when the bad news from Iraq started.
India's rupee had been strengthening against the dollar and the country's stock market was one of the
best-performing markets in the world this year amid hope that Mr. Modi and his Bharatiya Janata Party
would use their rare majority in parliament to pass business-friendly legislation and long-delayed
modernization of the country's ports, roads and power networks.
Investors and executives seemed to be taking a victory lap, sure that good times were about to return to
the country that less than a year ago was dubbed by analysts as one of the "fragile five" emerging
markets expected to struggle as the U.S. wound down its easy-money policies.
The problems in Iraq are making India look fragile again.
India is the fourth-largest oil consumer in the world and relies on imports for more than three-fourths
of its oil needs. In the year ended March 31, India imported 190 million tons or 3.8 million barrels per
day of crude oil. Iraq accounted for about 13% of those imports, second only to Saudi Arabia which
supplies about 20% of India's oil imports.
The first companies in India to feel the effects, analysts say, will be the refiners such as Indian Oil Corp.
530965.BY +0.91% or Reliance Industries Ltd. who buy Iraqi oil. They will have to look for new suppliers
to keep their plants fully utilized if supplies are interrupted. That could have a cascading impact on
petrochemical companies, power plants and other major users of petroleum products.
Oil and energy company shares have plunged this week. Indian Oil shares have fallen as much as 8%,
while Reliance shares fell about 5% since Tuesday.
Next, the rising cost of oil could add to India's consumer price inflation rate, which the country has only
recently been able to bring down to just over 8% in May from the more than 11% late last year.
Over the past few years, inflation in India has hovered at intolerably high levels while the fiscal and
current account deficits have swelled, presenting serious challenges for the economy, which has slowed
to its weakest levels in a decade. The economy grew just 4.7% in the last fiscal year, about half the
nearly 9% growth it recorded in the fiscal year ended March 2011.
"India's economy is highly sensitive," to inflation from bad weather as well as rising oil prices, Frederic
Neumann, co-head of Asian economic research at HSBC said in a report. "A prolonged rise in the cost of
crude would pose headaches for the government and [the Reserve Bank of India] alike."
HSBC estimates that a $10 per barrel increase in the price of crude oil pushes up wholesale inflation by a
full percentage point over a 12-month period. Higher gasoline prices push up the prices of food and
most other commodities because of the increased transportation costs.
Rising oil prices also inflate India's already massive subsidy bills. India fixes the prices on many fuels—
including diesel and kerosene—at below cost, hoping to shield the poor from price fluctuations. Fuel
retailers are forced to lose money and then the government compensates them for the money they lost.
An oil ministry official, who declined to be named, said every dollar increase in the price of crude oil
raises the government's subsidy burden by about 60 billion rupees.
"This will be a setback to India's efforts to improve its fiscal situation," said Anis Chakravarty, an
economist at Deloitte, Haskins & Sells.
India has huge responsibility in global economy
The Express Group, two-time winner of International Press Institute's India Award for Outstanding
Journalism, Kurt Shorck Award for International Journalism, Natali Prize for Journalism and the
International Federation of Journalists - Journalism for Tolerance Prize, 3-15-12, “India needs to play
major role global economic matters: Survey,” The Indian Express,
http://archive.indianexpress.com/news/india-needs-to-play-major-role-global-economic-matterssurvey/924149/2.
India needs to play a more constructive role in global economy, particularly in matters like
international trade and capital flows, government said today.¶ "Given its size and its profile in the global
economy, India will inevitably need to play an active role at global level," the Economic Survey 2011-12
said, adding that this would not be limited to just in debates on how to resolve the continuing crisis and
prevent the recurrence of similar crises in the future.¶ "But in influencing the rules for the global
economy on overarching macroeconomic issues such as trade, capital flows, financial regulation,
climate change, and governance of global financial institutions," the survey added.¶ India is on an
advantageous position over many nations now because of its large domestic market, its robust
investment-to-GDP ratio and demographic advantage. It has emerged as the fourth largest economy
globally.¶ On the other hand, eurozone is passing through a crisis and the US economy, though shown
some improvement in recent times, still remains sluggish.¶ At this juncture, it is not a "realistically
feasible option" for India to take a passive stance and just wait out the period of crisis, the survey said.¶
On the contrary, it is imperative for India to get itself engaged with the global development both with
actions and ideas as any untoward development could impact it as well.¶ "India is already too much a
part of the global economy and polity; developments in the world will affect India deeply and what
India does will affect the world. There is, therefore, a need for India to engage with the world in terms
of action and ideas," the survey said.¶ It also said any rise and fall of the Indian economy has its
bearing on the global growth and thus, there was a need for India to "take this responsibility
seriously".
India has critical role in world economy
Namrata Kath Hazarika, staff writer at SME Times, 3-8-13, “'India, Asia-pacific region critical to world
economic growth',” SME Times, http://www.smetimes.in/smetimes/news/topstories/2013/Mar/08/india-asia-pacific-region-critical-world-economic-growth80402.html.
India and other Asia-pacific regions will play a critical role in contributing to the economic and financial
growth of the world, said the Union Minister for Commerce and Industry and Textiles, Anand Sharma in
New Delhi on Thursday.¶ "Countries which has built capacities and built institution will play it's not a
defining role but a critical role in the narrative of this century. That is what the Asia-pacific region is all
about. This region in any case has been the slowest to move," he added while addressing the ICC Asia
Pacific CEO Forum.¶ He said these (the Asia Pacific Region) are the countries now that refer to as the
emerging economies. This economic region, which will be USD 16 trillion plus and the potential is to
double in a decade, Sharma added.¶ India is an important part of the South Asian economies, he
added, "India is integral to the change that is taking place. India is not an observer and India is not a
witness, India is center to it. And, we have been very clear while talking to our partner countries and
our interlocutors. I recall telling many of them that you cannot look at Asia's economic integration
without India being the part of the process."¶ "And I am very happy that India with our bigger
neighbour China along with Korea, Japan are very much engaged with the Asian group," Sharma also
said.¶ The new emerging countries today are innovators and developers and are strong partners with
the developed world, Sharma mentioned.¶
India’s economy is a critical engine of the global economy, also growing more
interconnected with the US
Betwa Sharma, staff writer for Rediff Real Time News, 11-24-09, “India's growth critical for global
economy: Nooyi,” Rediff Real Time News, http://business.rediff.com/report/2009/nov/24/india-growthcritical-for-global-economy-nooyi.htm.
Noting that India's rapid growth is a critical engine of global economy, PepsiCo chief Indra Nooyi has
said the business community in the United States was eager on playing an active role in the country's
future economic development.¶ "India is now on a trajectory of more rapid growth. It now stands in
fact as a critical engine of global growth, a vital partner in global security and a model for democratic
development," Nooyi, who is the chairperson of the US-India Business Council, said following an address
by Prime Minister Manmohan Singh.¶ Underlining that US-India relations have been deepening, Nooyi
said, "We've been able to transform the US-India relationship fundamentally from one of Cold War
mistrust to really strategic partnership."¶ "I know I speak for all the business interests in this room when
I say that we wish you the best for that development," she noted. "More than that, we want to actively
participate. In this interconnected world, no nation will succeed unless it enjoys profitable
relationships with others."¶
India’s economy crucial to global economy, especially in Southern Asia, IT industry and
services sectors key
LISA Forum India, 12-9-10, “India’s Role in a Changing Global Economy,” Golden View,
http://www.gvlocalization.com/en/news1.asp?id=665&Menuid=490.
India’s IT industry has emerged as a global leader for high-quality engineering and design tasks and for
development of products sold around the world. At the same time it has helped spur a revolution in
India’s internal consumer economy, which is on track to become the third largest in the world by
2035. Over half of the world’s leading IT firms are located in India and the size of this sector is
expected to quadruple by 2025. Much of this growth will be fueled by specialized, top-quality smalland-medium-sized companies.¶ Meeting the demand that India’s internal market will generate and
facilitating the export of Indian high-tech consumer goods will be a leading challenge for the
globalization industry in the coming decade. In particular, reaching Indian customers will require the
development of sophisticated and powerful approaches to multilingual communication based on lowcost mobile platforms, a significant engineering task. Achieving these goals will require adoption of
technical, cultural, and process standards and close collaboration between Indian government and
industry and international organizations involved in India.¶ The emergence of large-scale trade flows in
consumer goods between countries India, China, Russia, and Brazil has tremendous implication for the
localization industry, both in India and around the world. New language pairs, such as
Hindi↔Portuguese, will be increasingly important and critical content will need to be provided in a
variety of languages that are seldom addressed today. Multinational companies will need to find ways to
sell to the “bottom of the pyramid” and creatively adapt products to market conditions in India and
other countries.¶ India will also have a crucial role to play in providing services for the growing
consumer markets in all of southern Asia. With a large and dedicated base of business process and IT
outsourcing companies, India will need to add globalization capabilities to meet foreign demand for
services. At the same time, India’s twenty-two official languages provide access to a market of over
800 million consumers, making India the new strategic market for multinational companies looking for
new markets that will experience substantial growth.
European Economy
A. Higher oil prices threaten European economic recovery
CNN Money, Byline Mark Thompson, International Editor at CNN Money, 6/23/2014, “Oil prices
spark economic growth concerns,” CNN Money, http://money.cnn.com/2014/06/23/news/economy/oilprices-economy/
Islamist militant gains in Iraq sent world oil prices higher Monday, sparking concerns that this could
hurt global economic growth, especially in Europe where the recovery seems to be faltering.
Crude oil prices in London and New York touched levels not seen since last September after militants
from the Islamic State in Iraq and Syria (ISIS) seized city after city over the weekend as they continued
their march towards Baghdad.
Costlier energy could spell trouble for European economies still struggling to regain momentum after
the region's debt crisis.
Growth in the eurozone has slowed to its weakest pace in six months, according to a June survey of
purchasing managers released Monday. Companies across manufacturing and services reported higher
input prices.
"Both sectors reported higher oil prices as a key cause of rising costs," survey compiler Markit noted.
Rising energy costs may ease fears of deflation, which prompted the European Central Bank to unveil
an unprecedented range of stimulus measures earlier this month.
But they add to worries about growth in countries such as France, where business activity contracted for
a second month running in June.
"Most important is the rise of energy prices," said Dominique Barbet at BNP Paribas, commenting on the
weak French data. "This will not only add to the production cost of industry, but also put pressure on
households' purchasing power."
B. EU is critical to the global economy, it’s the largest economic entity in the world
André Sapir, Belgian Economist and Professor at the Solvay Brussels School of Economics &
Management, 2008, “Europe and the Global Economy,”
http://tria.fcampalans.cat/images/Europe%20and%20the%20global%20economy%20%20A.%20Sapir.pdf.
The European Union is the largest single economic entity in the world, with half a¶ billion people and a
gross domestic product (GDP) slightly larger than that of the¶ United States. Its presence in the world
economy is powerful: it is the largest¶ exporter and the second largest importer (behind the US) of
goods; the largest¶ exporter and importer of services; the largest importer of energy; the largest
donor¶ of foreign aid; the second largest source of foreign direct investment (FDI) and the¶ second
largest destination of FDI (behind the US); and the second destination for¶ foreign migrants (also
behind the US).¶ The EU’s presence in the world economy manifests itself not only through trade,¶
capital and migratory flows but also via an intense regulatory activity. It is, if not the ¶ main, at least
the second most important regulatory power in the world in just about¶ every area, including:
competition policy, where EU authorities have taken the lead¶ in certain aspects of antitrust;
environmental protection, where the EU is the main proponent of regulation against global warming;
money, with the euro being the second largest international currency in the world (behind the US
dollar); and financial market regulation, with European markets also ranking number two in the world
(again behind the US). The European Union is not only a global economic power, more or less on a par
with the United States. It is also the undisputed regional economic power of a geographical area that
encompasses Europe, the Middle East and North Africa (EMENA). But¶ is it a global or even a regional
economic leader, with clearly defined objectives and¶ a coherent set of foreign economic policies to
achieve them? ¶
Help Producers
Higher prices not helping oil producers — increased costs have matched increased
revenues
HIS 6/27 — IHS, global information company in energy, economics, geopolitical risk, sustainability and
supply chain management, 6/27/2014, “IHS: Escalating Costs Driving Diminishing Returns For Oil And
Gas Companies Despite Stronger Oil Prices,” Oil and Gas Financial Journal,
http://www.ogfj.com/articles/2014/06/ihs-escalating-costs-driving-diminishing-returns-for-oil-and-gascompanies-despite-stronger-oil-prices.html
Despite stronger oil prices, corporate returns on average capital employed (ROACE) are lower than in
2001, when oil prices were less than $30 per barrel, according to research from information and insight
provider IHS (NYSE: IHS).
“Our IHS study, which assessed energy company performance and capital returns, included more than
80 oil and gas companies,” said Nicholas D. Cacchione, director at IHS Energy and a lead researcher on
cost and energy company performance. “Collectively, these companies averaged an 11% ROACE in
2012 and 8.6% in 2013, both of which are weaker than the ROACE achieved in 2001 when the WTI
(West Texas intermediate) crude oil price hovered at just under $27 per barrel. The WTI crude oil price
averaged $94 per barrel in 2012 and $98 per barrel in 2013.”
Said Cacchione, “My guess is that shareholders are asking ‘What gives?’ The culprit is cost escalation.
While returns have increased in recent years, costs have accelerated at a rate that has squeezed
margins . The more than $60-per-barrel increase in global oil prices since 2002 has been offset by
significantly higher costs, and to a lesser degree, weaker U.S. natural gas prices. Margins have basically
been frozen.”
Looking at the upstream sector, which comprises the majority of business of the study universe; lifting
costs have more than quadrupled since 2000 to greater than $21 per barrel. Finding and developing
costs have followed a similar trajectory, reaching nearly $22 per barrel of oil equivalent (BOE) in 2013.
Government fiscal take (based on financial disclosure), which excludes the impact of royalty volumes in
the upstream sector, increased from 49% of pretax profits in 2000, to 60% in 2013.
Russian Oil DA
Neg
1NC — Russian Oil DA
First, oil prices are rising – Malaysia plane crash and global tensions
FT 7/18/2014 – Anjli Raval, Oil and Gas Correspondent for the Financial Times, 2014 (“Global oil prices
rise after Malaysia plane disaster,” July 18th, Available Online at http://www.ft.com/cms/s/0/cdd096f40e64-11e4-b1c4-00144feabdc0.html#axzz37pbrDsaZ, Accessed 07-18-2014) LB
The price of oil on both sides of the Atlantic rose on Friday as news of the Malaysian airline crash
intensified geopolitical strains and raised fears over a disruption to crude supplies.
Although no stoppages are imminent, the crash in eastern Ukraine has brought into focus tensions
between Russia and the west, one day after the US ratcheted up sanctions against Russia’s biggest
companies – including the world’s largest listed oil producer, Rosneft.
Prices had lowered over the past few weeks amid weakness in the physical markets and as investor
anxieties over global supply disruptions eased.
The front-month Brent contract had fallen to the biggest discount to the second-month in four years
earlier this week – known in industry jargon as contango – which implies a surplus of crude available for
delivery.
But the past two sessions have seen the price of oil rebound and analysts say prices are likely to remain
at these higher levels.
“The Brent ‘supercontango’ of 2014 did not last very long,” said Olivier Jakob, analyst at Petromatrix.
“Volatility is back in the oil markets and trading volume is back with a revenge.”
Second, the plan causes a sustained reduction in oil prices.
[Insert Link]
Third, high oil prices are key to the Russian economy — diversification is destructive
Feifer 11 (Gregory, Editor and Senior Correspondent for Radio Free Europe/Radio Liberty, Russia's
Image as Energy Superpower Benefitting from Middle East Crisis, http://oilprice.com/Energy/EnergyGeneral/Russia-s-Image-as-Energy-Superpower-Benefitting-from-Middle-East-Crisis.html)
With U.S.-led fighter jets pounding military assets in oil-rich Libya, and Japan still struggling to contain radiation at its stricken Fukushima
As the unrest in the
Middle East bites into supplies, prices for crude approached $105 a barrel this week. That's helping drive
windfall profits that are enabling the world's biggest energy exporter to finally emerge from recession
triggered by the global financial crisis in 2008. But while that's good news for Russia's economy, Kremlin critics say
rising energy prices are again shoring up the country's authoritarian government -- and that's bad for politics.
Energy Savior Russia is using the crises in the Middle East and Japan to burnish its image as the world's
energy superpower. Prime Minister Vladimir Putin -- who has predicted that Russia's GDP will equal its precrisis level by next year -nuclear plant, concerns are rising around the world about the future of energy supplies. But not in Russia.
exchanged his usually stern demeanor for an uncharacteristically friendly manner last week and promised to help Japan, where the nuclear
crisis has forced electricity blackouts. He predicted the effects of the earthquake and tsunami to energy supplies there will be long-term. "In
that regard, we have to think of accelerating our plans to develop hydrocarbon-extraction projects -- particularly gas extraction -- in the Far
East," he said. Putin offered to pump more gas to Europe by pipeline, freeing shipments of liquefied natural gas for Japan.
He also proposed laying an electricity cable to Japan and offered Japanese companies stakes in Siberian gas fields. Moscow has issued more
offers since, including encouragement for Japanese companies to invest in Russia's coal industry. But some analysts are warning Russia's
heightened focus on its global energy role is eroding any -- already distant -- hopes the government would enact economic reform. The Kremlin
vowed to diversify the country's economy after plummeting oil prices dealt the economy a body blow during the global financial crisis. Anti-
the latest events in the Middle East are instead helping
speed a return to Russia's precrisis situation, when peak oil prices flooded the country with cash.
Westernism Rising Political analyst Andrei Piontkovsky says
"We're returning to the golden era of 2006 and 2007, with official propaganda slogans extolling a 'great
energy power,'" Piontkovsky says. "It's very good for a very limited group of people for a very short time period, but
certainly it's very bad for the country." Piontkovsky says the developments are reinforcing the "general mentality" of
Russia's leaders, reflected in a return to the kind of strident anti-Western rhetoric that was especially loud during the precrisis oil boom.
He points to President Dmitry Medvedev's comments this month in which he blamed Western countries for prompting the Middle East unrest,
adding that "they have prepared such a scenario for us." But
it's Putin who's seen as Russia's supreme leader. He lashed
out on March 22 in his strongest anti-Western comments in years, condemning the UN Security Council for authorizing force against Libya. He
said last week's resolution enabled Western countries to take action against a sovereign state "under the guise of protecting the civilian
population." "It actually resembles medieval calls for crusades when someone called on others to go to a certain place and liberate it," Putin
said. Redefining Foreign Policy But the atmosphere in Moscow is more nuanced then the rhetoric suggests.
Medvedev rejected Putin's comments, calling them "unacceptable." And despite Putin's displeasure, Russia declined to veto the resolution
when it came to a vote last week, instead choosing to abstain. Fyodr Lukyanov, editor of the journal "Russia in Global Affairs," sees that decision
as more significant than the tough talk. "It's not typical," he says. "Russia used to take stands for or against, particularly when it comes to issues
such as intervention in other countries." He says foreign policy isn't being driven by rising oil prices. "It's about the gradual refocusing of Russian
interests and redefining of Russian foreign-policy identity from a global one to a more regional one." That change, he says, reflects a "much
more rational calculation of priorities." "It doesn't mean Russia is more pro-Western," Lukyanov says. "Russia is
becoming less
global, which means that, for example, the idea to challenge Washington everywhere and over everything
isn't relevant anymore." Russia's Resources Card Boosting energy exports is among the priorities, as Putin's latest salesmanship
reflects. But maintaining current levels won't be as easy as it may appear. Economist Clifford Gaddy of the Brookings Institution says the key
question for Russia's future economic success will be how it responds to demand in resource-hungry China.
Whatever the rhetoric coming out of the Kremlin, he says, Russia has little chance of competing in any
other sector. "You can dream all you want about diversification and blame Putin or whoever for not
diversifying or praise them because they want to diversify ," Gaddy says, "but it doesn’t make very much
sense. Russia's comparative, competitive advantage is not in anything except resources, so the smart
thing to do is play that card." For now, Gaddy sees few long-term effects for Russia from the Middle East unrest, saying oil prices
were predicted to rise to $105 to $108 this year even before it began, while commodity prices are expected to continue rising for the
That's depressing news for Putin's critics. Many believe the prime minister plans to
return to the presidency in an election next year, and -- if elected again -- he could remain in office for
the next 12 years.
foreseeable future.
Fourth, Russian economic decline risks global nuclear conflict
Filger 9 (Sheldon, Columnist and Founder – Global EconomicCrisis.com, “Russian Economy Faces
Disasterous Free Fall Contraction”, http://www.huffingtonpost.com/sheldon-filger/russian-economyfaces-dis_b_201147.html)
In Russia, historically, economic health and political stability are intertwined to a degree that is rarely
encountered in other major industrialized economies. It was the economic stagnation of the former Soviet Union that led to its political
downfall. Similarly, Medvedev and Putin, both intimately acquainted with their nation's history, are unquestionably alarmed at the prospect
that Russia's economic crisis will endanger the nation's political stability , achieved at great cost after years of chaos
following the demise of the Soviet Union. Already, strikes and protests are occurring among rank and file workers facing unemployment or nonpayment of their salaries. Recent polling demonstrates that the once supreme popularity ratings of Putin and Medvedev are eroding rapidly.
Beyond the political elites are the financial oligarchs, who have been forced to deleverage, even unloading their yachts and executive jets in a
desperate attempt to raise cash. Should
the Russian economy deteriorate to the point where economic collapse
is not out of the question, the impact will go far beyond the obvious accelerant such an outcome would be for the Global
Economic Crisis. There is a geopolitical dimension that is even more relevant then the economic context. Despite its economic vulnerabilities
and perceived decline from superpower status, Russia
remains one of only two nations on earth with a nuclear
arsenal of sufficient scope and capability to destroy the world as we know it. For that reason, it is not
only President Medvedev and Prime Minister Putin who will be lying awake at nights over the prospect that a
national economic crisis can transform itself into a virulent and destabilizing social and political
upheaval. It just may be possible that U.S. President Barack Obama's national security team has already briefed him about the
consequences of a major economic meltdown in Russia for the peace of the world. After all, the most recent national intelligence estimates put
out by the U.S. intelligence community have already concluded that the Global Economic Crisis represents the greatest national security threat
to the United States, due to its facilitating political instability in the world. During the years Boris Yeltsin ruled Russia, security forces
responsible for guarding the nation's nuclear arsenal went without pay for months at a time, leading to fears that desperate
personnel
would illicitly sell nuclear weapons to terrorist organizations. If the current economic crisis in Russia
were to deteriorate much further, how secure would the Russian nuclear arsenal remain? It may be
that the financial impact of the Global Economic Crisis is its least dangerous consequence.
