Oil Prices Supplement
High Oil Prices Good - Frontline ............................................................................................................ 3
High Oil Prices Good – Nigeria .............................................................................................................. 6
High Oil Prices Good – Mexico .............................................................................................................. 8
High Oil Prices Bad – Airlines .............................................................................................................. 10
High Oil Prices Bad – China ................................................................................................................. 11
High Oil Prices Bad – Russia ................................................................................................................ 12
High Oil Prices Bad – Mexico............................................................................................................... 15
High Oil Prices Good - Frontline
High energy prices increase investment in non-conventional sources of oil, which are
abundant in every continent on Earth – lowering prices in the long run
Learsy 5
Commodities trader and member of the Wilson Council at the Woodrow Wilson International Center for Scholars, Raymond J., “Over a Barrel:
Breaking the Middle East Oil Cartel”
The sands must first be strip-mined, which doesn't cost much, but then the bitumen has to be melted out of the clay encompassing it. That can
add anywhere from $10 to $15 to the price of a barrel of oil. Nevertheless, some estimates of oil reserves already include the
1.6 trillion
barrels in the tar sands of the Canadian West, now approaching economic feasibility after forty years of
dogged effort. Legendary Texas oilman T. Boone Pickens is a significant investor in this area, giving
credence to its growing potential. China is interested as well. In January 2005, the Chinese and Canadian;
governments announced preliminary agreements that are expected to lead to joint energy ventures. In
addition, Enbridge Inc., a Canadian pipeline company, is working with Chinese refiners on plans for a $2
billion pipeline project stretching from Edmonton, Alberta, to the northern coast of British Columbia. Known for taking
the long view, the Chinese appear to be betting that the extraction of oil from Canada's tar sands will
be economically feasible by the time the pipeline is completed. No one yet counts the equally vast
heavy-oil deposits of Venezuela's Orinoco belt, which now yield 500,000 barrels a day, even though
they may be technically closer to conventional oil and easier than tar sands to recover. An even larger
amount of oil-estimated at several trillion barrels-is locked in the oil shale of the American West, still
awaiting economic extraction. The real cost of lifting oil from beneath the Middle Eastern sands is small, thought to be as little as
$1 to $2 per barrel. That makes it risky to spend much larger sums extracting oil from the harder-to-get-at deposits. Yet, at today's high
market prices, extraction is increasingly feasible.
The summer of 2004 proves that Americans will cut oil consumption when prices rise
Learsy 5
Commodities trader and member of the Wilson Council at the Woodrow Wilson International Center for Scholars, Raymond J., “Over a Barrel:
Breaking the Middle East Oil Cartel”
pg. 201
A cool, brief touch of realism intruded on the markets on August 25, 2004, when the
U.S. Energy Information Administration
reported that American drivers had responded to the sky-high price of gasoline by using less of it than
expected over the summer. Gasoline inventories totaled more than 205 million barrels nationwide,
near the top of a five-year range. The oil price dropped by some $2 a barrel in response to this show
of consumer discipline. Even if Americans cut back on their gasoline consumption more by necessity
than choice, the summer of 2004 provided a tantalizing glimpse of what the administration might
have accomplished with a clear, focused policy to rein in oil consumption. Refusing to stock the
petroleum reserve with any oil priced above $35 a barrel, for instance, would have reduced daily
demand by 100,000 barrels. That may not sound like much when total U.S. demand is more than 20
million barrels a day, but prices at the margin are highly sensitive, so such a reduction would have
cooled the market and cut the price by far more than its proportions would indicate. The opposite
happened, of course. The Bush administration couldn't find its tongue, and prices went up, up, up
after early-fall market reports pointed to a 380,000-barrel-a-day decline in OPEC's August output. Hold
on a minute. Hadn't the cartel made loud pledges to boost production in order to bring prices down? Yes, but pledges were one thing, and
follow-through was quite another. OPEC producers could barely count their windfall profits. When OPEC ministers finally agreed to raise
production quotas, traders shrugged it off as a symbolic formality.
Empirically, high oil prices are great for economies
McKillop 4
Andrew, April 19, Oil and Gas Journal
The standard comment that "high oil prices hurt economic growth" is totally undermined
by real-world and real-economy trends. Comparing oil and natural gas price averages in the US in late 1998 with
price averages in late 2003, we find that crude oil import prices and bulk gas supply prices have risen
more than 200%. Meanwhile, claimed economic growth of the US economy was running at
more than 7% on an annual basis in late 2003. It is therefore not difficult to argue that sharply rising oil and gas
prices in fact increase economic growth rates, not the reverse. Logically, low or suboptimal economic growth rates would tend to
lower energy demand growth rates, which in turn would lower oil and gas prices. This has many "perverse," or apparently illogical,
implications. The worldwide economic mechanism that maintains oil demand growth at low levels when oil prices are low is
complex and ramifying. The components of this simple fact of world economic history notably include the world average per capita,
or "demographic," demand for oil, which reached its most recent peak when oil prices reached
their most recent all-time high. In 1978 world average demand on a per capita basis was 5.5 bbl/year. Since the mid1980s, it has been around 4.5 bbl/capita/year (bcy). Because of this fact, any argument that higher oil prices -- at
least up to the point where they rise to perhaps $ 75-100/bbl -- will or can result in a fall in world oil demand is
doomed to failure when tested by real-world and real economic data. The major reason for "price
inelasticity" -- or in fact "reverse elasticity," which is demand tending to rise with rising prices -- is that world economic
growth tends to increase when oil prices rise. Demographic demand, oil prices World annual average
demographic oil demand increased, regularly but erratically, through the 1970s, to a peak of a little more than 5.5 bcy in 1979 from
about 4.7 bcy in 1970. Since that time the demographic rate bottomed in the low oil price period of 1986-99 and has now started,
slowly, to increase again. Table 1 shows how demographic demand has varied since 1979.