AT: Russian Economy Low Now
US sanctions will have a minimal impact on the Russian economy
Moscow Times 7/17/2014 – Delphine d’Amora, staff writer for the Moscow Times (“U.S. Defense
Sanctions Toothless, but Europe’s May Bite,” July 17th, Available Online at
http://www.themoscowtimes.com/business/article/u-s-defense-sanctions-toothless-but-europe-s-maybite/503658.html, Accessed 07-18-2014) LB
As the U.S. and the European Union castigate Russia for allegedly aiding and abetting
the violence in eastern Ukraine, the U.S. Treasury in its latest round of sanctions has
targeted eight Russian defense companies with asset freezes and bans on any transactions
with U.S. companies and individuals.
According to the Treasury's statement, the firms were targeted "for operating in the arms or related
material sector in the Russian Federation."
Even though these sanctions are harsher than those faced by the two banks and two energy
companies also blacklisted in the latest round of sanctions, they are unlikely to significantly impact
the Russian defense industry, according to Ruslan Pukhov, director of the Moscow-based think tank
the Center for Analysis of Strategies and Technologies,
Although Russia and the U.S. work together on the International Space Station program
and on some civilian and dual-use programs, overall military cooperation between the U.S.
and Russia is highly limited and so the impact of sanctions will be "minor," he said.
AT: Diversification Turn
High oil prices are key to diversification –
1. Investment funds and confidence
Dashevsky 11 — Steven, Managing Director of Dashevsky & Partners, “The Russian economy and its
oil,” 5-24, http://rt.com/business/news/russia-economy-oil-rpice/
RT: High oil prices have helped Russia’s budget but is the country too dependent on energy exports? SD:
“Well the dependence has declined greatly in recent years, but I think the sad truth remains that, to a
very significant degree, Russia’s budget revenues and overall fiscal health is still very dependent on
the level of oil prices.” RT: How does the energy sector shape the Russian investment climate? SD:
“Well, there are many ways how the events happening in the oil and gas sector influence what is
happening in the broader economy . On the one hand this is the biggest source of cash flow
generation in the country, so in a sense it’s the biggest source of investment funds, both for the
companies, and for the government and also because oil companies invest very significant amounts of
money every year, so the ability of Russian oil companies to spend money affects really the entire
Russian economy – from transport companies to oil service companies to catering companies to local
airlines – so it is still, despite the significant efforts to diversify the economy, it’s a very important
source of investment funds. That’s kind of one angle, and another angle is what is happening in the
Russian oil and gas sector, since it is the biggest sector in the economy, affects the general investment
climate, from the kind of sentiment perspective. So, when something good happens like potentially
was going to happen, BP-Rosneft deal, or if there are good events happening, new fields are being
developed, new pipelines are being brought on-stream, that gives investor additional confidence that
the economy is progressing very well, and people are investing money in it, and the whole country is
open for business. Vice versa, if things are not going well, if deals are breaking up, if instead of going to
work people going to courts against each other, that clearly creates a big drag on the investors
sentiment for all of the Russian economy, not just oil and gas.”
2. Infrastructure spending
Bennallack 11 — Owain, executive editor of Develop, “The one market you can buy on higher oil
prices” 3-3, http://www.fool.co.uk/news/investing/2011/03/03/the-one-market-you-can-buy-onhigher-oil-prices.aspx
"There is generally a
close relationship between the performance of the Russian equity market and the oil price, with Russia
lagging slightly. In a stronger oil price environment, it is our belief that the Russian market will gain
upward momentum." The following graph shows the relationship between the oil price and the Russian market very clearly: You can
Yes, we're talking about Russia. As Matthias Siller, Investment Manager at Baring Asset Manager explains:
clearly see that going on this prior trend, the Russian market could be about to shoot upwards. It's already started 2011 with a bang in
comparison with most other emerging markets, which have wilted. More reasons to buy Russia We're not habitual graph followers at the Fool.
there are very strong reasons why Russia rises when the oil price does -- principally, that the country is
a huge exporter of oil, and its markets are stuffed to overflowing with oil producers. In the short term at
least, higher oil prices will massively boost their profitability. It's estimated that a $150 barrel of oil
would increase Russian oil firm's operating profitability by an average of 60-80%. But Baring's Matthias Siller points
But
It's an election year
in Russia, and incumbents flush with oil-fuelled tax receipts could well increase infrastructural and
social security spending, to the benefit of banks, construction firms, property companies, and
retailers. * A boost to oil production: Russian oil companies badly need to upgrade their facilities to get more of their reserves to
to two other reasons to be optimistic about Russian equities in this climate:
* More taxes for the government:
market. A higher oil price would give the Russian authorities leeway to introduce better tax incentives to encourage this, which could enable
Russia's producers to increase their output and profits. The Russian market is on a P/E of just 10 and forecast to fall to around 7, so on the face
of it this is pretty compelling opportunity.
3. Construction, real estate, financial services, and telecomm
Schneider 4 — Andrew, Kiplinger Business Forecasts, 6-8-2004, lexis
Energy will remain the key factor underpinning Russia's economy, with oil and natural gas exports
bringing in billions of dollars annually in foreign income. This is providing the fuel for booms in
construction and real estate as well as in several service-sector industries ranging from financial
services and telecommunications to retail.
"Oil revenues are fueling growth in all these sectors," says Caren Gaboutchian, a London-based
economist with ING Financial Markets. He notes that the link is particularly visible with regard to the
construction boom. "Oil companies pay their employees. The employees want to invest their cash,
and one of the best investments is the real estate sector in Moscow, either residential or commercial,"
he points out.
AT: Dutch Disease Turn
Oil revenue will not cause Russian imperial aggression – risk is low
Manning and Jaffe 1 (RAND Energy Analysts,
http://www.cfr.org/publication/3960/russia_energy_and_the_west.html)
The long term threat of a revived, neo-imperial Russian hegemon can not be dismissed out of hand.
However, US policy based on such a worst-case scenario carries the danger of becoming a self fulfilling
prophecy. In reality, the material needs of the Russian people are so huge, and the deterioration of
the Russian military so deep, that the potential of improved oil revenues to bring Russia back to a
position where it could dominate its neighbours, much less threaten the United States, is remote.
Oil dependence is overwhelmingly good for Russia – no viable alternatives
Dashevsky 11 (Steven, Managing Director of Dashevsky & Partners, The Russian economy and its oil,
May 24th, http://rt.com/business/news/russia-economy-oil-rpice/print/)
With higher crude price bringing the budget back into balance but also stoking inflation Business RT spoke with Steven Dashevsky, Managing
Director of Dashevsky & Partners about oil and its relationship to the Russian economy. RT: High oil
prices have helped Russia’s
budget but is the country too dependent on energy exports? SD: “Well the dependence has declined greatly in recent years, but I think the
sad truth remains that, to a very significant degree, Russia’s budget revenues and overall fiscal health is still
very dependent on the level of oil prices.” RT: How does the energy sector shape the Russian investment climate? SD: “Well,
there are many ways how the events happening in the oil and gas sector influence what is happening in the broader economy. On the one hand
this is the biggest source of cash flow generation in the country, so in a sense it’s the biggest source of
investment funds, both for the companies, and for the government and also because oil companies
invest very significant amounts of money every year, so the ability of Russian oil companies to spend
money affects really the entire Russian economy – from transport companies to oil service companies
to catering companies to local airlines – so it is still, despite the significant efforts to diversify the economy, it’s a very
important source of investment funds. That’s kind of one angle, and another angle is what is happening in the Russian oil and
gas sector, since it is the biggest sector in the economy, affects the general investment climate, from the kind of sentiment perspective.So,
when something good happens like potentially was going to happen, BP-Rosneft deal, or if there are good events happening, new fields are
being developed, new pipelines are being brought on-stream, that gives investor additional confidence that the economy is progressing very
well, and people are investing money in it, and the whole country is open for business.Vice versa, if things are not going well, if deals are
breaking up, if instead of going to work people going to courts against each other, that clearly creates a big drag on the investors sentiment for
all of the Russian economy, not just oil and gas.” RT: Are government moves to diversify the economy away from energy likely to succeed in the
short term? And in the long term? SD: “It’s a trick question.Someone told me that the first time the Russian government has become concerned
about its reliance on oil and gas revenue, was, in fact, almost immediately after oil and gas was found in Siberia, in 1973, 1974.One of the
central communist party committees has discussed the subject. So that was 1974.Almost 40 years later I think we
still find ourselves
in the current situation where the economy and the budget are very, very, dependent on oil and gas. I
personally don’t see how it is going to change. In the near term, and even in the long term , because even
if the Russian oil production begins to decline, or the global oil production begins to decline, what will happen at
that time would also mean high oil prices, so if global production will be getting lower, the oil price
will be getting higher because of that. So, as a result, the Russian intake from commodity exports would more or less stay the
same – it would be a big amount of money coming into the country. And there is very few other sources of hard currency the economy could
generate. So it
would take a miracle to materially change the structure of the Russian economy and of
the Russian budget. Even the long term, so I think the only thing you can do is really simply take this
natural wealth that has been given to you by god, and simply use it efficiently. I don’t think you can really
say ‘let’s become a hi-tech nation, or lets become a tourist mecca, or lets become the provider of savoir vivre
products like France. They are just not going to happen . You just take your natural resource wealth but you
try to use that efficiently, and try not to waste it.” RT: What is the best way the government can diversify the economy and
at the same time take advantage of the energy resources that it has? SD: “Well that’s a slightly different question.The answer to that is very
simple.If you are endowed with significant natural resources, one way how you diversify your economy, if this is still the core of your economy,
the core of your wealth, the way you diversify and the way you make the economy more diversified is by creating more value added.So I think
the clear sort of strategic goal that the Russian government should pursue is increasing the degree of refining of, for example, for oil.So instead
of selling simple vacuum gas oil, maybe fuel oil, which is subsequently being refined into high value added products in the west, you build these
refining complexes here.Instead of burning associated gas, for example, you create petrochemical refining complexes which process it into
I don’t think it is fair to say that, ok
if you have a natural resource driven economy, you are in a bad situation. I mean Australia has a natural
resource driven economy, and so does Canada, and so does Norway, but there are always ways, if you think about
various liquefied gas, and various associated petrochemical products, and you export that.So,
things to create value to make it more diversified, and the more you add value, the more added value is in the product you sell the less
vulnerable you are to commodity price swings.Because commodity price swings affect, fir4st and foremost, the raw natural resources, and to a
much lesser degree they affect the final product.So we all know how much the oil price changes every day, but the price per tonne of rubber or
plastic or certain petrochemical specialized products doesn’t change that often.It’s subject to much more longer term contracts.And if you go
there are different ways, I think,
how you can diversify the economy, and simply make Russia, instead of raw material exporter, into a
high quality, high value added energy exporter. In different types of energy, and different types of resources, as your final
product. And that I think is the only kind of reasonable diversification strategy .” RT Do you think Russia has Dutch
from producing gas to also producing electricity, that doesn’t change daily, it’s not as volatile.So
disease and how does energy reliance work in Russia with the import competing sector? SD: “There are elements of Dutch disease, so I think
Dutch disease happens when one industry, in this case oil and
gas industry, really begins to crowd out investment and jobs and becomes the centre of everything, so the
rest of the economy kind of dies. In the Russian case, it’s a little bit different because a lot of the money that
flows into the country, via the oil and gas sector, subsequently flows further into the economy . So the
impact from the oil and gas sector for example, on the currency is not what it used to be. So, yeah, if the oil prices
are high it gets stronger, but it’s not dramatically stronger, and I think the economy is becoming, in relative terms, it is getting better if oil
prices are high, instead of getting worse.Dutch disease really happens if there is one sector that is doing well and it drains resources from
all the other sectors.In Russia’s case when oil prices are high, all sectors are enjoying it because it trickles
not all the symptoms are here because the oil industry is not,
down to the entire economy. So I think there are certain elements of it, but I don’t think Russia has Dutch disease,
and whatever people say , fortunately if oil prices are high it is good for Russia, and it is good for Russia
as a whole , not just for Russian oil companies.” RT: How open is the Russian energy sector to foreign investment?
No Dutch Disease for Russia
RT, interviewing Dashevsky 11 — Steven Dashevsky, Managing Director of Dashevsky & Partners,
about the implications of oil dependence for the Russian economy. (“The Russian economy and its oil,”
5/24, http://rt.com/business/news/russia-economy-oil-rpice)
RT: What is the best way the government can diversify the economy and at the same time take advantage of the energy resources that it has?
SD: “Well that’s a slightly different question. The answer to that is very simple. If you are endowed with significant natural resources, one way
how you diversify your economy, if this is still the core of your economy, the core of your wealth, the way you diversify and the way you make
the economy more diversified is by creating more value added. So I think the clear sort of strategic goal that the Russian government should
pursue is increasing the degree of refining of, for example, for oil. So instead of selling simple vacuum gas oil, maybe fuel oil, which is
subsequently being refined into high value added products in the west, you build these refining complexes here. Instead of burning associated
gas, for example, you create petrochemical refining complexes which process it into various liquefied gas, and various associated petrochemical
products, and you export that. So, I don’t think it is fair to say that, ok if you have a natural resource driven economy, you are in a bad situation.
I mean Australia has a natural resource driven economy, and so does Canada, and so does Norway, but there are always ways, if you think
about things to create value to make it more diversified, and the more you add value, the more added value is in the product you sell the less
vulnerable you are to commodity price swings. Because commodity price swings affect, fir4st and foremost, the raw natural resources, and to a
much lesser degree they affect the final product. So we all know how much the oil price changes every day, but the price per tonne of rubber or
plastic or certain petrochemical specialized products doesn’t change that often. It’s subject to much more longer term contracts. And if you go
from producing gas to also producing electricity, that doesn’t change daily, it’s not as volatile. So there are different ways, I think, how you can
diversify the economy, and simply make Russia, instead of raw material exporter, into a high quality, high value added energy exporter. In
different types of energy, and different types of resources, as your final product. And that I think is the only kind of reasonable diversification
strategy.” RT Do
you think Russia has Dutch disease and how does energy reliance work in Russia with the import competing
sector? SD: “There are elements of Dutch disease, so I think not all the symptoms are here because the oil industry is
not, Dutch disease happens when one industry, in this case oil and gas industry, really begins to crowd out investment and jobs and becomes
the centre of everything, so the rest of the economy kind of dies. In the Russian case, it’s a little bit different because a
lot of the money that flows into the country, via the oil and gas sector, subsequently flows further into the
economy. So the impact from the oil and gas sector for example, on the currency is not what it used to
be. So, yeah, if the oil prices are high it gets stronger, but it’s not dramatically stronger, and I think the
economy is becoming, in relative terms, it is getting better if oil prices are high, instead of getting worse. Dutch disease really
happens if there is one sector that is doing well and it drains resources from all the other sectors. In Russia’s case when oil prices
are high, all sectors are enjoying it because it trickles down to the entire economy. So I think there are certain
elements of it, but I don’t think Russia has Dutch disease, and whatever people say, fortunately if oil prices are high it is good
for Russia, and it is good for Russia as a whole, not just for Russian oil companies.” RT: How open is the Russian energy sector to foreign
investment? SD: “It’s both open and closed.I think it is fairly open to larger strategic deals.We have seen BP-Rosneft deal, which although it has
been declined, for the time being, on technical grounds, and it didn’t happen, the fact that both sides wanted to do it, that the Russian
government was willing to receive that investment, and BP was willing to make it, I think it is a big testament to how open the industry is for
business.Total bought a big stake in Novatek, there are certain PSAs which continue to operate.If they went through difficult times, but both
Sakhalin 1 and Sakhalin 2 are producing energy and making money off it.So on the one hand it is open, on the other hand it clearly has become
much more concentrated among the top players, so if you look beyond that, there are various laws on participation in the Russian oil and gas
sector, and, in general, if you are an up and coming western company that wants to come in and develop the Russian reserves, I think you
would have a problem unless you are a global major that can bring something to the table with technology with capital etc, then I think it is
fairly open.So, I think it is more open than many many other emerging markets in the world.I would say that for big companies it is fairly open,
for small and mid sized companies it is fairly difficult, simply because the industry has become a lot more concentrated in recent years.” RT: Do
you think energy prices will remain about where they are for the short to medium term, and what does this mean for the Russian economy? SD:
“Well we went through the period two years ago when the oil went from $90/bbl to $150/bbl down to $30/bbl, and for every price level there
was an absolutely credible explanation why this is the right price level.So I really have no idea what the oil price will be in the future.The various
research suggest that the price of about $60-$80/bbl makes production of oil economical for most of the producers – so if it drops below $60 a
lot of people would have to stop production because they would begin to lose money – and at a price of about $80/bbl everyone is making a
reasonable margin for them to continue doing it – so I think we should probably see the oil price gradually weakening a little bit to where it was
before the latest rally.And speaking about Russia $75-$80/bbl would give the government more or less a balanced budget and more or less kind
of stable existence for one or two years, but I think the way the social expenditures, and the way the budget expenditures have been growing –
that pace of growth would not be sustainable with the $80 barrel of oil.So, $75-$80 is OK to balance the budget one or two years – maybe
borrow money a little bit externally – going forward, I haven’t done this calculation, but there have been some analysts who have done the
math, and it seems that every year Russia would need an oil price of about $5-$10 dollars per year higher to meet the rising budget
expenditures.”
Dutch Disease does not apply to Russia
Kuboniwa 10 – PHD economics Dr.h.c. Central Economics and Mathematics Institute, Russian
Academy of Sciences (Masaaki “Diagnosing the “Russian Disease”: Growth and Structure of the Russian
Economy Then and Now” Institute of Economic Research Hitotsubashi University, Tokyo, Japan October
2010)
In general, the
relationship between the oil curse and economic growth in resource-rich countries is
elusive in the long run (Alexeev and Conrad, 2009). Nevertheless, the Lehman shock, combined with the collapse of the oil price bubble, clearly
showed that Russian economic growth heavily relies upon oil price changes. We here characterize the present Russian situation as
the “Russian Disease,” the major symptom of which is a strong positive relation between the
country’s real growth and international oil price changes. In the literature, the Russian Disease has often been considered as a
variant of the Dutch Disease. The term Dutch Disease in the original context refers to the contrast between external health and internal ailments (The Economist,
No. 26, 1977). It also refers to the negative impact of expansion of natural resources in a country with oil price rises on its manufacturing growth through the
subsequent appreciation of the real exchange rate of its national currency (see Ellman, 1981 and Corden, 1984). Although the real exchange rate of the Russian
national currency (ruble) appreciated along with increases in oil prices, it is clear that the Russian
Disease is quite different from the
Dutch Disease in many respects. First, unlike the Dutch case in the 1970s, oil price rises for 1998-2008
resulted in relatively high overall growth in Russia. In addition, the impact of the marked fall in oil
prices after the third quarter of 2008 on Russian growth was much greater than that in the Dutch case
during the 1980s. Second, in contrast to the case of the Dutch Disease, the negative impact of oil price increases on
manufacturing growth was not observed in Russia for the 1998-2008 period. The manufacturing sector
was one of the major sectors contributing to favorable growth in the 1998 (bottom)-2008 (peak) period, whereas its sectoral
contribution to the great contraction of GDP in 2009 was the largest among sectors. Putin and Medvedev expected, and still expect,
that the diversification of the economy, including developments of manufacturing, would contribute
to establishing an economy that was not dependent on oil. Ironically, it is now obvious that the diversification
itself is oil-dependent. Third, the extraction of Russian oil and gas could not show any large expansion in physical terms during the favorable growth
period. The oil and gas industry was the booming sector only in terms-of-trade. Putin seemed to expect the real expansion of oil and gas extraction through renationalization of the oil and gas industry. The Russian oil and gas industry has been stagnant in real terms since 2005, partly due to this re-nationalization. Although
the fixed capital increment in the oil and gas sector showed subsequent increases, the value of its sectoral total factor productivity (TFP) remained negative, and,
thus, the oil and gas GDP growth was also very low for the 2004-2009 period and negative for the 2006-2007 period (Rosstat HP as of September 8, 2010). The oil
and gas sector will need tremendous capital replacement investments to raise its TFP. The marked oil price falls induced Russia’s great contraction of the GDP in
2009, while the oil and gas GDP did not show such a decline. This stagnant sector only buffered the overall growth contraction in 2009. Ironically, Russia, with more
than 10-million-barrel daily production, was the world’s largest producer of crude oil in 2009 thanks to a remarkable output adjustment (an 11 percent reduction)
by Saudi Arabia (BP, 2010). Russia, free from the OPEC output adjustments, has always escaped the restraints of oil price increases, while it has been forced to face
reductions in oil prices head-on. Fourth, the
continuous appreciation of the real effective exchange rate of the ruble
due to oil price rises induced the boost of imports in Russia, which, in turn, did not necessarily induce
adverse effects on Russia’s economic growth and competitiveness. Russia experienced servicization, as in advanced
countries as well as former Soviet republics. It has particularly Russian features deriving from its specific path dependency, which includes economic players’ strong
preferences for imported goods and FOREX as well. The domestic distribution activities of imported goods are accounted for as a part of sources of the GDP .
The
boost of imports largely contributed to the high growth of the trade sector’s value added, which was,
in turn, one of the major sources of the overall high growth. In the Russian official statistics, the revenues from foreign trade of
oil and gas are included not in the mining sector but in the trade sector. However, these special foreign trade revenues could not be the source of the rapid GDP
growth because Russia’s exports of oil and gas were also stagnant in real terms. Surprisingly, import
substitution, including domestic
assembling of foreign-make durable goods, appeared along with the boost of imports in Russia. The
real appreciation of the exchange rate of the ruble boosted the imports of consumer goods and eased
the imports of equipment and intermediate goods, which is considered to have contributed to
improvements in the manufacturing TFP. Based on the unpublished Rosstat data on import matrix, the share of imports of manufacturing
investment goods in the total gross demand for them amounted to 40 percent in 2006. In this paper, we examine statistically some of these facts to diagnose the
Russian Disease and focus on the terms-of-trade effects on the overall growth as well as the manufacturing development. First, showing the key differences
between the Dutch and Russian Diseases, we prove that a
key symptom of the Russian Disease is a strong positive relation
between the country’s real growth and terms-of-trade-effects. We also present three variants (oil prices, terms-of-trade, and
trading gains) of the concept of terms-of-trade effects using the SNA framework. Second, it shows a strong positive impact of terms-oftrade effects on the Russian manufacturing, which markedly differs from one of the major symptoms
of the Dutch Disease (slower growth of manufacturing through the booming mining sector and real appreciation of exchange rates). We also suggests
the significance of the manufacturing industry for the Russian economy. Third, we show that the appreciation (depreciation) of real
exchange rates of Russia’s rubles induced the boost (decline) of its imports. Fourth, we prove that the boost of
imports, in turn, induced the GDP growth of the trade sector as one of the major sources of the
Russian overall growth. We also present the impact of oil prices on two kinds of real exchange rates (CPI-based and GDP-based real exchange rates).
Economic decline causes Russian aggression — bigger internal link
Peters 8 (Ralph, Retired United States Army Lieutenant Colonel and Degree in International Relations
from St. Mary’s University, Bankrupt Rogues: Beware Failing Foes, NY Post, November 29th,
http://www.nypost.com/p/news/opinion/opedcolumnists/item_Sq6rxuaQjf2dV655mfdh9M)
FEELING gleeful at the misfortunes of others is an ugly-but-common human characteristic. The world delighted in our crashing economy, then
we got our own back as Euro-bankers and Russian billionaires proved at least as greedy as our own money-thugs. Of all the pleasures to be
found in the pain of others, though, none seems more justified than smugness over the panic in Moscow, Caracas and Tehran as oil prices
plummet. We may need to be careful what we wish for.
Successful states may generate trouble, but failures produce
catastrophes: Nazi Germany erupted from the bankrupt Weimar Republic; Soviet Communism's
economic disasters swelled the Gulag; a feckless state with unpaid armies enabled Mao's rise. Economic
competition killed a million Tutsis in Rwanda. The deadliest conflict of our time, the multi-sided civil war in Congo, exploded into the power
vacuum left by a bankrupt government. A resource-starved Japan attacked Pearl Harbor.
The crucial point: The more a state has
to lose, the less likely it is to risk losing it. "Dizzy with success," Russia's Vladimir Putin may have
dismembered Georgia, but Russian tanks stopped short of Tbilisi as he calculated exactly how much
he could get away with. But now, while our retirement plans have suffered a setback, Russia's stock market has crashed to a fifth of
its value last May. Foreign investment has begun to shun Russia as though the ship of state has plague aboard. The murk of Russia's economy is
ultimately impenetrable, but analysts take Moscow's word that it entered this crisis with over $500 billion in foreign-exchange reserves. At least
$200 billion of that is now gone, while Russian markets still hemorrhage. And
the price of oil - Russia's lifeblood - has fallen by
nearly two-thirds. If oil climbs to $70 a barrel, the Russian economy may eke by. But the Kremlin can kiss off its military-modernization
plans. Urgent infrastructure upgrades won't happen, either. And the population trapped outside the few garish city centers will continue to live
Should oil prices and shares keep tumbling, Russia will slip into
polni bardak mode - politely translated as "resembling a dockside brothel on the skids." And that assumes that
lives that are nasty, brutish and short - on a good day.
other aspects of the economy hold up - a fragile hope, given Russia's overleveraged concentration of wealth, fudged numbers and state
if the ruble continues to drop? Perhaps. But what incentive would Czar Vladimir have
to halt his tanks short of Kiev, if his economy were a basket case shunned by the rest of the world? Leaders with failures in
their laps like the distraction wars provide. (If religion is the opium of the people, nationalism is their methamphetamine.)
The least we might expect would be an increased willingness on Moscow's part to sell advanced
weapons to fellow rogue regimes. Of course, those rogues would need money to pay for the weapons (or for nuclear secrets sold
lawlessness. Should we rejoice
by grasping officials). A positive side of the global downturn is that mischief-makers such as Iran and Venezuela are going to have a great deal
less money with which to annoy civilization.
High Oil Prices Key to Russian Economy
Low oil prices cause investor flight and collapse the Russian economy – Russia can’t
diversify in time.
Vestrgaard 14 — Jakob Vestrgaard, March 25, 2014, PhD, International Political Economy; MSc,
Economics¶ Senior Researcher, Research Area on Global transformations in finance, migration and aid,
“Russia Reeling: Pushing a Fragile Economy Off the Cliff?” GEG Watch,
http://gegwatch.com/2014/03/25/russia-reeling-is-putin-pushing-a-fragile-economy-off-the-cliff/
Third, the Russian economy is highly dependent on oil and gas. The IMF stresses that both the Russian
economy and its public finances remain “highly sensitive to oil prices”. If sanctions are stepped up to
include a block on imports of Russian oil and gas, the effects on Russia would be huge. The revenue loss
is estimated to be in the order of $100 bn per day, which would have massive repercussions, not least
fiscally ( half of Russian state revenues come from energy receipts). In October last year, the IMF noted
that “going forward the Russian economy will have to rely on a more efficient use of resources and
higher investment, rather than increasing oil prices”. If sanctions are stepped up, this adaptation
challenge will come sooner and harder than anyone had expected.¶ Fourth, Russia suffers from a
resource curse. “Russia’s energy resources… are fast shifting from an opportunity to a familiar curse as
the country fails to make the structural adjustments needed to diversify its brittle economy”, notes
Christopher Hill, former US Assistant Secretary of State to East Asia. A strong entrepreneurial response
to quickly enhance the diversification of the economy is hardly to be expected, given Russia’s low
competitiveness and innovation capacity (Russia is ranked 62nd in the Global Innovation Index and
64th in the WEF competiveness index). Dependency on natural resources and low entrepreneurialism
will make the bleeding caused by stricter sanctions all the more shattering.
Russia is heavily reliant on high oil prices – the threshold for economic collapse is
$120.
Schuman 12 — Michael Schuman, 7/5/2012, former correspondent for the Wall Street Journal and a
staff writer for Forbes, “Why Vladimir Putin Needs Higher Oil Prices,” Time,
http://business.time.com/2012/07/05/why-vladimir-putin-needs-higher-oil-prices/
But Vladimir Putin is not one of them. The economy that the Russian President has built not only runs
on oil, but runs on oil priced extremely high. Falling oil prices means rising problems for Russia – both
for the strength of its economic performance, and possibly, the strength of Putin himself.¶ ¶ Despite the
fact that Russia has been labeled one of the world’s most promising emerging markets, often
mentioned in the same breath as China and India, the Russian economy is actually quite different from
the others. While India gains growth benefits from an expanding population, Russia, like much of
Europe, is aging; while economists fret over China’s excessive dependence on investment, Russia
badly needs more of it. Most of all, Russia is little more than an oil state in disguise. The country is the
largest producer of oil in the world (yes, bigger even than Saudi Arabia), and Russia’s dependence on crude
has been increasing. About a decade ago, oil and gas accounted for less than half of Russia’s exports; in
recent years, that share has risen to two-thirds. Most of all, oil provides more than half of the federal
government’s revenues.¶ ¶ (MORE: How Google Is Making Science Fiction Real)¶ ¶ What’s more, the
¶
economic model Putin has designed in Russia relies heavily not just on oil, but high oil prices. Oil
lubricates the Russian economy by making possible the increases in government largesse that have
fueled Russian consumption. Budget spending reached 23.6% of GDP in the first quarter of 2012, up
from 15.2% four years earlier. What that means is Putin requires a higher oil price to meet his spending
requirements today than he did just a few years ago.¶ ¶ Research firm Capital Economics figures that
the government budget balanced at an oil price of $55 a barrel in 2008, but that now it balances at close
to $120. Oil prices today have fallen far below that, with Brent near $100 and U.S. crude less than $90.
The farther oil prices fall, the more pressure is placed on Putin’s budget, and the harder it is for him to
keep spreading oil wealth to the greater population through the government. With a large swath of
the populace angered by his re-election to the nation’s presidency in March, and protests erupting on
the streets of Moscow, Putin can ill-afford a significant blow to the economy, or his ability to use
government resources to firm up his popularity.¶ ¶ That’s why Putin hasn’t been scaling back even as oil
prices fall. His government is earmarking $40 billion to support the economy, if necessary, over the next
two years. He does have financial wiggle room, even with oil prices falling. Moscow has wisely stashed
away petrodollars into a rainy day fund it can tap to fill its budget needs. But Putin doesn’t have the
flexibility he used to have. The fund has shrunk, from almost 8% of GDP in 2008 to a touch more than
3% today. The package, says Capital Economics, simply highlights the weaknesses of Russia’s
economy:¶ ¶ This cuts to the heart of a problem we have highlighted before – namely that Russia is now
much more dependent on high and rising oil prices than in the past… The fact that the share of
‘permanent’ spending (e.g. on salaries and pensions) has increased…creates additional problems should
oil prices drop back (and is also a concern from the perspective of medium-term growth)…The present
growth model looks unsustainable unless oil prices remain at or above $ 120pb .¶ (MORE: How to
Improve Obamacare)¶ ¶ The only way out of the trap is to decrease Russia’s dependence on oil. That will
require a much higher rate of investment, and especially private sector investment, to develop new
industries and create better jobs. Improving the poor investment climate, however, will take a long list
of reforms, which include fixing inefficient state enterprises, allowing greater competition, stopping the
state from crowding out the private sector, and fighting widespread corruption. Putin himself has
repeatedly advocated for just such reforms, as he did in a speech at the St Petersburg International
Economic Forum in June:¶ ¶ “We are well aware of serious long-term and medium-term challenges for
our economy. The economy is still not properly diversified. Much of the added value is created in
commodities sectors. There is a high proportion of non-competitive old plants and the level of Russia’s
dependence on oil prices remains high. We must reduce the dangerously high [budget] deficit if oil
revenues are not taken into account. This…is the Achilles’ heel of our economy…We understand very
well that we must offer investors exclusive conditions to compete for these investments, so that the
investors ultimately choose Russia. This is why we feel creating an investment climate that is not just
favorable, but truly better and more competitive, is a key issue in state policy…Today I want to reaffirm
our principled position: the state will gradually withdraw from a variety of industries and
assets…Unfortunately corruption is without exaggeration the biggest threat to our development. The risks are even worse than the
fluctuation of oil prices.”¶ Yet Putin and his political allies have said all this stuff before, and little has changed. Achieving Putin’s stated goals
will require drastic changes in the Putin state, changes he has so far shown little willingness to make.¶ ¶ He may have to, though. In a June 21
report, Capital Economics forecast growth would slow sharply, to 3.8% in 2012 and as low as 2.5% in 2013, from the 4.3% achieved in 2011.
Without reform, the fate of Putin’s economy — and his legacy — will rest on the unpredictable swings in
commodities markets.
Low oil prices collapse Russian economy — empirics
Reuters 12 — Byline Jason Bush, Reuters, 7/2/12, international news journalism agency “Analysis: Oilprice slide highlights risks to Putin's Russia,” http://af.reuters.com/article/idAFL6E8HS3N220120702
MOSCOW (Reuters) - Falling oil prices could trigger a prolonged slump in Russia that would lay bare
the growing fiscal risks, threatening President Vladimir Putin's election promise to increase wages and
fanning public discontent. The world's largest oil producer is well-placed in the short run to withstand
sliding prices, thanks to sizeable cash reserves and a flexible rouble. And Putin, who returned to the
Kremlin after March's election, is still widely popular. But the oil price has fallen by over $30 dollars in
the last three months, to close to $90 per barrel, and may fall further, narrowing his room for budgetary
maneuver just as mass protests have underscored dissatisfaction with the government. "This is not the
best start for the new government," said Peter Westin, chief strategist Aton brokerage in Moscow. "If
the oil price is temporarily at these levels, or even lower, it's not a huge problem. The issue is whether
it stays there." Oil and gas taxes account for around half of revenues raised by the federal budget, which
Putin, as prime minister, used to boost public sector pay and pensions as a way of overcoming the 2009
economic slump. Putin, who has taken a more populist approach to dealing with his declining popularity,
promised even more public sector pay rises as part of his election campaign. While that would cushion
the immediate blow of any slowdown, running down the fiscal reserves to maintain high social spending
would only increase Russia's long-term vulnerability to yet another oil price shock. "In the short term
they can sustain a very low oil price, but they need to address the structural problems in health,
education and pensions," said Ivan Tchakarov, chief Russia economist at Renaissance Capital. "This is not
a sustainable fiscal policy, there's no question about it." DEPENDENCY The last time oil prices fell so
precipitously, in 2009, Russia's economy slumped by a dramatic 8 percent. Collapsing oil was also a
catalyst for Russia's 1998 economic crisis that ended in devaluation and default. Putin, in his annual
statement on the budget on Thursday, acknowledged that Russia's reliance on energy prices was one
of its biggest policy headaches. "The Russian budgetary system is highly dependent on the situation
on world commodity markets," he said. "This limits the opportunities for budget maneuver." For now,
Finance Minister Anton Siluanov has earmarked $6 billion that could be spent in 2012 from a budget
rainy-day fund should a deteriorating global economy drag on growth in Russia. "We hope we don't
have to make use of these measures, because the steps being taken by the government and central
bank are sufficient," Siluanov said. He trimmed his 2013 budget deficit forecast to 1.5 percent of gross
domestic product, assuming an average oil price of $97 per barrel. The fiscal plan will help keep the
national debt, now around 10 percent of GDP, manageably low. BUFFER Analysts say the impact on
Russia of lower oil prices may be milder than during previous falls. "In the short term, in the next one to
three years, we are fine," said Tchakarov. He noted that according to Finance Ministry calculations,
every one dollar fall in the oil price means that the government loses around 55 billion roubles ($1.7
billion) in oil-related taxes over the course of a year. With the budget presently balancing at around
$115 per barrel, an oil price of $90 per barrel, if sustained over a full year, would leave the government
short to the tune of around $40 billion a year. But that is still just a fraction of the $185 billion that
Russia has stashed away in two fiscal reserve funds, designed to stabilize the budget in just such an
emergency. Even at $60 per barrel - the average oil price during the crisis year of 2009 - the reserve
funds could cover the shortfall for about two years. "I find this worrying about the budget at this
moment a little beside the point," said Clemens Grafe, chief Russia economist at Goldman Sachs. "The
fiscal buffers they have to absorb this are going to be sufficient without cutting expenditure." Analysts
also point out that since the previous financial crisis in 2008-2009, the central bank has radically
changed the exchange rate regime, allowing the rouble to fall in line with the cheaper oil price. Since oil
began its latest slide in mid-March, the rouble has lost around 15 percent of its value against the dollar.
"The rouble weakened exactly in line with the oil price. And a weaker rouble is very good because it will
secure the rouble equivalent of oil taxes for the budget," said Evgeny Gavrilenkov, chief economist at
Troika Dialog. SIGNIFICANT SLOWDOWN Despite these buffers, most economists expect that a
sustained fall in the oil price would cause a significant slowdown in Russia's economic growth - still a
surprisingly resilient 4.2 percent in May. "Between $70 and $80 per barrel you will have a recession,"
said Westin from Aton. Russia's ability to maintain government spending is limited by the so called
non-oil deficit - a measure of the underlying state of the budget once oil taxes are removed - that has
ballooned from 5 percent of gross domestic product in 2008 to over 10 percent this year. Even before
the latest decline in the oil price, the International Monetary Fund and World Bank were urging Russia
to scale back this underlying deficit by cutting down on bloated government spending. In a recent
interview with Reuters, Russia's deputy prime minister Igor Shuvalov vowed that while the government
intended to use its reserves to maintain expenditures this year, next year's budget would be "very
frugal, tight and responsible". That implies that sooner or later, falling oil prices will force cutbacks that
will hit the pockets of ordinary Russians. "The silver lining of a failing oil price is that it does increase the
urgency of social reform and budget cuts," says Kingsmill Bond, chief Russia strategist at Citigroup. ($1 =
32.9862 Russian roubles)
High oil prices are key to Russian growth — investment, inflation, and the ruble
Kramer 11 — Andrew, Journalist @ the New York Times, Russia Cashes In on Anxiety Over Supply of
Middle East Oil, March 7th, http://www.nytimes.com/2011/03/08/business
MOSCOW — Whatever
the eventual outcome of the Arab world’s social upheaval, there is a clear economic
winner so far: Vladimir V. Putin. Russia, which pumps more oil than Saudi Arabia, is reaping a windfall from the steep
rise in global energy prices resulting from instability in oil regions of the Middle East and North Africa.
Riding the high oil prices, the Russian ruble has risen faster against the dollar this year than any other
currency, which is helpful because it will curb consumer inflation during an election year. Russian stocks are
buoyant, too: the Micex index closed last week at 1,781, up nearly 6 percent since the beginning of the year. (Monday was a holiday in
Russia.) But the Russians could not step in to offset any potential big drop in global production, because Russia does not have any oil wells
at last week’s closing
of $114, the price of each of those barrels of Ural crude, the countries main export blend, has risen 24 percent
since the beginning of the year. Last week, the prime minister, Mr. Putin, sat down for a meeting with Russia’s finance minister,
standing idle that would allow it to increase production. Right now Russia is pumping oil at its top capacity. But
Aleksei L. Kudrin, which was nationally televised on state news channels for the public’s enlightenment as the two discussed, just short of
budget revenues have become considerable,” Mr. Putin said
matter-of-factly. Mr. Kudrin agreed, noting that if prices hold Russia will be able to resume contributions to its
sovereign wealth funds for the first time since the summer of 2008, when the global recession began. One
of those sovereign investment vehicles, the Reserve Fund, could reach $50 billion by the end of the
year, Mr. Kudrin reported. Just a few months ago Russian officials planning the 2011 budget had anticipated the fund would be depleted.
gloating, the benefits to Russia of a global oil panic. “Mr. Kudrin,
“Good,” Mr. Putin responded to Mr. Kudrin’s account, nodding with satisfaction. Russia, of course, does not have to look back farther than
Russian energy is in favor.
Russia’s perceived stability was a reason the French energy giant Total cited last week in agreeing to buy
about 12 percent of an independent natural gas producer in Russia, Novatek, and join a liquefied natural gas project in
2008 to see that a spike in the price of oil can be just that — followed by a dizzying drop. But for now,
the Russian Arctic. “The
upheavals taking place in a number of the oil- and gas-producing countries now send a
signal to investors to come to Russia,” Total’s chief executive, Christophe de Margerie, said in a meeting with President Dmitri A.
Medvedev announcing the deal. Mr. Margerie said his company was committing about $4 billion to the venture. “Russia offers a much
safer environment for investment,” he said. Oil experts say that because global production capacity for oil is still far larger than
world demand, the run-up in prices is being fueled by fear more than by reality. The concern is that the violence in Libya could spread to other
member states of the Organization for the Petroleum Exporting Countries, which are primarily Arab nations.
Russia is not only
outside OPEC, and thus free from the cartel’s production restraints, but also, with its formidable secret police
apparatus and a population bulge among the elderly rather than the young, is seen as less vulnerable to an outbreak of
social unrest. Russia has long jockeyed against Saudi Arabia, a member of OPEC, to be the world’s top oil-producing nation. Although the
Saudis have more production capacity and vastly more reserves, Russia is pumping more oil. And if oil and natural gas are considered together,
Russia is the largest energy-exporting nation. Which country is in first place for oil at any given moment depends on how the Saudis wield their
swing production capacity, the cushion of unused wells and pipelines the Saudis can turn on to tamp down global prices. As the biggest OPEC
member, Saudi Arabia is the cartel’s enforcer and enabler, with the power to influence global prices or to moderate global disruptions by how
much of its production capacity it chooses to put to work. If the Saudis open the valves during periods of instability, Russia falls into second
place as a producer — but still makes a healthy profit off higher prices. Russia has little incentive to invest in spare capacity — in part because
being outside the OPEC cartel gives it less direct ability to influence prices through the ebb and flow of production. If anything, a large idle
capacity by Russia would work against its financial interests — by acting as market insurance, and thus holding prices down — during periods of
instability in the Middle East. Russian officials also say that spare capacity is too hard to maintain in their far northern country. Most of its
current production comes from wells in Siberia that would freeze solid in the permafrost if not kept running. And the Russians will probably
argue the new fields they plan to open in Arctic waters will be so expensive to drill that it would be unwise to later shut them down. “They are
producing flat-out on a permanent basis,” Didier Houssin, the director of energy markets and security at the International Energy Agency in
In the longer term for Russia, policies that encourage or discourage oil field
investment are the bigger determinant of how much oil the country can provide to global markets . The
energy agency forecasts that Russian energy output will remain about stable for five years, but will require
increasing investments as the main oil provinces in western Siberia, having peaked years ago,
continue to decline. In this respect, Middle East instability could bring longer-term benefits to
Moscow than the current oil price spike, if it redirects even more of the Western oil industry’s
investment to Siberia and the Russian Arctic shelf. The British oil giant BP cited Russia’s relative stability
compared with OPEC regions, when BP in January announced a $7.8 billion deal to invest in the stateowned Russian oil company Rosneft and jointly search for oil in the Arctic. Later that month, Exxon Mobil, the
biggest American oil company, signed a deal with Rosneft to explore offshore in the Black Sea. Unrest in North Africa is also
strengthening Russia’s bargaining position with Europe on natural gas exports and pipeline politics — although Russian
officials have used delicate phrasing to make this point. Aleksei B. Miller, the chief executive of Gazprom, in a visit to European capitals late
last month, suggested that Europeans reconsider their opposition to new Russian pipeline proposals, in
light of the “external situation” in North Africa, a region that competes with Russia to export pipeline gas to
Paris, said via telephone.
Europe.
Russian economy is vitally dependent on oil — prices key to overall economic
investment
Dashevsky 11 — Steven Dashevsky, Managing Director of Dashevsky & Partners, “The Russian
economy and its oil,” 5-24, http://rt.com/business/news/russia-economy-oil-rpice/
RT: High oil prices have helped Russia’s budget but is the country too dependent on energy exports? SD: “Well the dependence has declined
greatly in recent years, but I think the sad truth remains that, to
a very significant degree, Russia’s budget revenues and
overall fiscal health is still very dependent on the level of oil prices.” RT: How does the energy sector shape the
Russian investment climate? SD: “Well, there are many ways how the events happening in the oil and gas sector
influence what is happening in the broader economy . On the one hand this is the biggest source of cash
flow generation in the country, so in a sense it’s the biggest source of investment funds, both for the companies, and for the
government and also because oil companies invest very significant amounts of money every year, so the ability of Russian oil
companies to spend money affects really the entire Russian economy – from transport companies to oil service
companies to catering companies to local airlines – so it is still, despite the significant efforts to diversify the economy, it’s a very
important source of investment funds. That’s kind of one angle, and another angle is what is happening in the
Russian oil and gas sector, since it is the biggest sector in the economy, affects the general investment
climate, from the kind of sentiment perspective. So, when something good happens like potentially was going
to happen, BP-Rosneft deal, or if there are good events happening, new fields are being developed, new pipelines are
being brought on-stream, that gives investor additional confidence that the economy is progressing
very well, and people are investing money in it, and the whole country is open for business. Vice versa, if things are
not going well, if deals are breaking up, if instead of going to work people going to courts against each other, that clearly creates
a big drag on the investors sentiment for all of the Russian economy, not just oil and gas.”