Low oil prices cause oil shocks and massive civil wars
Jaffe and Manning 2000
Amy Myers, former Senior Economist for Petroleum Intelligence Weekly, directs the Energy Research Program at the Institute for Public Policy
at Rice, Robert, Senior Fellow and Director of Asian Studies at the Council on Foreign Relations, Feb., Foreign Affairs
Neither, frankly, is Washington. The political reverberations of a sustained oil glut should not be
underestimated. Several important regimes -- in the Gulf states, Russia, the former Soviet
republics, and such key Latin American countries as Venezuela, Mexico, and Colombia -- count on
healthy oil revenues for calming restive populations, assuaging social tensions, and in some cases, nationbuilding writ large. Without the salve of rising oil revenues, many of these nations can expect to see
heightened political instability, social unrest, or even civil wars, which could be grimly reminiscent of recent
Balkan slaughters. In the Gulf, such instability could trigger the next oil shocks in the form of short-term
disruptions. The 1991 Gulf War demonstrated the West's capacity to defend important oil regions from traditional external threats
like the Iraqi invasion of Kuwait. But America's painful experiences with revolutionary Iran in the late 1970s and the Balkans in the
1990s are grim reminders of how hard it can be to cope with internal instability. The new dynamics of the global oil market have
profound implications for U.S. national security policy. Washington had better gird itself.
High oil prices are key to the global economy, preventing civil and ethnic war in the
poorest nations, increasing global oil supply, and a successful transition to
renewables.
McKillop 4
Andrew, April 19, Oil and Gas Journal
This macroeconomic mechanism of higher
revenues for fast-spending poorer countries quickly
levering up world economic growth (the very simplest type of Keynesianism, but at the global level) is rapidly
and easily triggered by rising oil and other "real" resource prices. This flatly contradicts the
arguments by those who contend that higher oil prices "hurt poorer countries the most."
What is more important is to consider how the investment need for assuring that future world oil, gas, coal and renewable energy
supplies will be developed without higher oil prices and faster global economy growth. Some idea of that need has recently been
spelled out by ExxonMobil Corp. and by the International Energy Agency, which released its World Energy Investment Outlook
report in November 2003, forecasting a need to spend an average of $ 103 billion/year for oil and $ 105 billion/year for gas through
2030. ExxonMobil has indicated (most recently in September 2003) that sustaining oil and gas production
capacity itself requires the finding and development of 36 million b/d of replacement
capacity by 2015. Can this be done without higher oil prices? Higher revenues for many
low-income oil exporter countries -- notably for the special cases of Nigeria, Saudi Arabia, and especially Iraq -may be the only short-term way to stop these countries from falling into civil strife,
insurrection, or ethnic war, let alone making vast investments to maintain or expand their
current export capacity. In the case of Iraq, increased oil revenues are a question of life or death because higher revenues
might prevent the country from becoming ungovernable and might give it some potential for stability. No immediate and instant
recession can occur with oil at $ 50/bbl or even $ 60/bbl. Vastly higher oil prices than that would be needed to abort the worldwide
mechanism of higher oil, energy, and real resource prices driving faster economic growth. Conversely, low oil and
energy prices entraining low real resource prices, combined with rising population numbers, surely aggravate the
cycle of poverty in low-income commodity exporter countries. Deprived of sufficient revenues, such
countries can become "basket case" indebted countries, subjected to draconian conditions by the Club of Paris, World Bank, and
International Monetary Fund for debt refinancing and restructuring. The ability and capacity for investing huge
amounts of capital into oil, gas, and other energy production infrastructures by low-income, indebted
countries is realistically very low or zero. Yet estimates for world investment needs of the oil and gas industry
through the next 10-15 years extend into the range of several thousand billion dollars. Without strong economic
growth, it is unrealistic to expect that any "energy transition" can occur , for example, as predicated
by the Kyoto Treaty on climate change. More critically, it also is unrealistic to expect that world oil
supply can be increased at the rates required or as deemed feasible in such publications as the IEA's World
Energy Outlook -- that is a net average increase of about 2.25 million b/d/year during 2003-20 (raising capacity to about 115 million
b/d), over and above replacement of capacity lost through depletion. These gigantic investment needs are very obviously dependent
on strong and sustained economic growth. Without much higher and firmer oil prices, it is unlikely that
global economic growth can be significantly increased from current low average annual
rates for many key economies.