High prices boost government revenue — results in social spending, infrastructure
development, and domestic liquidity.
Holmes et al. 11 — Frank, John Derrick, and Tim Steinle, Co-managers of the U.S. Global Investors
Eastern European Fund, What's Driving Russia's Outperformance?, http://www.usfunds.com/investorresources/frank-talk/Eastern-Europe/Whats-Driving-Russias-Outperformance5318/?CFID=3340758&CFTOKEN=38605250
The Russian MICEX Index, which increased 22.5 percent in 2010, has jumped 15 percent so far in 2011, significantly
outperforming many other markets. China is the second-best performer of the BRICs, rising more than 5 percent, while India
(down over 10 percent) and Brazil (down over 2 percent) have lagged. Overall, the MSCI Emerging Markets Index has dropped just over 1
percent. This has effectively recouped Russia with the other BRIC countries. The Russian economy lagged out-of-the-gate once the global
recovery began, leading some to question whether it belonged in the same category as Brazil, China and India. Those sentiments seemed
premature and symptomatic of an anti-Russia mindset. Russian’s outperformance has been driven by several factors. First,
the Russian ruble has appreciated 7 percent against the U.S. dollar, boosting stock market performance for U.S. investors. This development
also has a long-term benefit as a strong ruble benefits the country’s domestic sectors, something we’ll discuss later. A second factor driving
Russia has been the geopolitical and natural disaster events
that have transpired during the past few weeks.
Russia is relatively safe from the type of political uprisings seen in the Middle East and North Africa . Its
government is decidedly popular with the public and the one-two punch of President Medvedev and Prime Minister Putin give the government
The price of oil has risen roughly 25 percent since the unrest and
turmoil began in the Middle East and North Africa. As an energy exporter of crude oil and natural gas,
Russia is one of the few large economies in the world that directly benefits from higher energy prices.
Russia is the world’s largest oil producer and it’s estimated that for every $10 increase in the average
annual price of oil, Russia’s revenues rise by $20 billion, according to the Financial Times. Since Russia is not a
member of OPEC, it is not bound by production caps and can increase production as it sees fit while
prices are at elevated levels. Russia is also the world’s top exporter of natural gas and Stratfor Intelligence points out the situation
clout on both international and domestic fronts.
in Libya has shut down 11 billion cubic-meters of natural gas flow to Italy. As Europe’s third-largest consumer of natural gas, Italy has turned to
Russia for gas supplies. In addition, a shutdown of several Japanese nuclear facilities could mean as much as a 14 percent increase in natural gas
consumption to meet the Japan’s energy demands. In the energy sector, the Eastern European Fund (EUROX) portfolio emphasizes companies
that show strong growth in production, reserves and cash flow, relative to their peers. Specifically, Novatek, Rosneft and TNK-BP fit this profile.
Russian energy equities, which carry the largest weighting in the MICEX, have gained 25 percent this year. This is higher
than non-oil Russian equities, which have risen only 7.7 percent. However, as oil and gas taxes swell the government’s
revenue, these funds are increasingly allocated to social and public works programs which are likely
to create an opportunity for non-energy related equities. These sectors appear poised to benefit from the
current macroeconomic environment. This table from Merrill Lynch shows the performance of the different sectors of the
Russian market following a sustained rise in oil prices. Merrill Lynch compiled research on the seven instances where oil prices rose 20 percent
in a two-month span and maintained at least half those gains over the following six month period. Historically, the average gain for Russian
equities is more than 34 percent. While energy generally jumps out ahead when oil prices move higher, you can see that it lags other sectors as
the rally progresses. We have long been positive on both Russian financials and the consumer sector and these sectors appear well positioned
going forward. Consumer-oriented equities such as retailers have historically been the best performers, netting an 85 percent gain on average
and triple the gain of energy equities. Retailers X5 and Magnit should be able to capitalize on these trends. Russian financials are next with an
average 83 percent gain. Sberbank, Russia’s largest bank, is the largest holding in EUROX. Another
area that could directly
benefit from the Kremlin’s cash-filled pockets is infrastructure. Russia is in dire need of a significant
revamping of its infrastructure. Similar to the American Society of Civil Engineers report that rates America’s infrastructure a “D,”
the World Economic Forum says the quality of Russia’s infrastructure lags that of other emerging countries such as South Africa, Turkey, China
and Mexico. The areas most in need of upgrading are Russia’s transportation and electrical power grid. The
quality of Russia’s roads ranks in the bottom-third in the world, according to Merrill Lynch, and it’s estimated that Russia loses 6 percent of GDP
each year due to underdeveloped roads. In fact, the combined length of Russia’s roadways declined 6 percent between 2002 and 2010 despite
a 60 percent increase in car penetration, Merrill-Lynch says. It’s a similar story for Russia’s airports and rail network.
Russia currently has roughly 300 operational airports but just 40 percent of them have paved runways and 30 percent do not have an airfield
lighting system, Merrill Lynch says. The rail network, almost entirely constructed during the Soviet era, is highly concentrated in the Western
region of the country and is estimated to require more than $70 billion in investment for upgrades and repairs by 2020, according to Merrill
Lynch. Russia’s aging power grid is unreliable and accident-prone. Merrill Lynch projects that significant investment by
2020 is required to update and modernize the grid. With industrial consumers accounting for 85 percent of electrical consumption, keeping the
power up and running is essential to maintaining Russia’s industrial production levels. To finance the much needed infrastructure
improvements, the Russian government created the $420 billion Federal Target Program (FTP). The FTP focuses on key transportation areas
such as rails, autos, marine and civil aviation. The FTP has specific goals to meet by 2015 such as increasing the percentage of roads that meet
federal standards by 23 percent. The plan also calls for a 47 percent increase in the shipment of goods and a 40 percent increase in airline
penetration through improvements of aviation infrastructure. In addition to the FTP, three special events will help drive Russia’s infrastructure
spending: The 2012 Asia-Pacific Economic Cooperation (APEC) Summit, 2014 Winter Olympics in Sochi and the 2018 World Cup. Merrill Lynch
estimates that total spending for the World Cup will reach $50 billion. Construction for the Games in Sochi includes 161 miles of roads and 65
miles of rails, and the APEC calls for 48 new objects to be constructed for a total of $83 million. While higher
energy prices are in
danger of slowing down consumers in the U.S., Western Europe and certain emerging market countries, it has the
opposite effect for the Russian economy. With increased cash flow from its natural gas and crude oil exports,
the Russian government has the much-needed capital to invest in the country’s aging infrastructure and to
support domestic consumption . This should drive outperformance of Russian markets throughout 2011
and stimulate demand for infrastructure-related commodities such as crude oil, copper, cement and iron ore.
Reverse causal evidence that decline causes economic crisis.
Mauldin 11 — William, Staff Writer @ Dow Jones Newswire, Russian Budget Under Threat From Oil
Drop Amid Election Spending, June 5th,
http://www.morningstar.co.uk/uk/markets/newsfeeditem.aspx?id=138501958334655
MOSCOW (Dow Jones)--Russia's
ability to balance its $375 billion budget has come under threat after a sharp
drop in crude prices, especially since the Kremlin plans on boosting spending during a year of
parliamentary elections and preparations for the 2012 presidential vote. Russia's annual budget is expected to lose $36
billion from Brent crude's $18 drop from a high of $127.02 a barrel, assuming prices don't rebound. The crude drop
threatens to put the budget into deficit territory, since Finance Minister Kudrin has said the budget needs an
average 2011 oil price of $115 to balance, although many economists say the crucial oil price is
somewhat lower. The ruble weakened significantly against the dollar on Friday after oil slumped, but
Russian Eurobond prices were relatively steady, taking their cues on international debt markets and Treasuries. "I am surprised the market
reaction has not been more aggressive," said Timothy Ash, emerging markets analyst at Royal Bank of Scotland. "The
question is
whether this drop in oil and commodity prices is just a correction of the start of a new weaker trend. If it is the latter, you
do not want to be long Russia."
No offense — high prices are always better than low prices.
Russian Times 11 — RT Online, Russia surfing the oil price surge, February 25th,
http://rt.com/business/news/russia-surfing-oil-surge/
On balance do you think high oil prices are good for Russia? Surely it means more money? VO: Sure,
absolutely. One way or another high oil prices gives much more resources for Russia to deal with.
That’s why, no matter what way you look at it, it is always better for Russia to have high oil prices
than low oil prices. I guess the most important thing is to realize that the sustainability of these prices is the big question.
RT:
Global oil prices are key to the Russian economy – 9% swing in budget surplus.
Cooper 9 — William H. Cooper June 29, 2009, Specialist in International Trade and Finance, “Russia’s
Economic Performance and Policies and Their Implications for the United States,” Congressional
Research Service, http://fas.org/sgp/crs/row/RL34512.pdf
The levels of Russian oil production have varied over the years and have roughly mirrored overall
conditions of the Russian economy and global demand. The graph in figure 2 above indicates that from
1989 to 1996, the volume of oil production decreased appreciably, from 11.1 million barrels/day (mbd)
to 6.1 mbd or about 45%. This period is contemporaneous with the deep slide in Russian economic
growth shortly before and immediately after the collapse of the Soviet Union. The decline was caused
by a dramatic drop in world demand for oil, a decrease in world oil prices, the depletion of exploited
Russian oil fields, and the lack of investment in discovering new ones. Production began to grow in 1997,
at first gradually, then more rapidly reaching 9.8 mbd in 2008, still below the 1989 level.52 Oil
production has continued to increase but at a decelerating rate, with possible implications for the
future.¶ Russia’s Economic Performance and Policies and Their Implications for the United States¶
Among the factors which contributed to the deceleration of oil production was the Yukos case which
led Russian oil companies to reduce investment in upstream activities. Also, the heavy taxation of oil
revenues is another contributing factor. Most oil-sector investment in Russia is aimed at increasing
current production rather than developing new fields; therefore, any slowdown in the growth of capital
spending is soon reflected in slower growth of production and exports. Russia will be not be able to
sustain oil production over the long term if the investment in the sector is not increased.54¶ While oil
production activities represent a small direct part of Russian GDP, the income derived from oil
production has contributed significantly through the multiplier effect to overall GDP growth.
According to the IMF, the Russian federal government budget enjoyed a fiscal surplus equivalent to
4.6% of GDP in 2007; however, if oil-related revenues are excluded, the budget would have been in a
deficit equivalent to 4.7% of GDP.55 Of course, the IMF calculation assumes that the Russian
government would have maintained the level of expenditures. This analysis suggests that Russia is
becoming more reliant on world oil prices increasing or at least remaining high.¶ The significance of oil
and other natural resources to the Russian economy is perhaps no more evident than in Russian
foreign trade. Even during the Soviet period, oil and other natural resources were by far the primary
source of hard currency revenues. They have maintained and, at times increased , their importance in
post-Soviet era Russian foreign trade. In 2007, energy resources (oil, natural gas, and coal) accounted
for 65% of total Russian export revenues. Metals accounted for another 14% of Russian exports.56
Russia’s increasing reliance on exports oil and other energy resources and raw materials has made
Russian trade vulnerable to the volatility of international commodity prices. Exports of machinery and
equipment accounted for only 5% of Russian exports.57
Russia Key To Global Economy
Russian economic downturn will disrupt the global economy
Cooper 9 — William H. Cooper June 29, 2009, Specialist in International Trade and Finance, “Russia’s
Economic Performance and Policies and Their Implications for the United States,” Congressional
Research Service, http://fas.org/sgp/crs/row/RL34512.pdf
The greater importance of Russia’s economic policies and prospects to the United States lie in their
indirect effect on the overall economic and political environment in which the United States and
Russia operate. From this perspective, Russia’s continuing economic stability and growth can be
considered positive for the United States. Because financial markets are interrelated, chaos in even
some of the smaller economies can cause uncertainty throughout the rest of the world. Such was the
case during Russia’s financial meltdown in 1998. Promotion of economic stability in Russia has been a
basis for U.S. support for Russia’s membership in international economic organizations, including the
International Monetary Fund (IMF), the World Bank, and the World Trade Organization (WTO). As a
major oil producer and exporter, Russia influences world oil prices that affect U.S. consumers.
Russian Economic Collapse Causes War
Russian economic collapse causes increased expansionism and U.S.-Russia conflict
Vestrgaard 14 — Jakob Vestrgaard, March 25, 2014, PhD, International Political Economy; MSc,
Economics¶ Senior Researcher, Research Area on Global transformations in finance, migration and aid,
“Russia Reeling: Pushing a Fragile Economy Off the Cliff?” GEG Watch,
http://gegwatch.com/2014/03/25/russia-reeling-is-putin-pushing-a-fragile-economy-off-the-cliff/
Recession in Russia is a frightening scenario, not least in the current political climate of surging
nationalism and ‘Great Russia’ ideology. And few doubt that if the West does indeed step up its sanctions on Russia, Putin
would retaliate. But how? The option European investors should fear the most, is forced nationalization. Eurointelligence reports that the Duma
is already preparing the legislation. It’s in the best interest of both parties to avoid such escalation.¶
Yet, if Putin continues into
Eastern parts of Ukraine – or imposes the Russian army on smaller targets such as Moldova – the West
will have little choice but to step up sanctions (although this course of action could easily hurt the fragile
economic recovery, not least in the Eurozone).¶ So far, sanctions are relatively mild, aimed at a small
group of individuals and two Russian banks. If sanctions are tightened in the coming weeks and months
– to include energy import restrictions, a freezing of Russian assets in the EU, and cutting Russian banks
off from the dollar and euro markets – two questions are particularly pressing:¶ First, can Putin avoid
that this will cause Russia’s already low growth to drop further and be replaced by recession? Second, if
not, where will the Russian population turn its frustration and anger, and how will Putin play it
domestically?¶ In the optimist scenario, Putin’s domestic power base will gradually erode, and the
events will mark a turning point in the history of Russian democracy, with a serious blow taken by authoritarian
ruling. In a pessimist scenario, recession and social unrest will be impetus for further conquests by Putin
and the beginning of a new Cold War period.¶ Alexander Rubtsov, from the Russian Academy of Sciences, asserts that if
Putin is pressed domestically, there will be two ways he can go: “either tighten the screws, and so be ready to crush
mass protests with repression, or arrange new conquests”. Comparisons with Nazi Germany in the
1930s, and the annexation of Sudetenland, easily seem exaggerated. But if Putin is indeed pushed into
a corner – with a suffocating economy and increasing inflation and unemployment – his response, and
its geopolitical repercussions, certainly are not pleasant to imagine. ¶ Although it is not at all clear that
Putin is “prepared to negotiate”, as Neil Buckley notes, one can only join him in hoping that a “major multilateral
diplomatic push for a settlement” will lead to a “final peace over Ukraine between Moscow, Washington and
Brussels”, before the situation spins irreversibly out of control.
Aff
2AC — Russian Oil DA
Russian economy declining now – US sanctions
Reuters 7/17/2014 – Polina Devitt, Moscow-based staff writer for Reuters, 2014 (“Latest U.S.
sanctions hit Russian assets, rouble at six-week low,” July 17th, Available Online at
http://www.reuters.com/article/2014/07/17/us-russia-markets-stocks-idUSKBN0FM0NL20140717,
Accessed 07-18-2014) LB
(Reuters) - Russian shares fell 2.3 percent on Thursday after Washington imposed its toughest
economic sanctions yet on Russian energy, financial and defense firms, also hitting the rouble and the
country's sovereign dollar bonds.
The U.S. government imposed sanctions on Wednesday on some major players in the Russian economy
over what Washington says is Moscow's reluctance to curb violence in Ukraine.
Sanctions, which in effect close medium- and long-term dollar funding, were imposed on Russia's No.
1 oil producer Rosneft, its No. 2 gas producer Novatek, its No. 3 bank Gazprombank and state-owned
Vnesheconombank (VEB).
No Link: [insert]
No Internal Link: oil isn’t key to Russia’s economy.
Adomanis 12 — Mark Adomanis, Forbes Contributor, 7/18/12,
http://www.forbes.com/sites/markadomanis/2012/07/18/russias-economy-in-2012-a-strong-start-andan-uncertain-future/
The IMF recently cut its forecast for Russia’s 2013 GDP growth from 4 percent to 3.9 percent, and repeated its forecast that
2012 economic growth would come in right at 4 percent. The Russian Ministry of Economic Development is slightly less
optimistic, predicting that 2012 GDP growth will be in the 3.4-3.7% range (though it reserves the right to revise this upward if necessary). Well
the results of the first half of 2012 are now available from Rosstat and, at first glance, they would appear to be ground
for significant optimism: GDP grew at a 4.9% rate, fixed capital formation grew at 4.7%, and retail turnover
galloped ahead at a rapid 6.9% annual rate. Also on the positive side of the ledger was a 3% growth in
disposable incomes and a strikingly large 10% decline in unemployment to a post-Soviet low. Russia
has now officially surpassed its pre-crisis GDP peak and is doing so with oil prices that are roughly $30
a barrel less than they were in 2008 , when the world energy market was at the height of its decadelong run up in prices, and with notably lower levels of both unemployment and inflation. So while the Russian economy
isn’t exactly a world-conquering colossus, it’s arguably in better shape than its ever been: prices are
more stable, more workers are active, and investment and consumption are increasing.
Turn: low oil prices spark economic diversification efforts that are key to long-term
economic growth.
Kommersant 06 — Russia’s Daily Online New Source, “Low Oil Prices May Push Up Russia’s
Economy,” 7/16/2006,
http://www.kommersant.com/p705040/r_500/Low_Oil_Prices_May_Push_Up_Russia’s_Economy/
The OPEC Reference Basket has fallen below $60 per barrel, for the first time over the last five
months, closing at $59.08 at the New York exchange yesterday. However, futures for Light Sweet
grew. Analysts explain it, saying that stags decided to buy more contracts at attractive low prices.
Experts note that a new drop is the start of a long-term trend of a decline in oil prices. Russian
authorities have already given their predictions of how Russia’s economy will be affected by
lower oil prices. The Central Bank’s head Sergey Ignatyev said that Russia would not suffer even if
oil falls below $25-30 per barrel. Independent experts are of a different opinion, though. With a
Urals barrel at $80 a Russian oil company has after-tax net profit of $36.3 billion annually. If Urals
decline to $30, the net profit will plummet to $7.8 billion. Yet, a fall in natural resources prices
may give a positive impulse to the Russian economy. “Certainly, if the natural resources industry
slows down, other sectors may speed up as the Central Bank will no longer have to strengthen
the ruble to trend down inflation,” Evgeny Nadoshin at the Trast bank said. “This is what Russian
business has long been asking for.” A sharp drop in oil prices may force the Russian government
to reinvigorate reforms and diversify economy, which will boost Russia’s economy. Even if
authorities prefer a passive stance and keep on increasing budget expenses ahead of presidential
election, Russia’s gold reserves and stabilization fund will help the economy to slow down as
smoothly as possible.
No Impact: the ’98 economic crisis proves that Russia’s economy is resilient.
Beehner 05 — Lionel, Masters degree in International and Public Affairs from Columbia, Council of
Foreign Relations - Council of Foreign Relations, “Is Russia’s Economy Running out of Energy?”, October
28, 2005, http://www.cfr.org/economic-development/russias-economy-running-out-energy/p9119
Russia’s oil exports are up, its currency is strong, and its gross domestic product (GDP) growth has hummed along at a 7 percent clip for the
seventh year in a row, surpassing all other Group of Eight (G8) members. Maybe President Vladimir Putin’s pledge to double Russia’s GDP does
not sound so farfetched. Think again, some economists say. While Russia’s
economy, buoyed by an increase in global demand for oil,
has fully rebounded after the 1998 collapse and ruble devaluation , experts urge caution. Recent growth, like a
Potemkin village, is not what it seems on the surface, due more to skyrocketing world oil prices than to sound macroeconomic policies. Indeed,
Moscow has expanded control over Russia’s main cash-cow: energy. “The Russian oil and gas sector’s new paradigm can be summarized in two
words: ‘state domination,’” Ariel Cohen, a senior research fellow at the Heritage Foundation, wrote in a February 2005 executive
memorandum. “The free-market paradigm has been abandoned.” For example, the government’s October 2003 arrest of Mikhail
Khodorkovsky, formerly Russia’s richest man and head of the country’s second-largest oil company Yukos, sent shockwaves through the market
(In the year after Khodorkovsky’s arrest, capital flight—only $2.9 billion in 2003—soared to $9 billion). Gazprom, the state-controlled gas
behemoth, recently acquired Sibneft, Russia’s fifth-largest oil firm, and now enjoys a near monopoly on the country’s gas production and vast
network of pipelines. Hence, Moscow’s maneuvers have validated charges that Russia’s economy is unhealthily tied to oil, a commodity whose
value fluctuates widely. “In
1998, when world oil prices dipped to around $10 a barrel, this drop coincided
with the worst of Russia’s economic crises and the collapse of the ruble ,” wrote Fiona Hill, a senior
fellow with the Brookings Institution, in a December 2004 article in the Globalist.
Turn: Dutch Disease—Dependence on oil ensures Russian economic instability and
foreign aggression.
Shlapentokh 06 — Vladimir Shlapentokh, professor of sociology at Michigan State University, Oil &
Gas Journal, “HEADLINE: Intoxicated by high oil prices: Political Dutch disease afflicting the Kremlin,”
November 6, 2006, lexis
As suggested by many economists, Dutch
disease--a country's excessive dependence on the export of raw materials--can have
serious economic consequences as a country becomes increasingly dependent on that raw
materials sector. Other branches of the economy, such as manufacturing, often decline because of the
concentration of such resources as oil or gold, as happened in 16th century Spain. A sudden fall in the price of
the raw materials could bring an economic collapse. Seemingly, the Russian leaders, like their
colleagues in Venezuela and Iran, see the world through the prism of oil revenues. It goes without saying
that one of the first victims of the political Dutch disease is democracy. However, an even more
dangerous consequence of the political Dutch disease is the leader's loss of a sober assessment of
reality. Under the impact of their technological achievements, both Stalin and Khrushchev, with
their skewed visions of reality, moved the country closer to a major war. Putin's euphoria over oil prices
may not be as great as his predecessors' enthusiasm, but his aggressiveness in foreign policy in general, and toward the US and Russia's
neighbors in particular, has clearly increased since 2005. The shift occurred in late 2005 when Moscow brandished its gas weapon against
Ukraine and indirectly against Europe. Russia's foreign policy has hardened (despite some cooperative gestures toward the West) and
influenced several international conflicts, including issues surrounding North Korea, Iran, and the Middle East. The conspicuous
demonstrations in July of friendship with Venezuela's Chavez, another political leader inebriated by oil revenues, and the readiness to
sell him weapons despite American protests were clear signals of unfriendliness toward the US. Russian media treated Moscow's
attitudes toward Chavez as an obvious demonstration of disregard toward American concerns. Dmitry Medvedev's proposal to make the
ruble fully convertible in an attempt to renew the currency's international status was another result of the country's oil fever. Medvedev
talked contemptuously about "the financial irresponsibility of the United States," citing the country's growing national deficit. He also
denounced the International Monetary Fund's attempt to promote market reforms, forgetting that only a few years ago Russia had
scrounged for credits from this bank. Oil fever has not infected all Russians. The level of enthusiasm among the general
public and particularly among experts does not match the levels observed after Sputnik and cosmonaut Gagarin were launched into
space, to say nothing of the excitement after the 1945 war victory. Among the most persistent critics of the oil frenzy is Egor Gaidar
who suggested that the leadership's oil delirium and its disregard for the instability of oil prices
were dangerous to the country. Several independent politicians and journalists have seconded
Gaidar's critique of the Kremlin's "hydrocarbon doctrine," demonstrating concern for the "time bomb in our
political system." Concerned about the Kremlin's "muddled vision of the world," some independent minds in Russia, such as
Dmitry Muratov, the editor of Novaya Gazeta, insisted: "The intellect of the government changes inversely with
the price of oil." n6 Leonid Radzikhovsky, a famous liberal journalist, wrote about the inverse correlation between the level of
democracy and the price of oil. What is more, even Vladislav Surkov, until now the Kremlin's leading ideologue challenging Medvedev, in
a struggle for influence over Putin, suggested that, with gas as its only basis, the
Russian economy would inevitably
reveal its fake prosperity in the "post-hydrocarbon era." Russia is not the only country in the world that is obsessed
with oil. Every country, in one way or another, is preoccupied with oil. While the US, Europe, China, and India are concerned about fuel
supply and the adverse influence of high oil prices on the economy and standard of living, several countries, including Russia, have
turned their oil resources into weapons for achieving their domestic and foreign goals. As
the experiences of Stalin and
Khrushchev showed, Russian leaders sometimes overstretch the potential of their advantages
and lose a sober perspective of reality. Mesmerized by his clout, Putin may accept "the invitation"
of the Russians to stay in power after 2008. Today, 51% of the Russians would vote for him if he decided to try for a third
term, which he promised not to do. In the foreign arena, Putin has already shown less willingness to cooperate with the West and the US
in particular. His foreign policy may harden even more. However, it is unlikely that Moscow will demonstrate direct hostility toward the
West in the near future. The post-Soviet space is another story, however. The
idea that oil will allow Russia to take
control over Ukraine, Georgia, and Belorussia is deeply engrained in the minds of Kremlin
politicians. We can expect an exacerbation of the political developments in the post-Soviet space,
which will undoubtedly complicate relations with the West. Aside from the damage to Russia's international
relations, the oil delirium is more problematic to the country's long-term national interests. The over-confidence in oil
revenues may lead to a decline in the spirit of entrepreneurship, to a refusal to modernize
industry, or even to an acceptance of deindustrialization. The obsession with high oil prices
explains why the Kremlin sees few obstacles to the country's continued move toward an
authoritative regime. It also explains the Kremlin's conspicuous disregard for the growing problem of corruption in society. With
the vision of the Russian leadership blurred, it may become increasingly insensitive to various destructive tendencies in the country. The
impact of the price of oil on political decision-making in Russia is crucially important to the world and should be closely monitored.
2AC — Russian Democracy Turn
Low oil prices key to Russian democratic transition — high prices preserve corruption
Krastev 6 — Ivan Krastev, chair of the Centre for Liberal Strategies in Sofia, Bulgaria, executive director
of the International Commission on the Balkans, 6/13/2006, “The energy route to Russia democracy,”
http://www.opendemocracy.net/globalization-institutions_government/democracy_energy_3637.jsp
In an attempt to explain the Russian revolution to Lady Ottoline Morrell, Bertrand Russell once remarked that, appalling though Bolshevik
despotism was, it seemed the right sort of government for Russia: "If you ask yourself how Fyodor Dostoevsky's characters should be governed,
you will understand". In
explaining the recent resurgence of authoritarianism in Russia one does not need to reread
Dostoevsky or draw on the Bolshevik legacy. It is enough to take into account the rise of the price of oil. At least this is
what one might think when reading the new Freedom House study Nations in Transit 2006 (released on 13 June 2006 in Berlin) that
rates the democratic performance in twenty-seven countries in the European Union and its eastern neighbourhood. The study shows that
the skyrocketing of oil prices in the last year has led to deteriorating governance standards,
restrictions on media and the judiciary, and rising corruption in all four energy-rich countries of the
former Soviet Union – Russia, Turkmenistan, Kazakhstan and Azerbaijan. The study is a powerful illustration of Thomas
Friedman's "first law of petropolitics" formulated in Foreign Policy magazine (March/April 2006 [subscription only]). According to
this law "the price of oil and the pace of freedom always move in the opposite direction in oil-rich
petrolist states". It follows that the worst enemy of Russian democracy is not the Kremlin or oligarchs but
the high price of oil. The soaring price of oil has made the energy-rich post-Soviet states more
powerful, less democratic and more corrupt. The oil money that has floated the state budget
dramatically decreases Russian state dependence both on foreign funding and on the taxes collected
from its citizens. Russia's reliance on western credits has turned into Europe's reliance on Russian oil and gas. The result is that Russia
does not want to be lectured any more; she wants to lecture. Now when the Russian government has more
money than it knows how to spend, the Russian government has lost interest in improving the quality
of its governance, and concentrates instead on deciding whom to buy and whom to leave in the cold. More money means larger and
better client networks. But even more important – the high price of oil has given birth to a new state
ideology – oil nationalism. "We, the people" has been transformed into "We, the people who have oil". The country's oil is at the
core of the new Russian state identity. Oil, not history or culture, is at the heart of Russia's claim to great-power status.
It is oil that makes Russians feel powerful, special and privileged. Any criticism of the government is
simply dismissed as an attempt by foreigners to put their hands on Russian oil. A green revolution The
combination of the "orange" fears of the elites and the new price of oil has produced a real regime change in Russia. In less than two decades
Russia has been transformed from a communist one-party state into an oligarchic one-pipeline state. The monopoly of power is now fixed not
in any article of the constitution but in the legislation regulating the use of the energy infrastructure. When at the most recent European UnionRussia summit, at Sochi in May 2006, Gazprom rejected EU demands for Russia to open its pipeline network to access by independent
producers and other countries, this was a declaration of the new Russian philosophy of power. The western response to the rise of Russia as a
non-democratic energy superpower is a mixture of indignation, fear and double-standard politics. The visit in May of the United States vicepresident Dick Cheney in Lithuania is a disturbing illustration of this new reality. Cheney went to Vilnius where he ferociously attacked Russia's
democratic record; the next day he flew to Kazakhstan and praised Nursultan Nazarbayev for stabilising his country. If the American vicepresident reads the democracy ranking in the Nations in Transit 2006 survey he will learn that in Kazakhstan there is even less freedom than in
Russia. But what senior members of the American administration are reading these days is not reports of human-rights organisations but
reports on the US's energy-resource balance. The result is a policy that is at the same time morally appalling and strategically wrong. So, the
"second law of petropolitics" (pace Thomas Friedman) is that the price of oil and the will of democratic
governments to promote democracy in energy-rich states always move in opposite directions. Now, it is
clear that the democratisation of Russia is preconditioned on the fall of the price of gas and oil and
the de-monopolisation of the Russian energy sector. The success of the west in overcoming its oil and
gas dependency and moving towards renewable-energy sources will be the one and only indicator of
the success of Europe's democracy-promotion policies. Talking democracy without fighting high oil
prices does not make sense any longer.
The European Union's democracy-promotion effort will have results only if it is
combined with a common EU energy policy. A coalition composed of old cold warriors, western-funded NGOs and freedom-loving youth is no
longer capable of bringing democracy to Russia; a new, effective coalition needs to be more of an eclectic mixture of environmentalists,
business leaders and innovative scientists. In this context, Vladimir Putin is absolutely right to believe that the only real challenge that he faces
is not from within Russian society but from outside. Where Putin is wrong is in fearing the spectre of an "orange revolution" that could be
exported to Russia. What he should be afraid of is a green revolution in the west. Only
when the price of oil falls in the west
will freedom rise in Russia.
So, if you want to see Russia free and democratic, stop signing anti-Putin petitions and voting for
hardline anti-communists. This will change nothing. What you should do is to turn down the lights when you leave your apartment, sell your
American car and start using public transport. The
fight for democracy today is a fight against the tyrannical price of
oil.
Russian democracy prevents proliferation and US-Russia nuclear conflicts.
McFaul 1 — (Michael McFaul, Peter and Helen Bing Senior Fellow at the Hoover Institution, “Pull
Russia into the West,” Christian Science Monitor, 2001
http://www.csmonitor.com/2001/0726/p11s1.html
Since coming to office, President Bush has made real progress in challenging some of the lingering legacies of the Cold War. He has advanced a
vision of defending U.S. national security interests that is not constrained by Cold War logic and agreements. Mr. Bush’s
new approach
to international security issues has yielded real results—including most notably President Putin’s agreement in
July to rethink Russia’s categorical rejection of missile defense systems . But to end the Cold War totally
will require Bush to advance new thinking on the other major legacy of that era—the divide between
rich and poor, democratic and autocratic, NATO and non-NATO—that still separates Europe into East
and West. This final remnant of the Cold War will disappear only when Russia becomes a democracy,
fully integrated into Western institutions. Unfortunately, the promotion of Russian democracy has taken a
back seat to arms control. In the long run, this is a bad trade for American security interests. Bush is our first truly
post–Cold War president. Before becoming president, even Bill Clinton worried about multiple warheads on Soviet ICBMs, pondered
communist expansion in Asia, and was curious enough about the Soviet Union to travel there. Bush was doing other things during the Cold War.
My guess is that he never met a "Soviet" citizen. Unlike most of his foreign-policy advisers, who made their careers fighting the Cold War,
Bush’s thinking is unencumbered by a past era. For many, this lack of experience is frightening. Yet Bush’s lack of baggage also presents
opportunities. Twelve years after the fall of the Berlin Wall, and 10 years after the Soviet Union broke up, it is striking how many Cold War
practices continue. Tens of thousands of U.S. troops remain in Germany, Pentagon war plans still aim to destroy with nuclear missiles Russian
military plants (many of which are long out of business), and U.S. and Russian heads of state still meet to discuss arms control. "The
best
defense against a hostile Russia in the future? Promoting Russian democracy and integration into the
West now." Bush’s willingness to think beyond the Cold War must be applauded. Already, he has compelled
everyone to rethink the strategic equation between offensive and defensive weapons systems. Although still unwilling to discuss concrete
numbers, Bush
has reiterated his campaign promise to reduce—unilaterally, if necessary—the number of nuclear
warheads in the U.S. arsenal. In agreeing with Putin this past July to link the discussion of these reductions with consultations about
defense systems, Bush has moved closer to convincing the Russians that his plans for missile defense need not threaten their security. But
getting Russian acquiescence on this new equation is the easy part of dismantling Cold War legacies. After all, Presidents Yeltsin and Clinton
agreed years ago that nuclear arsenals should be reduced far below levels agreed to in Start II. And despite all the posturing, Putin and his
security officials don’t really believe that the Anti-Ballistic Missile Treaty is the "cornerstone" of strategic stability between the United States
and Russia. They rightly have calculated that even the most robust U.S. missile defense system will not make nuclear deterrence obsolete. Most
important, Russian government officials know that a U.S. missile defense system is a tool of limited utility in most foreign and security policy
issues. And that’s the problem with Bush’s current policy toward Russia. By focusing almost exclusively on securing Russian acquiescence to
missile defense and U.S. withdrawal from the ABM treaty, Bush
has devoted almost no attention to the most
important issue in U.S.-Russian relations—Russian democracy and Russian integration into the West. If
Russia becomes a full-blown dictatorship in the next 10 years, a U.S. missile defense system will be a rather
useless weapon in the arsenal for dealing with an enemy Russia. If, in this worst-case scenario,
autocratic Russia decides to invade NATO member Latvia, destabilize the Georgian government, or trade
nuclear weapons with Iran, Iraq, or China, our missile defense system will do little to deter these
hostile acts against U.S. national interests. "If Bush can nudge Putin in a more democratic direction, then he will be
remembered as the president who dispelled the last lingering elements of the Cold War." The best defense against these
potential hostile acts is to promote Russian democracy and integration into the West now. If Russia
becomes a full-blown democracy in the next 10 years, then the prospects for conflict between the United States
and Russia, be it over the Latvian border or the balance of nuclear weapons, will be reduced dramatically. A
democratic Russia moving toward entry into the European Union and even NATO will also make possible the unification of Europe and the final
disappearance of East-West walls (be it through visa regimes or military alliances) that still divide Europe.
1AR – Russian Economy Low
Russian economy low now — Ukraine tensions cause capital outflows
Vestrgaard 14 — Jakob Vestrgaard, March 25, 2014, PhD, International Political Economy; MSc,
Economics¶ Senior Researcher, Research Area on Global transformations in finance, migration and aid,
“Russia Reeling: Pushing a Fragile Economy Off the Cliff?” GEG Watch,
http://gegwatch.com/2014/03/25/russia-reeling-is-putin-pushing-a-fragile-economy-off-the-cliff/
Putin’s political ambitions may come at high cost to the Russian economy. Current tensions between
Putin and Western leaders, and the fear of tighter sanctions, are already causing trouble. The Russian
government announced yesterday that it is expecting capital outflows to soar to $70bn in the first
quarter of the year, a fourfold increase in comparison with a total outflow of $63bn last year.¶ ¶ “The
outflows seriously weaken the Russian economy, at a time when foreign direct investment is
collapsing”, notes Wolfgang Münchau. Sanctions are still modest, so it is mainly the fear of tighter
sanctions in the near future – and the potential Russian retaliations – that is currently driving capital
outflows. If sanctions are tightened, to possibly include a block on imports of Russian gas and oil, the
impact on the Russian economy could be devastating.¶ ¶ To realize just how bad things could get, take
into account that by end 2013, the Russian economy was already causing deep concern. Economic
growth was only slightly above 1 % and the IMF raised alarm that considerable “vulnerabilities”
persisted. Russia faces four key problems, all of which will dramatically worsen if sanctions imposed by
US and the EU are further tightened:
1AR — Oil Not Key To Russian Economy
Russia has diversified — makes economy resilient to shocks.
Melik 12 — James Melik, 7/4/2012, Reporter, Business Daily, BBC World Service, “Russia moves to
diversify economy with technology projects,” BBC, http://www.bbc.com/news/business-18622834
Twenty miles west of Moscow, a
new technology race, rather like the space race of the 1960s, is opening up.¶ In the area of farmland,
Russia is trying to build its own version of Silicon Valley - the Skolkovo Innovation Centre.¶ It is part of
the government initiative to divert the country away from its economic dependence on oil and gas and
towards a new kind of industry.¶ It has been a key policy for Dmitry Medvedev, the man who was Russia's president until
he was replaced by Vladimir Putin at the beginning of May 2012. ¶ The Skolkovo project is widely criticised in Russia and construction work has still not started in
earnest more than two years after the proposals was announced. ¶ Another
aim of this proposed technology drive is to keep
clever Russians in the country, along with their money-making ideas, rather than them leaving because
they are fed up with corruption and the weight of bureaucracy. ¶ Cash not credit¶ Many of these technology companies are able to
start up because of funds acquired from venture capitalists.¶ But how do these venture capitalists decide who to back?¶
Continue reading the main story¶ “¶ Start Quote¶ Buying things online, which is a normal thing to do in the West, is just starting here” ¶ Richard Creitzman¶ Fast
Lane Ventures¶ "We
look for proven business models that work abroad and we basically copy them and
bring them to Russia," says Richard Creitzman at Fast Lane Ventures.¶ "We find the ideas, we find the people, we find the funding," he says. ¶ "We
give a management team the opportunity to start up a company, assisted with infrastructure, and let
them try to build that company."¶ The Russian government is promoting technology and internet-based
companies, and Mr Creitzman says the development at Skolkovo is a good example of using state money along with
private funding.¶ The success of such ventures depends on Russians adapting to new ideas.¶ "The use of the internet and e-commerce sites, buying things
online, which is a normal thing to do in the West, is just starting here," Mr Creitzman says. ¶ "People tend not to pay by credit cards, they tend to pay the courier
that delivers the item.¶ Continue reading the main story¶ “¶ Start Quote¶ It's for the good of the state to develop new businesses”¶ Richard Creitzman¶ Fast Lane
Ventures¶ "There is less trust of credit cards, less trust of the goods, so the market isn't as developed here yet as it is in the West."¶ Business as usual¶ Looking
ahead, with the new Vladimir Putin presidency, thoughts turn to what the business climate is going to be in the next few years.¶ "We are not planning for any major
changes," says Mr Creitzman.¶ "Every couple of weeks there is an investment committee that sits down and goes through a range of ideas that are developed by the
management, the shareholders and the business analysts," he says.¶ He maintains that the state has money, especially as the oil price is probably going to remain
good in the medium-term - maybe three to five years.¶ "Skolkovo was created under President Medvedev's presidency. I don't think that is going to change. I think
that will continue to have support because it's for the good of the state to develop new businesses," he says. ¶ Ms Shalimova ¶ Ms Shalimova says she created
Lokata to be a nationwide service¶ Branching out¶ Lokata is a small company taking advantage of the pro-technology climate, which received funding from Fast
Lane Ventures.¶ Zhanna Shalimova, the chief executive, says her company allows people to search for goods and services online in the brochures and catalogues of
retailers and service providers.¶ She has taken the idea from a German company doing the same thing and implemented it in Russia. ¶ "We are very lucky because
we have such really strong shareholders," she says.¶ "We have Fast Lane Ventures, who are specialists in internet start-ups as they know
this industry very well," she says.¶ She concedes Lokata may not be a typical start-up because they have a product that was already developed and tested in
Europe.¶ "But still I think that there are many bureaucratic things in Russia, which makes life not so easy," she says. ¶ However, that does not deter her and she sees
her business growing outside the main cities. ¶ "Internet
connectivity in Russian regions may exceed 85% by 2015. This
makes the regions highly attractive for advertisers," she says.¶ "We created Lokata as a national service that will cover the whole
country."
Oil prices not key to economy — inflation and prevents oil from driving growth
Kelly 11 — writer for Reuters (Lidia, May 19, 2011, “Russia's economy struggles for sustainable
growth” http://in.reuters.com/article/2011/05/18/idINIndia-57105920110518)
Russia's economy is struggling to attain sustainable growth despite the surge in prices for its oil
exports, data showed on Wednesday, pointing to another tough decision on official interest rates later
this month. Industry output grew at its slowest rate in 18 months in April, while producer prices rose
more than forecast and weekly consumer inflation, stuck at 0.1 percent, underlines the conflicting
pressures on the central bank. Pledging to keep full-year inflation below 7.5 percent ahead of
presidential elections in March 2012, the central bank is expected to continue tightening monetary
policy -- but a sluggish economy will complicate its decision-making on how to control prices and
manage rouble appreciation driven by high oil prices. Investors have been scrutinising data for clues on
the central bank's move after the regulator unexpectedly raised all key rates last month, including the
benchmark refinancing rate. The latest data, including Monday's figures showing gross domestic
product growing a weaker than expected 4.1 percent year-on-year despite surging oil prices, suggests
that emerging Europe's largest economy is struggling. " We would have expected that given the high
oil prices something of this would transfer to the real economy , but the big story is inflation, which is
eating into the real income of consumers," said David Oxley, an emerging markets economist at Capital
Economics in London.
Manufacturing and construction key – oil prices don’t increase growth
Kelly 11 — writer for Reuters (Lidia, May 19, 2011, “Russia's economy struggles for sustainable
growth” http://in.reuters.com/article/2011/05/18/idINIndia-57105920110518)
Crude has held above $100 per barrel for a third month in a row -- more than $30 above what had
been initially assumed in the 2011 budget -- ensuring fresh cash inflows into the economy and
propping up Russia's trade and current account surplus. The Economy Ministry said late last month
that it was relying on industry to put the economy onto a sustainable path to 4.2 percent gross
domestic product growth this year. "Manufacturing sectors of the industry will be the drivers of
economic growth in 2011, with growth dynamics of 7.5 percent," the ministry said in a document
describing economic scenarios. But while manufacturing grew 5.3 percent year-on-year in April, it was
down 3.6 percent on the month, Wednesday's data from the Federal Statistics Service showed.
Extraction of raw materials, including oil and gas, was also down on the month, after a period when
rising crude prices encouraged production. "Industry in Russia strongly reacts to changes in external
demand, but high oil prices are not enough any more and from the point of view of internal growth,
expectations about growth in the second quarter come, first of all, from construction ," said Natalya
Orlova, an economist at Alfa-Bank. Construction was one of main drivers of Russia's stellar
performance in the second half of the last decade, before the 2008 crisis brought a halt to virtually all
projects. Oxley at Capital Economics said the upshot is that growth will likely pick up in the second half,
with pre-election spending taking hold and the spike in inflation fading to take some of the pressure
off the central bank.
1AR — Diversification Turn
Reliance on oil guarantees long term political instability and economic collapse — only
diversification solves
Hockenos 6/6 — Paul Hockenos, former editor of the journal Internationale Politik, columnist for AlJazeera, June 6, 2014, Al Jazeera, http://america.aljazeera.com/opinions/2014/6/vladimir-putinrussiachinanaturalgasoilcurseeconomy.html
A cornerstone in Putin’s power play, Russian
oil and gas supplies are essential to a resurgent Russia. Only Saudi Arabia
exports more oil than Russia, which boasts nearly a quarter of the world’s (non-OPEC) oil production. But
Russia’s lopsided dependence on its petroleum revenues (which account for 70 percent of the country’s
annual exports and 52 percent of the federal budget) undermines its political stability in the long run.
Putin’s recapture of the mineral extraction industry from the private sector has hastened the country’s slide
into authoritarianism and state-controlled capitalism.¶ Moreover, given an unstable global market,
Putin’s gambit stakes economic performance on variables beyond Moscow’s control. Unless he takes
radical measures to diversify Russia’s economy in the near future, its bottom will eventually fall out,
facilitating his demise.¶ As witnessed in the Ukraine crisis, the clout Russia packs with its petroleum resources, at
least in the short term, is undeniable. Precipitous price hikes on petroleum exports were used to
discipline the unruly post-Maidan Ukrainian leaders, while Ukraine’s pre-Maidan Russian loyalists were rewarded.
Russia’s leverage reverberatesva far beyond gas-dependent Central Europe. In March, as the United States and
the European Union mulled punitive action against Moscow in the wake of the Crimea annexation, Germany’s reluctance was
difficult to overlook. More than a third of its imported gas comes from Russia. And with Russia’s 30-year, $400
billion gas deal with China signed last month, Putin tried to show the U.S. that it is not the only superpower he can do business with.¶ Spoils of
the Soviet era¶ At home, the Kremlin’s recouping of petroleum riches for the purposes of the state and its elites paved the way for Putin to
remake Yeltsin-era Russia into a centralized, autocratic regime under his control. When Putin first came into office in 2000, the spoils of the
Soviet Union had been divvied up among the oligarchs — understandably provoking the ire of an impoverished population, especially one
weaned on statist, anti-market thinking. Moreover, the constitution allowed the state to reserve ownership over subterranean resources. This
enabled the Kremlin to wrest control of the bulk of gas and oil industry revenues from the privatized oil companies, tycoons such as Mikhail
Khodorkovsky and foreign oil companies.¶ By the mid-2000s, Russia’s oil production was surging, as were prices for petroleum products on the
international market, which laid the basis for economic recovery and stability in Russia. This was a welcome relief from the hardship caused by
the implosion of communism a decade before. Finally, average Russians could buy smartphones and new cars and take vacations abroad. While
Russia’s ascent slowed during the 2008–09 financial crisis, it bounced back quickly, continuing to bolster the middle class, swell state coffers
and enhance Putin’s popularity. This relative economic improvement catapulted the Russian leader into an undisputed position of power as
both president and prime minister. ¶ Yet energy experts argue that Putin’s
solid-looking fortress is built on sand. The
“curse of oil,” a phenomenon in which mineral wealth corrupts autocratic states and often leads to civil strife,
is usually the misfortune of underdeveloped countries. While Russia is not a classic example of such a country, it clearly has many of the
same risks as the “petrostates”: namely, lack of democracy, domestic conflict, stunted reforms, high corruption
and economic disarray.¶ In the past 25 years, Russia’s petrochemical resources have lifted the country
out of the dumps but also brought it crashing down. They also created favorable conditions for Putin to
amass power in an ever more centralized state, silence the opposition and civil society and, as of 2014, assert a claim to great-power
status by annexing a sovereign territory.¶ According to Michael L. Ross, the author of “The Oil Curse,” petroleum-rich states that
rely on extraction of rents from state-owned assets, rather than the tax revenue of their wage earners and
productive sectors, tend to be more authoritarian. Those states, for example, are not beholden to their citizens in terms of
expenditures. Accountability is indefinitely suspended while social services and infrastructure projects are
given or taken away arbitrarily by a paternalistic state.¶ If 2014 is the year that Putin officially revealed his intentions, in
retrospect it might also be viewed as the pinnacle of his power and Russia’s global pretensions. ¶ Moreover, oil-addicted countries
are constantly at the mercy of the world market, which makes long-term planning impossible. Their
economies are extremely sensitive to marginal shifts in supply and demand. In a volatile industry such as
energy, the country’s fate is determined by prices, which can mean boom or bust. The lack of transparency
inherent in petrochemical industry dealings facilitates corruption and conceals incompetence. In 2010, for example, Putin pushed through laws
halting publication of information about the government’s oil and gas businesses, making the records off limits to critics and the media.
High oil profits allow Russia to avoid diversification—this will crush the economy long
term
Tempera 11 — Michele, “Is Russia Diversifying Its Economy or Once More Strengthening Its Already
Strong Sectors?” PECOB, March
From the Soviet period the Russian Federation inherited a rigid industrial structure on which it has built its present-day productive system with
substantial continuity. The strict configuration of the Soviet planned economy has left Russia with few big industrial complexes which were for
the most part less efficient and productive than the western European ones. The
main and driving economic sectors were at the
time, and remain today: energy, weapons manufacturing and steel and aluminium production. The peculiar soviet economic policies
prevented any significant diversification until the early nineties, when a general economic collapse and the loss of the satellite states economies
support led to an arrest in any possible productive development. The far-reaching privatization wave that
occurred after the
fall of communism has partly reshaped these traditional economic divisions, leaving a good slice of the biggest
factories in the hands of the public sector through its state-owned or state controlled enterprises and the holding companies. This change
happened, especially under the Eltsin government tenure, without any effect on the whole productive structure
except for the ownership of some of the more profitable state enterprises. The internal political and financial scenery emerged in this way and
and brought Russia to the new millennium with a roughly tripartite economic structure. The first segment is composed by a number of small
enterprises and activities which suffered huge technological backwardness and isolation from the rest of the country’s economy. The second
segment is made up of an extended public sector which stretches to cover the majority of strategic financial and productive enterprises once
owned by the soviet regime. The control over these strategic economic strong points is exerted through public holding companies or by the
federal government directly. The third economic part, which came to light at the beginning of the new millennium, is constituted by the state
enterprises or some of their branches that the so called “oligarchs” were able to gather at the time of the vast, non-transparent and suspect
post-soviet privatizations. This
situation led to an almost motionless economic structure, where a small number
of primary sectors have been advantaged at the expenses of dynamic, widespread and balanced
economic development. At the same time the majority of Russian human and monetary resources have
been devoted to those sectors, leaving only a minor role to all other activities. From Putin’s rise to power in
1999 onwards, this unbalanced trend has been going on without any interruption and is still evident today. Nevertheless the last eleven years
have seen the rising need to cope with the lack of economic alternatives outside of the above mentioned pillars, that historically have been the
backbone of Russia’s productive system. The necessity to enlarge the economic options has been felt by Moscow as a priority on paper, but it
hasn’t been already addressed successfully. Throughout the ten years of Putin’s hold on power, there have been some efforts to solve the
problem of imbalance between overdeveloped and underdeveloped economic sectors. However, the various attempts to diversify Russian
economy have been, it seems, in vain. It is also possible to affirm that in the same period of time, what could have been considered as a
temporary weakness, caused by the understandable postsoviet financial and institutional difficulties, has become Russia’s permanent structural
feature, keeping the national economy from being helpful to the bulk of the population. In this context the last ten years have seen the funding
of the three key Russian productive sectors (defence, energy and steel) rise until the great majority of the total state investment spending. If we
take into consideration 2010 and the beginning of 2011, we can easily observe that the tendency described above hasn’t changed considerably.
On the contrary, in October 2010, Prime Minister Putin and Energy Minister Shmatko announced at a conference held in gas-rich Siberia that
investments in the gas sector will escalate until 2030 to an amount of approximately 450 billion dollars. The plan hinges on the national gas
monopoly of Gazprom, the state company which is the strategic point on which Russian economic and political powers rely. Moreover the
nuclear energy and oil production output will be augmented through large supplementary investments made by public and private Russian
agencies. The defence sector will have an even larger share of the investments at hand for the future, confirming the past trend. By 2020 the
military spending will reach almost 2% of Russian GDP, with a extensive army and renewal of heavy weapons worth 650 billions dollars up to
the same year. The steel industry is following the same path, mostly for two reasons: the unquenchable Asian demand that keeps alive the
profitability of the production, and the home consumption stirred (directly or indirectly) by state economic activities. These huge investment
plans, focused on the few already-developed economic sectors, will absorb most of the public financial resources in the approaching decades.
It’s a situation that reveals the misleading nature of the declarations and actions taken by the Russian political authorities ahead of an urgent
and widely recognized need to diversify the Russian economy. In fact the necessity and the will to work effectively for the diversification of the
economic structure has been a central issue in the official statements made by Moscow, more than once in the last years. For what concerns
the policies oriented towards this goal, the agreements with the European Union in the spring 2010 whose content went from know how and
technology transfer to bilateral cooperation in research must be underlined. Furthermore a national plan to modernize and upgrade the
productive activities in Russia has been lunched in the fall 2010 with a massive commitment by the government, but which remained largely on
paper. Even though something has been done, the endeavours made by the public authorities have so far fallen apart, generating activities
separated and isolated from the general (and frail) economic net. This outcome has tragically resembled the national outlook depicted by the
three main national sectors inside a weak economy. In addition, it must be noted that technological research and the productive activities
which have flourished in the last years as a consequence of the efforts made by Moscow to encourage innovation and diversification of the
economy, have kept a strong association with the three main national economical sectors. In this way the possible benefits of an enlargement
to the whole economy of dynamic and new activities have remained limited to little circle of industries linked to the main ones. The Special
Economic Zones (SEZs), established in the last decade as a tool to attract investments and start new enterprises on the Russian territory, are to
be considered as another example of failed attempt to enlarge the economic participation of a wider segment of the population. They didn’t
generate the expected effect on the country’s wellness as a whole, only improving artificial arithmetical indexes, sacrificing labour rights and
environmental laws without a real positive outcome for the majority of the people. The same goes for the Foreign Direct Investments in Russia.
They have been mainly directed to the three driving sectors of the national economy, almost without touching other parts of the national
economical structure that are in need of support. While in terms of foreign investments draw the gas and oil industry kept on gaining ground in
the last few years, the rest of economy, especially the small and medium enterprises, lagged behind almost to a standstill. The poor judicial and
institutional accountability, holds investors from risking something in other activities than the ones already developed whose attachment to
state interests assures a sufficient degree of certainty in the mid-term repayment. The strong pledge of Moscow in attracting foreign
investments, emerging in the last decade, has risen simultaneously to a lack of internal autonomous economic action, apart from the three
main sectors and a few others. This circumstance is still present and yet the ineffectiveness of this strategy has not been fully understood and
overturned by political authorities. In fact it prevents the economy from acting autonomously and the political actors from taking the proper
role in shaping a complete, modern and balanced industrial policy. The concentration of the foreign investments in a small number of
productive sectors has caused a mounting vulnerability of the three sectors themselves. As the weight of foreign capitals grew in these
segments of national economy, so did the potential risks involved in a sudden downturn or retirement of investments. It happened in the last
three years with the effects of the international financial crisis. In 2009 foreign direct investments in Russia fell by 13% against 2008, while the
2010 figure was even worse. This sharp and harmful drop was generated by the concentration of foreign capitals in the primary and narrow
part of the national economy. Another problem connected to the missed diversification of Russian economy and thus its polarized and
imbalanced nature, is its exposure to the oscillations of world market trends. This is especially true for the energy sector, which is mainly export
oriented and makes up for the majority of the state monetary resources and reserves. In fact the fluctuation of oil and gas prices is dangerous
for Russia, given the lack of flexibility in its economy, and the prominence of this sector inside the national economic setting. A proof of the
difficulties explained above has been given recently by the 15% fall in gas and oil sales to EU during 2009 and 2010. At the same time the
economic growth is diminished by 8% in 2009. This explains briefly but clearly the damaging effect caused by the low range of productive
options present in the Russian economic structure, especially in times of financial turbulence or market prices variations. Another example is
given by the very high unemployment rate observed in some of the biggest Russian cities which are dominated by an almost single sector
industry. The so called “mono-industrial” cities
represent the tip of the iceberg and the most apparent icon
of the neglected productive diversification in the country. The awful, direct and immediate result on the
population of those cities, in terms of job losses and consequent distress, is a mirror in which Russia
can reflect its larger but similar structural economic problems on a national level. The existence of the three mentioned
sectors in a privileged position inside the Russian economy has favoured the creation of economic, financial and political centres of power. As
receivers of the highest amount of monetary resources and investments from abroad as well as from the
government, those industries have developed a big influence ahead of the other economical players in
the country. Being the backbone of the Russian productive economy, they have precedence over other
issues and are now able to direct reforms so as to avoid any structural reform of the Russian economic
system. The stronger this influence is, the more difficult will be to change the present unfair and polarized
economical pattern. This in turn strengthens the influence held by the three sectors themselves. This condition, as it is easily
understandable, holds very negative implication for the rest of the economy as well as for the economic structure as a whole, and in the end for
the Russian population. At the moment, the
most visible of the detrimental effects is the absence of the
relocation of wealth produced among the society and the harsh inequality which is a trademark of post soviet Russia. In this context, it
is almost impossible for medium and small ventures to prosper and to broaden the economic options
for citizens and government, which is a result of the shortage in public support, political strategic vision and allocation of resources to more
receivers than the accustomed ones. The
energy sector surely plays the biggest role in offering the successive Russian
governments an enormous monetary (also political and electoral) revenue which has discouraged (and still does) the
productive diversification of the economy. The three pillars of Russian economy (energy, weapons and steel) have created the image of
the state abroad as a and have shaped the post-soviet country’s structure both politically and economically. It
seems that this trend
it’s not turning around and that the envisaged change towards diversification has a long way to go
yet. Apart from the consequences already exposed, there are two more reflections to be made. The development of these three sectors is
harming the environment producing goods in an unsustainable way for unsustainable purposes. Hydrocarbons, vast quantities of steel
and heavy weapons are old fashioned products belonging to the “old economy” of the twentieth century, whose
usage will be less and less frequent in the upcoming years (unfortunately apart from the weapons). What’s more, the
production, on an extremely large scale, of heavy weapons has a double moral repercussion. On one side the export of weapons and war
technology in general produces violence in other parts of the world; on the other side the huge defence spending at home is removing (and will
even more so in the near future, given the plan outlined above) essential resources otherwise vital to face many social and economic problems
which badly affect Russia. The three sectors are still gaining ground inside the crisis hit Russian economy, developing rapidly but in a
quantitative way (more steell, more weapons, more gas, more aluminium etc.). Rather than taking into account the need to raise significantly
the quality standards and, most of all, consider other goals for the future of its economy and society, Russia is still
chasing after an
economic model both unsustainable and already out of time.
Failure to diversify from oil exposes Russia to international economic fluctuations
Tempera 11 (Michele, “Is Russia Diversifying Its Economy or Once More Strengthening Its Already
Strong Sectors?” PECOB, March)/
The Special Economic Zones (SEZs), established in the last decade as a tool to attract investments and start new enterprises on the Russian
territory, are to be considered as another example of failed attempt to enlarge the economic participation of a wider segment of the
population. They didn’t generate the expected effect on the country’s wellness as a whole, only improving artificial arithmetical indexes,
sacrificing labour rights and environmental laws without a real positive outcome for the majority of the people. The same goes for the Foreign
Direct Investments in Russia. They have been mainly directed to the three driving sectors of the national economy, almost without touching
other parts of the national economical structure that are in need of support. While in terms of foreign investments draw the gas and oil
industry kept on gaining ground in the last few years, the rest of economy, especially the small and medium enterprises, lagged behind almost
to a standstill. The poor judicial and institutional accountability, holds investors from risking something in other activities than the ones already
developed whose attachment to state interests assures a sufficient degree of certainty in the mid-term repayment. The strong pledge of
Moscow in attracting foreign investments, emerging in the last decade, has risen simultaneously to a lack of internal autonomous economic
action, apart from the three main sectors and a few others. This circumstance is still present and yet the ineffectiveness of this strategy has not
been fully understood and overturned by political authorities. In fact it prevents the economy from acting autonomously and the political actors
from taking the proper role in shaping a complete, modern and balanced industrial policy. The concentration of the foreign investments in a
small number of productive sectors has caused a mounting vulnerability of the three sectors themselves. As the weight of foreign capitals grew
in these segments of national economy, so did the potential risks involved in a sudden downturn or retirement of investments. It happened in
the last three years with the effects of the international financial crisis. In 2009 foreign direct investments in Russia fell by 13% against 2008,
while the 2010 figure was even worse. This sharp and harmful drop was generated by the concentration of foreign capitals in the primary and
narrow part of the national economy. Another
problem connected to the missed diversification of Russian
economy and thus its polarized and imbalanced nature, is its exposure to the oscillations of world
market trends. This is especially true for the energy sector, which is mainly export oriented and makes
up for the majority of the state monetary resources and reserves. In fact the fluctuation of oil and gas
prices is dangerous for Russia, given the lack of flexibility in its economy, and the prominence of this
sector inside the national economic setting. A proof of the difficulties explained above has been given recently by
the 15% fall in gas and oil sales to EU during 2009 and 2010. At the same time the economic growth is
diminished by 8% in 2009. This explains briefly but clearly the damaging effect caused by the low range of productive options present
in the Russian economic structure, especially in times of financial turbulence or market prices variations.
High oil prices undercut Russian economic diversification
Ria Novosti 12 (“Unrest in Libya hurts Russian economic diversification, analysts say,” 3/14,
http://en.rian.ru/business/20110314/162994533.html)
Efforts of Russia, one of the world's largest crude producers, to increase the share of its non-energy economy has
been nipped in the bud by higher oil prices following the unrest in Libya, a significant oil supplier to the
international market, analysts say. Unrest in Libya, a member of the Organization of Petroleum Exporting Countries (OPEC) and the world's 12th
largest crude exporter, propelled oil prices to $130 per barrel, the highest in the last two and a half years. This might seem a boon for Russia,
where energy revenue accounts for 65% of the budget revenue, but analysts
say it deprives the economy of incentive to
diversify with the bulk of investment coming into the highly profitable energy sector. "High oil prices
push us back to ... the pre-crisis development model in the medium-term prospect," Alexei Devyatov, an
Uralsib bank analyst, said. "The economy starts focusing on the raw materials sector, while other industry
growth will slow down." In 2010, as oil prices eased, Russia's processing industry expanded 11.8% compared with a 3.6% growth of the
mining industry, statistics show. Windfall oil revenues flowing into the country put the central bank at the crossroads whether it should target
inflation, like central banks in developed states, or curb the strength of the ruble. The central bank started changing its policy to target inflation,
one of the Kremlin's everlasting woes, last fall, when it widened the floating corridor of its currency basket, consisting of dollars and euros, and
cut the volume of its monthly interventions. But more petrodollars hunting for the ruble make the national currency more expensive which
translates into less competitive Russian exports, primarily in oil. "Rising oil prices change central bank's policy. It is returning to its previous
policy," Devyatov said. But easing the ruble means switching on the printing press and fueling inflation. "If oil prices are high, it is difficult for
the central bank to fight inflation which is considerablly flat now. It is difficult to prevent inflation from growing when producers' costs are rising
and capital, which correlates with the oil price, is coming in," Alexandra Evtifyeva from VTB Capital said. But in the short-term, Russia will
benefit from soaring oil prices which will help it replenish state coffers. "We have a chance to balance our deficit-ridden budget thanks to the
oil prices," Investcafe analyst Dmitry Adamidov said. A strong inflow of liquidity will also help replenish the country's Reserve Fund, set up to
cushion the federal budget against a fall in oil prices, which was battered considerably by the international financial crisis.
High oil prices create inflation and the devaluation of non-oil sectors of the economy –
low oil prices lead to growth
Bernstam and Rabushka 1—Michael S. Bernstam, a research fellow at the Hoover Institution, Stanford
University, is an economic demographer who studies economic systems in their relationship with
income, population, financial development, natural resources, the environment, conflict, and other
social change AND Alvin Rabushka is the David and Joan Traitel Senior Fellow at the Hoover Institution
(“The Dutch Disease: Peter the Great's Real Legacy?”, July 2, 2001,
http://www.hoover.org/research/projects-and-programs/russian-economy/6020)
the Russian government stated that it would soon introduce legislation to reduce the
obligatory selling of foreign currency proceeds by exporters to the Central Bank from 75 to 50 percent. This
measure, as we have discussed in detail with statistical evidence on this site ("The Secret of Russian Economic Growth: Testing an Old Hypothesis with New Data" and "Can More Liberal Subsidies Spur Growth and
Reduce Inflation?"), threatens economic growth and fiscal solvency .
On June 29, 2001,
Russia is abuzz with talk of the Dutch disease. The current conventional wisdom as summarized in a June 20, 2001, Wall Street Journal article entitled "Russia's
Strong Ruble Damps Hopes for Extended Growth" is that high commodities prices are causing an economic slowdown, threatening Russia's recovery. This view holds that high oil prices, although
the source of recent growth and strong profits in the oil sector, are causing inflation and real ruble
appreciation that will strangle the growth of non-oil industries for years to come. There is a related, though somewhat
Nevertheless,
contradictory, fear that profits in the oil sector (and equity prices) will decline if world prices fall while domestic production costs rise.
High oil prices are credited with Russia's strong 8.3% growth in 2000, the highest rate in more than 30 years. Every dollar rise in Russia's oil is said to contribute 0.4% to GDP. Energy and metals constitute 80% of exports and the
bulk of the domestic equity market. The prevailing view in Russia is that devaluation of the ruble after August 1998 played an important role in recent growth by increasing domestic demand, as Russian consumers switched to
cheaper domestic goods.
the conversion of large foreign currency earnings into rubles, which are sold to the
Central Bank under its 75% repatriation rule, leads to increasing the monetary base, thereby inflation.
Since Russia's inflation exceeds that of its trading partners, the ruble is appreciating in real terms,
which reduces the competitiveness of non-commodities producers.
Subscribers to the Dutch disease argue that
Real ruble appreciation is thus presumably causing a slowdown in growth (currently running at 5.4%) say those in the Dutch disease
school of thought. With annual inflation running at 15-20% this year, the ruble will appreciate as much as 15% in real terms. This ruble
appreciation must be curtailed to restore higher growth.
What's the policy answer to this conundrum?
If high oil prices are the cause of ruble appreciation, economic slowdown, and
the Dutch disease, which crowds out the development of non-oil production, then lower oil prices are
the cure. Less foreign earnings from oil exports would reduce the rise in the domestic money supply, slow
inflation, ease or halt ruble appreciation, thus stimulating growth in non-oil industries. If so, the Russian government
should simply instruct the country's oil exporters to sell oil at a lower price. Less foreign currency earnings would increase Russian
On the above argument, the answer seems clear.
growth. It would also curry favor with Western countries by reducing their oil import bills. Who knows? Perhaps Western Europe and the United States would buy manufactured Russian goods out of gratitude. Or write off some
portion of Russian debt. Actually price-for-debt might be negotiated. There is probably no single gesture that would earn Putin more thanks in the West, and kudos from economists and bankers, than a decision to cut oil prices.
It would be a small price to pay if lower oil prices reduce profits and equity values of energy firms
since the presumed benefit would be the promise of higher future economic growth. Sacrificing current growth
from high oil earnings appears to be a price worth paying to encourage an increase in domestic nonoil output and the promise of higher future growth from a weaker ruble.
1AR — Dutch Disease
High oil prices cause Russian imperialism
Khrushcheva 08 (Nina L. Khrushcheva is an associate professor of international affairs at the New
School, “The Russians are Coming,” Chronicle of Higher Education, 9-5, Lexis)
Russia's resurgence is largely the result of international economic conditions, in particular the world's energy crisis. As
long as the price of oil remains high, Putin will be able to promote an image of Russia -- one of the world's main
energy suppliers -- as a divinely ordained nation, destined to withstand the decay and destruction of the West. Judging
by Russia's recent incursion into Georgia, that is more than just a slogan. Putin is proudly uninterested
in Western criticism, which has earned him broad popular support at home. He believes that Russia's quick show of force
has taught a lesson to the United States, Georgia, and all of the former Soviet satellites seeking closer
ties with the West. His popularity will allow him to go on to make the case that Tbilisi, Sevastopol, and
Tallinn belong to Russia and -- if necessary -- should be taken by force.
High oil prices hurts relations with Russia and causes Russian expansionism – history
proves
Applebaum 11—Masters in IR from the London School of Economics, BA from Yale (Anne, The
Washington Post, “When oil prices rise, Russia has freedom over a barrel”, Tuesday, January 4, 2011,
http://www.washingtonpost.com/wp-dyn/content/article/2011/01/03/AR2011010304070.html)
Why the change of tone? Why now? Many complex theories have been hatched to explain it. This being Russia, none can be proved. But perhaps the explanation is very simple: Oil is once again above $90 a barrel - and the price is
if one were to plot the rise and fall of Soviet and Russian foreign and
domestic reforms over the past 40 years on a graph, it would match the fall and rise of the
international oil price (for which domestic crude oil prices are a reasonable proxy) with astonishing precision.
rising. And if that's the reason, it's nothing new. In fact,
In the 1970s, oil prices began to rise significantly, along with the then-Soviet
Union's resistance to change. The previous decade (with oil prices at $2 or $3 a barrel, not adjusted for inflation) had been one of flux and experimentation. But after OPEC pushed prices up in
the 1970s, oil revenue poured in - and the Soviet Union entered a period of internal "stagnation" and external aggression.
Soviet leader Leonid Brezhnev invested heavily in the military , halted internal reforms and in 1979 (when oil was at $25 a barrel) - invaded
Afghanistan.
To see what I mean, begin at the beginning:
Andropov, who had the good fortune to run the Soviet Union when oil prices were still
high (at his death, in 1984, they averaged $28 a barrel). Andropov could thus afford both an internal crackdown on dissidents and a
continued tense relationship with the West. But Andropov was followed by Mikhail Gorbachev, who took over just as prices
plunged. In 1986 (with oil down to $14 a barrel), he launched his reform programs, perestroika and glasnost. By 1989 (when oil was still only at $18) he allowed the Berlin Wall to
Brezhnev was eventually followed by Yuri
fall, freed Central Europe and ended the Cold War.
Prices fluctuated, but they did not really rise again in the 1990s (plunging as low as $11 in 1998), the years when Boris Yeltsin was still
trying to be best friends with Bill Clinton, the Russian media were relatively free and there was still talk, at least, of major economic reforms. But in 1999
(when oil prices rose to $16 a barrel), Yeltsin's prime minister, Vladimir Putin, launched the second Chechen war, the West
bombed Belgrade, and the mood in Russia turned distinctly anti-Western once again.
Putin took over as president in 2000, at the start of a long and seemingly inexorable rise in oil prices. Indeed,
Gorbachev's calls for internal reform were long forgotten by 2003 (when oil prices were creeping up to $27 a barrel). The days when Yeltsin pushed for Russia to join Western
institutions were a distant memory by 2008, when Russia invaded Georgia (and oil was at $91 a barrel).
The fortunate
High oil prices allow Russia to challenge US hegemony
Bennett 12 – graduate U Chicago and Emory School of Law ( John T. “Oil Prices Fueling Russia's
Disruption of U.S. Foreign Policy” April 04, 2012 http://www.usnews.com/news/articles/2012/04/03/oilprices-fueling-russias-disruption-of-us-foreign-policy)
Russia's burgeoning oil and natural gas exports are underwriting Russian efforts to regain status as a
world superpower Russia, once an old foe, is again proving to be a major obstacle for America's foreign
interests, and will continue to be a thorn in the country's side as long as oil prices remain high. Russian
leaders have the Obama administration's efforts to pressure Iran into giving up its nuclear weapons
ambitions difficult at every turn. Moscow has also joined China in rejecting a U.N. measure that would
strike a diplomatic blow to Syrian president Bashir al-Assad, frustrating White House officials. The White House will also likely
seek new, harsh sanctions against North Korea if it launches a long-range rocket that could one day be
fitted with a nuclear weapon capable of hitting U.S. turf. But experts say again that Moscow--along with support from
Beijing-- will likely stand in the say. [See pictures of the violence in Syria.] Russia's return to the fore as a check against
America's global whims has escalated in recent months, as Russian Prime Minister Vladimir Putin was elected as President, and is
setting his agenda for a third term. U.S.-Russian relations returned to the front pages last week after Obama urged outgoing Russian President Dmitry Medvedev to
"give me space" on several issues, including a European missile defense shield that Moscow opposes. Likely GOP presidential nominee Mitt Romney soon after
called Russia America's "top geopolitical enemy." "Putin
still aspires for Russia to be a superpower," says Steven Pifer, a former U.S.
ambassador to Ukraine. "There are only two ways for Russia to achieve that: nuclear weapons, and oil and natural gas
sales." The price of a barrel of oil was nearly $105 at midday Tuesday, steadily climbing from a 52-week low of $76.35 per barrel in October. Oil prices began to rise
in late 2010, peaking at $113 per barrel in May 2011, before dipping last summer and then rising again. [Whose Russia Comment Was More Damaging: Obama's or
Romney's?] Russia is the world's second-largest oil exporter at 5 million barrels a day, and its the ninth-leading natural gas exporter at 38.2 billion cubic meters a
year, according to the CIA World Factbook. Russia rakes in nearly $500 billion annually in exports, with the CIA listing petroleum and natural gas as its top two
commodities. Frances Burwell, vice president of the Atlantic Council, says Russia's oil
revenues "give it a comfort zone" from which
its leaders feel they have the global cache to make things tough for Washington. Burwell says she "places more
weight" for Russia's recent global muscularity on "Putin's re-emergence." The Russian once-and-soon-again president "clearly sees playing the national card as the
strong guy internationally benefits him," she says. But, make no mistake, bloated
underwrite Putin's muscle-flexing, experts say.
national coffers from high oil and gas prices
Diversification Inevitable
Diversification is inevitable – Russia will import key technologies and business models
from the west.
Blau 10 — John Blau 6/30/2010, reporter for DW, German national broadcasting network, “Russia
looks westward for help with high-tech diversification,” DWhttp://www.dw.de/russia-looks-westwardfor-help-with-high-tech-diversification/a-5742646
After more than a decade of relative freedom, Russia's
economy is dependent on the energy sector. Now leaders in
Moscow want to build up a high-tech industry– with help from the West.¶ Graphic depicting a microchip¶ Russia hopes to
race ahead toward high-tech diversification¶ Hit by the global financial crisis that led to a sharp fall in trade, Russia has embarked on
a campaign to develop its economy away from being simply an exporter of primary commodities, such
as oil and gas. President Dmitri Medvedev is staking much of his economic vision on creating a globally competitive high-tech industry.¶
Part of Moscow's plan is to buy into or even acquire key companies located in technologically
advanced, competitive markets such as Germany and France.¶ Infineon speculation¶ Russia's growing
appetite for technology companies is the likely cause of renewed speculation about Russian financial
holding company Sistema acquiring a stake in German chipmaker Infineon.¶ The Russian government, Financial
Times Deutschland reported without citing sources, has called on Berlin to let Sistema take a 29-percent stake in Infineon. According to the
report, both Medvedev and Prime Minister Vladimir Putin insisted on the plan in talks with German Chancellor Angela Merkel.¶ Infineon chip¶
Infineon is on Russia's high-tech acquisition radar¶ Sistema has declined to comment, and Infineon is providing little information. A
spokesperson told Deutsche Welle the chipmaker "is not currently holding talks" with the Russian company, declining to comment on whether
the two firms or the leaders of their countries have negotiated in the past. ¶ In December 2009, Sistema confirmed talks about becoming a
partner in a possible investment in Infineon by the Russian state.¶ Munich-based Infineon already has some operations in the Zelenograd region
near Moscow, where Russia's largest semiconductor companies, Mikron and Angstrem, operate facilities.¶ Already a big user of German
technology¶ Angstrem is already a big user of technology from Germany; the manufacturer, for instance, hired M+W Zander in Stuttgart to
build a new chip factory and also took over a production line operated by Advanced Micro Devices (AMD) in Germany.¶ Another key
component of Medvedev's high-tech diversification plan is to create a Russian equivalent of Silicon Valley. The
Russian president,
who this month toured California's high-tech mecca, intends to build a technology center called
Skolkovo outside of Moscow. He hopes talented and entrepreneurial Russians, if given sufficient
funding and scientific freedom, will hatch lucrative inventions to help break the country's dependence
on gas and oil.¶ Russian President Dmitry Medvedev and German Chancellor Angela Merkel¶ Merkel and Medvedev are reportedly talking
about a Russia-Infineon hookup¶ It's not as if Russia needs to start from scratch, though. The country has long been a leader in aviation and
space technology, where, with the help of advanced microelectronics technology and expertise, it hopes to become a force again. Russia was
also at the cutting edge of photovoltaics until the government ceased funding 15 years ago.¶ What's
necessary now, most
experts agree, is a change of focus.¶ 'Doctoring with intellectual property rights'¶ "Russia clearly needs to
diversify its economy," Fredrik Erixon, director of the European Centre for International Political Economy in
Brussels, told Deutsche Welle. "But it's not so much a question of whether it will diversify but how."¶
Erixon pointed to earlier attempts by Russia to build its own high-tech industry. The attempts failed,
he said, for a number of reasons, including a lack of sufficient funding, isolating local companies from
foreign competition and, in particular, "doctoring with intellectual property rights."¶ He also cited a lack of
transparency in Russian business as another issue the country will need to overcome in order to build a sustainable high-tech industry.¶
"Russian companies don't have the corporate governance regulations their counterparts in the West have," Erixon said. "So it can be very
difficult to know who's always behind a company, whether it's the government or some other group."¶ Reciprocity is better¶ Alexander Rahr,
an expert on Russia at the German Council for Foreign Relations in Berlin, believes that while a
need for transparency is
"correct," he argues that reciprocity, at this point in Russia's economic development, is better. ¶ "Just 20
years ago, private ownership in Russia was forbidden," Rahr told Deutsche Welle, adding that "time is still needed" for Russia to establish the
level of transparency expected by western companies.¶ What's
important now, he said, is for Russian companies to be
able to buy into western companies and vice versa. "Access to each other's market needs to be the
same," Rahr said. "This still requires some political effort."
Middle East Oil DA
Neg
1NC — Low Oil Prices Cause Saudi Instability
Low oil prices lead to civil unrest in Saudi Arabia
Hargreaves 13 — Steve Hargreaves, 7/18/13, Staff Reporter for CNN, “Falling oil prices could spark
global turmoil”, CNN, http://money.cnn.com/2013/07/18/news/economy/opec-oil/
But if oil prices fall over the next few years, as some analysts predict, the effects won't be all roses.
OPEC (The Organization of the Petroleum Exporting Countries), for example, could be on the losing
end. And that could lead to unrest in countries around the world. Oil producing nations in the Middle
East and elsewhere have used bulging oil revenues of the last few years to placate their people. No
place is this more true than Saudi Arabia, which has subsidized housing, health care, gasoline and a
host of other things to the tune of hundreds of billions of dollars since the Arab Spring protests began
in 2010. As a result, Saudi Arabia now needs oil prices close to $100 a barrel just to balance its budget.
If oil prices fall, it may have to cut social spending. In a country that's been a reliable oil exporter to the
global market for over half a century, yet has both a restless segment clamoring for reform as well as
extremists in the ranks, the repercussions could extend well beyond OPEC. "It's not in the U.S. interest
to have a more unstable Middle East, even if we are importing no oil from that region," said Meghan
O'Sullivan, a professor at Harvard's John F. Kennedy School of Government who specializes in Mideast
petro-politics. "Or Russia either," she added, referring to the world's second largest oil exporter. OPEC
in a bind: Thanks to an energy boom in United States, Canada and elsewhere, plus a slowing of Chinese
demand as that economy matures and shifts to less energy-intensive industries, demand for OPEC oil
may fall by a million barrels a day over the next three years, according to the latest projections from
the International Energy Agency. Coupled with rising oil consumption at home and a projected fall in oil
prices, OPEC nations could see a 30% cut in revenue by 2018, according to Trevor Houser, an analyst at
the Rhodium Group.
1NC — Low Prices Hurt Middle East Stability
High Oil Prices key to Middle East stability
Hargreaves 13 — Steve Hargreaves, reporter for CNN, 7/18/13, CNN Money, “Falling oil prices could
spark global turmoil” http://money.cnn.com/2013/07/18/news/economy/opec-oil/
As a result, Saudi Arabia now needs oil prices close to $100 a barrel just to balance its budget. If oil
prices fall, it may have to cut social spending. In a country that's been a reliable oil exporter to the
global market for over half a century, yet has both a restless segment clamoring for reform as well as
extremists in the ranks, the repercussions could extend well beyond OPEC. It's not in the U.S. interest
to have a more unstable Middle East, even if we are importing no oil from that region ," said Meghan
O'Sullivan, a professor at Harvard's John F. Kennedy School of Government who specializes in Mideast
petro-politics. "Or Russia either," she added, referring to the world's second largest oil exporter. OPEC in
a bind: Thanks to an energy boom in United States, Canada and elsewhere, plus a slowing of Chinese
demand as that economy matures and shifts to less energy-intensive industries, demand for OPEC oil
may fall by a million barrels a day over the next three years, according to the latest projections from the
International Energy Agency. Coupled with rising oil consumption at home and a projected fall in oil
prices, OPEC nations could see a 30% cut in revenue by 2018, according to Trevor Houser, an analyst at
the Rhodium Group.
1NC — Low Prices Hurt Middle East Economies
Low prices devastate Middle East economies
Al Khatteb 3/19 — Luay Al Khatteb, founder and director of Iraq Energy institute, 3/19/14,
Huffington Post, “Why World Oil Prices Should Be High and Stable”
http://www.huffingtonpost.com/luay-al-khatteeb/why-world-oil-prices-shou_b_4992593.html
Despite the low cost of Middle East oil production, only a few of the region's smaller states could cope
with an extended price drop below $100. Most need an oil price of $90 or greater to cover current
government spending, with the IMF forecasting fiscal deficits in nearly all of the region's oil-exporters
by 2015 in the event of a major price drop. Even at $100 per barrel, public spending is expected to slow
down in the region. These countries have grown dependent on their high oil rents, spending huge sums
on unrealistic energy subsidies to domestic consumers and failing to invest in future generations. Even
Iraq, despite experiencing the region's largest spike in domestic production, is running up an evermounting deficit as government spending outstrips expanded revenues. Last year's budget reached
$119 billion, a whopping six-fold increase on 2004 spending levels, while the government is expected to
spend upwards of $150 billion this year. While oil production in Iraq is at its highest level in decades (3.5
million barrels a day in February, with some 2.8 million destined for export ), increased revenues are
entirely dependent on high oil prices. Any drop in prices means that Iraq's deficit - perpetually hovering
at around 17% would spiral out of control. Worse, operating costs for Iraq's oil industry are rising faster
than its oil income, leaving fewer and fewer funds for capital investment, desperately needed for true
economic development.
2NC/1NR — Low Prices Hurt Middle East Economies
Low Oil Prices Kill OPEC Economies
Tatlow 98 — Didi Kirsten Tatlow, reporter at Moscow Times, 11/24/1998, The Moscow Times,
http://www.themoscowtimes.com/news/article/opec-ministers-gather-to-discuss-low-oilprices/282894.html
While low prices are good news for consumers, many OPEC states are facing potentially serious
situations back home. In Saudi Arabia, where oil provides over 70 percent of the national income,
economic growth this year will drop to a negligible 0.3 percent compared to 7 percent in 1997, a
banking and ratings agency said Saturday. "For every one dollar fall in the oil price, it is estimated that
the country loses in the vicinity of $2.5 billion in budget revenues," Cyprus-based Capital Intelligence
said in a report. With average prices falling from $18 in 1997 to around $12, Saudi Arabia can expect
just $26 billion in oil export revenues, 24 percent below budget, the agency said. Kuwait's state-run
news agency said last week it expected oil revenue for 1998 to be 45 percent lower than last year.
2NC/1NR
Saudi Arabia is completely dependent on oil revenues — social services and
employment
Luft 13 — Gal Luft, Senior adviser to the United States Energy Security Council and co-author of
"Petropoly: The Collapse of America's Energy Security Paradigm, “American oil boom is bad news for
Saudi Arabia”, Newsday, 5/28/2013, http://www.newsday.com/opinion/oped/american-oil-boom-isbad-news-for-saudi-arabia-gal-luft-1.5355333
With no revenues from personal income tax and 40 percent of its 28 million citizens under the age of
15 - not to mention a male population that is mostly employed in the bloated public sector - Saudi
Arabia is heavily dependent on oil revenues to provide cradle-to-grave social services to its people.
And the financial liability has only gotten heavier since the Arab Spring forced the regime to fight
public discontent with ever more gifts and subsidies. To make things worse, Saudi Arabia is the world's
sixth - sixth! - largest oil-consuming country, guzzling more crude than major industrialized countries such
as Germany, South Korea, and Canada. With so much of its oil consumed at home, the kingdom has only 7
mbd to export - even as government expenditures are on the rise.¶
Saudi Arabia requires high prices to maintain its economy
Luft 13 — Gal Luft, Senior adviser to the United States Energy Security Council and co-author of
"Petropoly: The Collapse of America's Energy Security Paradigm, “American oil boom is bad news for
Saudi Arabia”, Newsday, 5/28/2013, http://www.newsday.com/opinion/oped/american-oil-boom-isbad-news-for-saudi-arabia-gal-luft-1.5355333
All this is to say that in order for Saudi Arabia to guarantee its economic viability, it must ensure that
the break-even price of oil - the price per barrel it needs to balance its budget - matches the country's
fiscal needs. This break-even price - the "reasonable price" or, as the Saudi Arabian euphemism has it,
the "fair price" - has risen sharply in recent years. "In 1997, I thought 20 dollars was reasonable. In
2006, I thought 27 dollars was reasonable," Naimi explained in March. "Now, it is around $100 . . . and I
say again 'it is reasonable.'"¶ According to the Arab Petroleum Investments Corporation, the break-even
price is currently $94 per barrel, less than the current spot price for Brent crude. (Iran needs oil to be at
$125 per barrel to break even, which explains the feud between Iran and Saudi Arabia within OPEC.) But
absent deep political reforms that create new sources of income, the break-even price will surely grow.
According to Riyadh-based Jadwa Investment, one of the world's most important knowledge bases on
Saudi Arabia's economy, by 2020 the break-even price will reach $118 per barrel. At this point, the
Saudi Arabia Monetary Agency's cash reserves will begin to drain rapidly and the break-even price will
soar to $175 a barrel by 2025 and to over $300 by 2030. And this cuts to the heart of the dilemma: To
balance its budget in the future, Saudi Arabia will need to either drill more barrels and sell them for
lower prices or drill fewer barrels - actively reducing global supply - and sell each at a higher price.
Saudi Backstopping
Saudi perception of demand reduction will cause them to release spare capacity —
crashing prices and forcing out alternative energies for decades
Meyer and Swartz 8 — Gregory Meyer and Spencer Swartz, Adjunct Professor @ University of
Phoenix + staff writer for the Wall Street Journal, 5/5/2008, “ENERGY MATTERS: Saudi Fears Of High Oil
Prices Fade With Demand,” now available at http://snuffysmithsblog.blogspot.com/2008/05/saudifears-of-high-oil-prices-fade.html)
Saudi Arabia's role in the global oil market has sometimes been likened to the Federal Reserve,
calibrating its output depending on market signals. Critical to this unique standing has been Saudi
maintenance of a cushion of "spare capacity," now estimated at about two million barrels a day. For
much of the recent period, the kingdom has refrained from tapping into all or most of its spare
capacity. Within oil industry circles in places like Houston, the Saudi power has also carried a somewhat
ominous connotation. Faced with growing production from the U.K., Mexico and other non-OPEC
countries in the mid-1980s, Saudi Arabia flooded the market in an effort to drive out high-cost
production and reassert its dominant market share. The 1986 oil price crash ushered in more than 15
years of mostly-lower crude prices, instilling a memory of economic hardship on the western oil industry
that continues to be reflected in Big Oil's caution during these heady times. The shift to lower
petroleum prices also impeded the development of renewable energy for about two decades . In his
book, The Prize, Daniel Yergin compared the Saudi tactic in the 1980s to power plays by John Rockefeller
and other heavyweights in the history of oil who have used a "good sweating" to drive out competitors.
"No one is worrying about over-supply," Yergin said in an interview. Instead, the market is preoccupied
with meeting growth in China, India and other fast-developing economies. "What (the Saudis) have
discovered is that the tolerance level in consumers is higher than they thought," said Thomas
Lippman, an adjunct scholar at the Middle East Institute, a Washington research institute. Given the
specter of higher demand in Asia and the increased cost of bringing on new oil production, many
analysts believe the long-term price of oil is in the $45-$60 a barrel range. Recent comments by Naimi
suggest the Saudi official sees an even higher floor than that. "A line has been drawn now below which
prices will not fall," Naimi said in March in an interview with PetroStrategies, a French energy
publication. Citing the marginal costs of biofuels and Canadian tar-sands, Naimi defined the floor as
"probably between $60 or $70." Naimi in April said Saudi Arabia was putting off a plan to expand oil
capacity beyond 12.5 million barrels because of concerns about demand growth. "Unless we see really
genuine demand, we have to pause right now and see what happens," Naimi told Petroleum Argus.
Some energy analysts say the Saudi move suggested a more sober outlook on oil prices. "If they see a
lot of risk on the demand side then you could see very low prices and potentially a lot of underutilized
capacity down the road," said Ken Medlock, a fellow at Rice's Baker Institute.
Efforts to increase oil supply or reduce demand will cause Saudi-led OPEC to engineer
a price crash
Morse 2 — Edward Morse, former Deputy Assistant Secretary of State for International Energy Policy,
Foreign Affairs, March/April, ebsco, http://www.foreignaffairs.com/articles/57803/edward-l-morse-andjames-richard/the-battle-for-energy-dominance)
A simple fact explains this conclusion: 63 percent of the world's proven oil reserves are in the Middle East, 25 percent (or 261 billion barrels) in
Saudi Arabia alone. As the largest single resource holder, Saudi Arabia has a unique petroleum policy that is designed to maximize the benefit of
Saudi Arabia's goal is to assure that oil's role in the international
economy is maintained as long as possible. Hence Saudi policy has always denounced efforts by
industrialized countries to wean themselves from oil dependence, whether through tax policy or regulation. Saudi
holding so much of the world's oil supply.
strategy focuses on three different political arenas. The first involves the ties between the Saudi kingdom and other OPEC countries. The second
concerns Riyadh's relationship with the non-OPEC producers: Mexico, Norway, and now Russia. Finally, there is Saudi Arabia's link to the major
Given the size of the Saudi oil sector, the
kingdom has a unique and critical role in setting world oil prices. Since its overriding objectives are
maximizing revenues generated from oil exports and extending the life of its petroleum reserves,
Riyadh aims to keep prices high as long as possible. But the price cannot be so high that it stifles demand or
encourages other competitive sources of supply. Nor can it be so low that the kingdom cannot achieve minimum revenue
targets. The critical balancing act of Saudi foreign policy, therefore, is to maintain oil prices within a
reasonable price band. Stopping oil prices from falling below the minimum level requires cooperation from other OPEC countries and
oil-importing regions -- most importantly North America, but also Europe and Asia.
occasionally from non-OPEC producers. Preventing oil prices from rising too high requires keeping enough spare production capacity to use in
an emergency. This latter feature is the signal characteristic of Saudi policy. The kingdom can afford to maintain this spare capacity because of
the abundance of its oil reserves and the comparatively low cost of developing and producing its reserve base. In today's soft market, in which
Saudi Arabia produces around 7.4 mbd, the kingdom has close to 3 mbd of spare capacity. Its spare capacity is usually
ample enough to entirely displace the production of another large oil-exporting country if supply is disrupted or a producer tries to reduce
output to increase prices. Not only does this spare capacity help the kingdom keep prices in check, but it also serves to link Riyadh with the
United States and other key oil-importing countries. It
is a blunt instrument that makes policymakers elsewhere
beholden to Riyadh for energy security. This spare capacity is greater than the total exports of all other oil-exporting countries -- except
Russia. Saudi spare capacity is the energy equivalent of nuclear weapons, a powerful deterrent against
those who try to challenge Saudi leadership and Saudi goals. It is also the centerpiece of the U.S.-Saudi relationship. The
United States relies on that capacity as the cornerstone of its oil policy. That arrangement was fine as long as U.S. protection meant Riyadh
would not "blackmail" Washington -- an assumption that is more difficult to accept after September 11. Saudi
Arabia's OPEC
partners must also cooperate with the kingdom in part to prevent Riyadh from producing a glut and
having prices collapse; spare capacity also serves to pressure key non-OPEC producers to cooperate with Saudi Arabia when
necessary. But unlike the nuclear deterrent, the Saudi weapon is actively used when required. The kingdom has
periodically (and brutally) demonstrated that it can use its spare capacity to destroy exports from
countries challenging its market share. This tactic is the weapon that Saudi Arabia could use if Moscow ignores Riyadh's requests
for cooperation.
Saudi Arabia will oversupply the market if threatened by alternative energy
Meyer and Swartz 8 — Gregory Meyer and Spencer Swartz, Adjunct Professor @ University of
Phoenix + staff writer for the Wall Street Journal, 5/5/2008, “ENERGY MATTERS: Saudi Fears Of High Oil
Prices Fade With Demand,” now available at http://snuffysmithsblog.blogspot.com/2008/05/saudifears-of-high-oil-prices-fade.html)
The Saudi national most vocal in outlining the potential threat of renewable energy has been former
petroleum minister Sheikh Ahmed Zaki Yamani, who held Naimi's job from 1962 to 1986. Perhaps
Yamani's most oft-quoted statement was his prediction that "The Stone Age did not end for lack of
stone, and the Oil Age will end long before the world runs out of oil." The comment has been cited as
early as the 1970s, but Yamani has continued the mantra. Speaking last week, Yamani said his advice
to OPEC is "to increase production and lower prices because this is harmful midterm (and) long term
to OPEC itself," according to a report in Energy Intelligence. "It will increase the activities to find
alternative sources of energy, and OPEC will remain helpless at that time." Yamani was unavailable for
an interview, but the Centre made available its Executive Director, Fadhil Chalabi, who was Acting
Secretary General of OPEC in 1983-1988. Chalabi said leading OPEC producers are being short-sighted in
seeking ever-higher oil prices. While demand growth has been impressive in developing countries so far,
Chalabi warned that China's use of coal, nuclear energy and other sources will displace oil. "It's a matter
of time," Chalabi said.
Aff
Low Prices Don’t Hurt Saudi Arabia
Low prices don’t impact Saudi Arabia — they want to maintain good relations with the
U.S. — empirics prove
RT 6/25 — Russian Newspaper, 6-25-14, “Saudi Arabia vs high oil prices: It’s not all about the money,”
http://rt.com/business/opec-meeting-increase-oil-cartel-prices-saudi-arabia-804/
Right now oil supply heavily exceeds demand leading to falling prices. It’s an advantage for oil
consumers in the US and Europe, but it is bad news for most OPEC producers like Iraq, Iran, Venezuela,
Angola, and Russia. So when OPEC was meeting in Vienna, some oil states like Iraq were expected to ask
the cartel to curb output and push prices back up. The oil driven economy of Russia, which is not an
OPEC member, was also seeking more expensive oil. But Saudi Arabia, the world’s largest oil producer,
turns out to be willing to see Brent fall further — even below the current price of $96 per barrel. So
why don’t the Saudis want higher prices? Vladimir Rozhankovsky from Nord Capital explains: “We’ve
seen this before in the 70s during the Yom Kippur War, when the US asked Saudi Arabia to lower oil
prices, with North America in turn offering to help in the construction of oil drilling facilities. This time
Saudi Arabia is also likely to please the US, seeking to keep a lid on prices and winning over support on
the matter of its Gulf neighbours”. Sanctions imposed by the US in response to Tehran's refusal to curb
its nuclear program have already significantly cut Iranian crude exports — from about 2.5 million barrels
a day last year to between 1.2 and 1.8 million barrels now, according to estimates by US officials.
US Production
Good
Prevents Oil Shocks
New U.S. production key to balance prices — Iraq and other disruptions will cause
price shocks absent increased production
Bawden 6/16 — Tom Bawden, Environmental Editor for The Independent (London), 6/16/2014, “Long
years of oil price stability are at risk, BP’s top economist warns,” The Independent,
http://www.independent.co.uk/news/business/news/long-years-of-oil-price-stability-are-at-risk-bpstop-economist-warns-9540548.html
Bob Dudley, BP’s chief executive, said: “The major disruptions to production seen throughout 2013
were balanced by continued rises in production elsewhere. This underlines the importance of
continuing to secure these new supplies through continued access to new resources , policies to
encourage markets and investment, and the application of new technologies worldwide.”
The US will leapfrog Saudi Arabia and Russia to become the world’s biggest producer of oil and gas in
the next three years thanks to its reserves of shale oil, according to the International Energy Agency.
The review found that renewable energy production continued to grow – “albeit from a low base”.
Renewable technologies such as wind, solar and tidal power now account for more than 5 per cent of
global power output – and, including biofuels, for nearly 3 per cent of primary energy consumption. But
sustaining costly subsidy regimes has become a challenge where penetration rates are highest –
principally in Europe, where renewable producers are grappling with weak economic growth and
strained budgets, the report cautioned.
For now, though, the big energy story remains oil and whether Iraqi disruptions or US production
increases will win the day – a further front in the battle between the US and Iraq.
U.S. Oil exports stabilize global markets
Jaffe 13 — Amy Myers Jaffe, 3/27/13, Expert in energy at the James Baker institute of public policy.
Executive director of energy and sustainability., “The Experts: How the U.S. Oil Boom Will Change the
Markets and Geopolitics”
http://online.wsj.com/news/articles/SB10001424127887324105204578382690249436084
For four decades, the
geopolitical leverage achieved by large petro-exporting states has been a major
challenge for the U.S. and its allies. Now, the rapid growth of oil and natural-gas production from
unconventional shale resources in North America is rapidly eliminating this threat , with positive geopolitical
implications for the U.S. As political uncertainty spreads across the Mideast, rising U.S. shale-oil production
may become a more critical touchstone to market stability. In fact, the U.S. shale-oil boom might roll back
the clock to the 1960s when a U.S. oil surplus (via the Texas Railroad Commission), put Washington, not Riyadh, as
the world's swing producer. In a world where the U.S. will have few, if any, oil imports to replace during a
global supply outage, Washington will have more discretion to use the Strategic Petroleum Reserve to
help allies in times of crisis or to prevent oil producers from using energy cutoffs to achieve financial or
geopolitical goals. U.S. oil and gas exports will also garner closer ties to allies and friendly countries through
closer economic relations.
Bad
Doesn’t Solve Oil Shocks
No impact — experts agree economies are resilient to oil shocks
Kahn 11 — Jeremy Kahn, Master of Science in IR from the London School of Economics, former
managing editor at The New Republic, Boston Globe 2/13/2011, “Crude Reality,”
http://www.boston.com/bostonglobe/ideas/articles/2011/02/13/crude_reality/)
The idea that a sudden spike in oil prices spells economic doom has influenced America’s foreign
policy since at least 1973, when Arab states, upset with Western support for Israel during the Yom Kippur War, drastically cut production and
halted exports to the United States. The result was a sudden quadrupling in crude prices and a deep global recession. Many Americans still have
vivid memories of gas lines stretching for blocks, and of the unemployment, inflation, and general sense of insecurity and panic that followed.
Even harder hit were our allies in Europe and Japan, as well as many developing nations. Economists
have a term for this
disruption: an oil shock. The idea that such oil shocks will inevitably wreak havoc on the US economy has become deeply rooted in the
American psyche, and in turn the United States has made ensuring the smooth flow of crude from the Middle East a central tenet of its foreign
policy. Oil security is one of the primary reasons America has a long-term military presence in the region. Even aside from the Iraq and Afghan
wars, we have equipment and forces positioned in Oman, Saudi Arabia, Kuwait, and Qatar; the US Navy’s Fifth Fleet is permanently stationed in
Bahrain. But
a growing body of economic research suggests that this conventional view of oil shocks is
wrong. The US economy is far less susceptible to interruptions in the oil supply than previously
assumed, according to these studies. Scholars examining the recent history of oil disruptions have
found the worldwide oil market to be remarkably adaptable and surprisingly quick at compensating
for shortfalls. Economists have found that much of the damage once attributed to oil shocks can more
persuasively be laid at the feet of bad government policies. The US economy, meanwhile, has become
less dependent on Persian Gulf oil and less sensitive to changes in crude prices overall than it was in
1973.
U.S. economy can absorb price increases — there will be no shock
Luskin 11 — Donald Luskin, Chief Investment Officer for Trend Macrolytics LLC, a consulting firm
providing investment strategy and macroeconomics forecasting and research for institutional investors,
columnist both for National Review Online and SmartMoney.com, “Oil Prices Won't Kill the Recovery”,
Wall Street Journal 2011,
http://online.wsj.com/article/SB10001424052748704893604576200392973262006.html?mod=googlen
ews_wsj
Will the spike in oil prices emanating from instability in the Middle East be enough to derail the U.S.
economic recovery, just when it's finally building up a head of steam? Surely it's not helpful. But while our collective memory
and intuition about oil shocks may cause us to fear the worst, a clear-eyed look at the data suggests that
oil prices may have to rise considerably higher to trigger a U.S. recession. The oil shocks of the 1970s
and early '80s, which caused deep recessions, were so epochal that we're conditioned to assume that
any rise in oil prices is bad for growth and any fall is good. Yet historical data tells us that most oil-price
changes are not correlated with future changes in real output growth. For example, oil prices rose
steadily throughout the mid-2000s while growth remained strong. Where oil prices do matter to
growth is in extremis, in those rare cases when an extraordinary and rapid oil-price change creates an economic shock. But it's
difficult to come up with a simple rule that tells us when an oil shock is enough to cause a recession—
or not. Crude oil prices as high as $147 a barrel in the summer of 2008, for instance, aren't seen as the cause
of the Great Recession. Most observers would cite instead the fall of Lehman Brothers and the banking crisis that immediately followed,
events that occurred at roughly the same time. Let's
just accept that oil shocks matter. Is today's oil price of about $104
a barrel in the U.S. (and $115 globally) a shock? To be a shock, it has to be big. And "big" is a matter of context. Yes,
today's oil prices are more than 30% higher than they were a year ago. That sounds big. But at the
same time, they are more than 30% lower than they were less than three years ago. That's big, too, but in the
opposite direction. Which context counts? Research by economist James Hamilton of the University of California, San Diego
suggests that oil prices imperil the economy when they reach a new three-year high. Steven Kopits, managing
director of the energy consulting firm Douglas-Westwood, says the overall economy is threatened when the 12-month average oil price
exceeds the year-ago 12-month average price by more than half. Below those levels consumer and investor expectations aren't sufficiently
disrupted to make a difference. Both
conditions are very far from being triggered at today's prices. To be a
shock, it has to be a surprise, and in one sense the current situation is: Despite all the pessimistic narratives that have overhung the
economy during the last six quarters of recovery—housing double-dip, insolvent states and municipalities, collapse of the euro zone, real estate
bubble in China, and so on—virtually nobody was predicting that the Middle East would be ept with contagious regime change spread via
Facebook and Twitter. That said, should
anyone really be surprised to learn that the Middle East is politically
volatile? No, and things there might get crazier. But if the history of the region has taught us anything, it is that whoever
controls the oil always eventually ends up selling it to the developed world, often despite their ravings about the developed world's imperialist
evils. In
the meantime, Saudi Arabia has committed to make up for any transitory shortfalls. Pumping
an additional one million barrels a day would not be a stretch for the Saudis—doing so would merely bring the
Kingdom's production levels back up to mid-2008 levels. So even if we now face a shock, it will be transitory, and it will
be buffered. That's why, for all the uncertainty, oil is now $104 a barrel, not $1,000 a barrel. More
importantly, the U.S. economy is today well-positioned to absorb an oil spike without experiencing it
as an oil shock. First, we're nowhere near peak oil consumption, which we hit in August 2005 at 21.7 million barrels
per day. We're now 9% below that, even though consumption has recovered substantially since its worst levels
of the Great Recession in September 2008. The last three recessions—those that started in 1990, 2001 and 2008—began only
after oil consumption reached new peak levels. Economies in the early stages of recovery, like ours today,
are less vulnerable to oil shocks than those in the late stages of expansion. As a business cycle matures, the
economy experiences diminishing returns from any given factor of production—labor, credit, oil or anything else. When a recovery is still new,
large gains can be levered from relatively modest increases in inputs, so the economy can afford to pay more for those inputs. We've
also
grown much more efficient when it comes to energy consumption. It may come as a surprise to many,
but today in the U.S. we're consuming the same amount of crude oil that we did 12 years ago and real
output is more than 25% higher. For all the talk of our being the planet's most villainous energy hog, we've become
remarkably oil efficient. Finally, this oil spike is coming at a fortuitous moment in American politics .
President Obama, tacking to the political center after his party's self-described "shellacking" in last year's midterm elections, said earlier
this month that he wants to "increase domestic oil production in the short and medium term." That may
be the most shocking thing about this oil spike.
Shocks are exaggerated — consensus of economists
Kahn 11 — Jeremy Kahn, Master of Science in IR from the London School of Economics, former
managing editor at The New Republic, Boston Globe 2/13/2011, “Crude Reality,”
http://www.boston.com/bostonglobe/ideas/articles/2011/02/13/crude_reality/)
There is no denying that the 1973 oil shock was bad — the stock market crashed in response to the sudden spike in oil
prices, inflation jumped, and unemployment hit levels not seen since the Great Depression. The 1979 oil shock also had deep
and lasting economic effects. Economists now argue, however, that the economic damage was more
directly attributable to bad government policy than to the actual supply shortage. Among those who
have studied past oil shocks is Ben Bernanke, the current chairman of the Federal Reserve. In 1997, Bernanke analyzed
the effects of a sharp rise in fuel prices during three different oil shocks — 1973-75, 1980-82, and 1990-91. He
concluded that the major economic damage was caused not by the oil price increases but by the
Federal Reserve overreacting and sharply increasing interest rates to head off what it wrongly feared
would be a wave of inflation. Today, his view is accepted by most mainstream economists. Gholz and
Press are hardly the only researchers who have concluded that we are far too worried about oil
shocks. The economy also faced a large increase in prices in the mid-2000s, largely as the result of surging demand from emerging markets,
with no ill effects. “If you take any economics textbook written before 2000, it would talk about what a
calamitous effect a doubling in oil prices would have,” said Philip Auerald, an associate professor at George Mason
University’s School of Public Policy who has written about oil shocks and their implications for US foreign policy. “Well, we had a price
quadrupling from 2003 and 2007 and nothing bad happened.” (The recession of 2008-9 was triggered by factors
unrelated to oil prices.) Auerald also points out that when Hurricane Katrina slammed into the Gulf Coast in
2005, it did tremendous damage to offshore oil rigs, refineries, and pipelines, as well as the rail lines
and roads that transport petroleum to the rest of the country. The United States gets about 12
percent of its oil from the Gulf of Mexico region, and, more significantly, 40 percent of its refining
capacity is located there. “Al Qaeda times 1,000 could not deliver this sort of blow to the oil industry’s
physical infrastructure,” Auerald said. And yet the only impact was about five days of gas lines in Georgia,
and unusually high prices at the pump for a few weeks.
No impact to shocks — every empiric proves
Kahn 11 — Jeremy Kahn, Master of Science in IR from the London School of Economics, former
managing editor at The New Republic, Boston Globe 2/13/2011, “Crude Reality,”
http://www.boston.com/bostonglobe/ideas/articles/2011/02/13/crude_reality/)
Among those asking this tough question are two young professors, Eugene Gholz, at the University of Texas, and Daryl
Press, at Dartmouth College. To find out what actually happens when the world’s petroleum supply is
interrupted, the duo analyzed every major oil disruption since 1973. The results, published in a recent
issue of the journal Strategic Studies, showed that in almost all cases, the ensuing rise in prices, while
sometimes steep, was short-lived and had little lasting economic impact. When there have been prolonged price
rises, they found the cause to be panic on the part of oil purchasers rather than a supply shortage. When oil runs short, in other
words, the market is usually adept at filling the gap. One striking example was the height of the IranIraq War in the 1980s. If anything was likely to produce an oil shock, it was this : two major Persian Gulf
producers directly targeting each other’s oil facilities. And indeed, prices surged 25 percent in the first months of the conflict. But within 18
months of the war’s start they had fallen back to their prewar levels, and they stayed there even
though the fighting continued to rage for six more years. Surprisingly, during the 1984 “Tanker War” phase of that
conflict — when Iraq tried to sink oil tankers carrying Iranian crude and Iran retaliated by targeting ships carrying oil from Iraq and its Persian
Gulf allies — the price of oil continued to drop steadily. Gholz and Press found just one case after 1973 in which the market mechanisms failed:
the 1979-1980 Iranian oil strike which followed the overthrow of the Shah, during which Saudi Arabia, perhaps hoping to appease Islamists
within the country, also led OPEC to cut production, exacerbating the supply shortage. In
their paper, Gholz and Press
ultimately conclude that the market’s adaptive mechanisms function independently of the US military presence in
the Persian Gulf, and that they largely protect the American economy from being damaged by oil shocks. “To the
extent that the United States faces a national security challenge related to Persian Gulf oil, it is not ‘how to protect the oil we need’ but ‘how to
assure consumers that there is nothing to fear,’ ” the two write. “That is a thorny policy problem, but it does not require large military
deployments and costly military operations.”
Saudi Arabia can temper price shocks
Reuters 6/25 — English Newspaper, 6-25-14, “Saudi Arabia committed to supply extra oil if needed,”
http://gulfbusiness.com/2014/06/saudi-remains-committed-supplying-market-extra-oil-neededofficial/#.U6s2tJRX-uY
Top oil exporter Saudi Arabia is committed to supplying the market with extra crude to meet any rise
in demand or if there are disruptions in oil supplies, a Saudi oil official said Tuesday. Saudi Arabia,
which currently produces around 9.7 million barrels per day, has the ability to pump to its full capacity
of 12.5 million bpd, the official told Reuters. “Arabia has the capability to produce up to 12.5 million bpd
when the customers ask for it. The oil resources, production facilities and the management all support
this,” the official said. “If there is an increase in demand or disruption in supplies, Saudi Arabia will
supply the market. Saudi Arabia will continue to make sure there is a balance in the international oil
market. Saudi Arabia did that in the past and will continue to do so.” “Stabilizing [the] oil market in
terms of balancing supply and demand and reducing volatility of oil prices has been Saudi Arabia’s top
concern in the past 40 years at least.” Saudi Arabia has in the past shown an ability to raise production
to meet its customers’ needs, he added, citing times when Riyadh had to up its output to cover
disruptions during the Iraqi invasion of Kuwait in the early 1990s, and Libya’s civil strife in the
aftermath of its 2011 uprising, among others.