High Oil Prices Good – Nigeria
High prices are driving the Nigerian government to ignore the Delta problem – falling
prices will escalate violence and production will be drastically cut.
Financial Times 07
[July 12, “Highest stakes for a generation,” lexis-nexis] //karlovic
Once again, however, it is Nigeria's political system that is the greatest potential obstacle. The government may have been working better in
some respects at the federal centre since the end of military rule. But at the periphery the weakness of many of the 36 states remains palpable.
Nowhere is this more apparent than in
the oil-producing Niger Delta. There, state governments have failed to
capitalise on the greater share of revenues they now receive by delivering benefits to the people. In
turn, the threat has escalated from well-armed militant and criminal gangs demanding a share of
power and wealth. In the past year the gangs have interrupted the production of about a quarter of
the 2.9m barrels of oil per day upon which the government and economy still depend. When world oil
prices are Dollars 70 a barrel, this may not keep Nigeria's rulers awake. But what happens if the
violence in the delta worsens or prices fall?
Nigeria key is socio-economic stability of the Economic Community of West African
States – Nigerian destabilization will result in regional anarchy and hell on earth
Eze 7
Director General of the Nigerian Institute of International Affairs, [Osita Chukwuemeka, Africa News, “Nigeria; Crude Oil Attracts US, EU to Gulf
of Guinea – NIIA DG,” April 8, lexis-nexis] //karlovic
The second point is that if
you come closer and look at Economic Community of West African States
(ECOWAS), Nigeria has 140 million people. Other countries have population of 20 million, 10 million or
less. I think you can see the difference. Nigeria cannot abandon these countries to weather through
the storms and tides of socio-economic woes. We are endowed with capacity to take some measures
to protect the sub-region from deteriorating into anarchy. The issue of Liberia and all the problems in
Guinea Bissau come to mind. If we do not have a big brother like Nigeria, the ECOWAS sub-region will
be a hell on earth. The other aspect of big brother is money. Nigeria has spent so much money for ECOWAS or
ECOMOG over the years. Nigeria has been spending fortunes to manage conflicts in Africa's conflict
prone states through ECOMOG right from Ibrahim Badamosi Babangida regime till date. No single
country have been playing this role.
African instability leads to global nuclear war – proxy wars and regional conflict draws
the strong international states in.
Deutsch, phd of economics – founder of think-tank Rabid Tiger Project, 02
[Jeffrey, November 18, Vol. 2, Num 9, http://www.rabidtigers.com/] //karlovic
The Rabid Tiger Project believes that a
nuclear war is most likely to start in Africa. Civil wars in the Congo (the country
domestic instability in Zimbabwe, Sudan and other countries, as
well as occasional brushfire and other wars (thanks in part to "national" borders that cut across tribal
ones) turn into a really nasty stew. We've got all too many rabid tigers and potential rabid tigers, who
are willing to push the button rather than risk being seen as wishy-washy in the face of a mortal
threat and overthrown. Geopolitically speaking, Africa is open range. Very few countries in Africa are
beholden to any particular power. South Africa is a major exception in this respect - not to mention in that she also probably
formerly known as Zaire), Rwanda, Somalia and Sierra Leone, and
already has the Bomb. Thus, outside powers can more easily find client states there than, say, in Europe where the political lines have long
since been drawn, or Asia where many of the countries (China, India, Japan) are
powers unto themselves and don't need
any "help," thank you. Thus, an African war can attract outside involvement very quickly. Of course, a
proxy war alone may not induce the Great Powers to fight each other. But an African nuclear strike
can ignite a much broader conflagration, if the other powers are interested in a fight. Certainly, such a
strike would in the first place have been facilitated by outside help - financial, scientific, engineering, etc. Africa is
an ocean of troubled waters, and some people love to go fishing.
Asia is a close second, due to the competition of major powers. For example, in an Indo-Paki confrontation, China may be tempted to side with
Pakistan, since China and India are major nuclear powers sharing a long border. However, the Asian powers are basically stable internally, at
least for now. The things to watch for are domestic economic and political instability in a nuclear power, the spread of nuclear weapons to new
countries and new national antagonisms and great-power ties either weak or nonexistent enough to enable opportunistic alliances and
destabilization, or strong enough that the great powers feel compelled to follow their client states.
High Oil Prices Good – Mexico
Mexico’s market growth is soaring due to high oil prices
Business Week in 8/16 2004, Geri Smith,
The Mexican
economy also has been buoyed by low global interest rates and high oil prices -- Mexico is the world's
sixth-largest oil producer. Moreover, the bursting of the tech bubble in 2000 hurt the U.S. market more than it did Mexico's. For all these
reasons, Mexican stocks have become something of a blue-chip emerging-market play. ``When markets struggle
globally, Mexico tends to outperform,'' says Berges. LOCAL HEROES To be sure, Mexico is still dependent on trade with the U.S., where it
sends nearly 90% of its exports. The U.S. economic slowdown from 2000 to 2003 hurt Mexican electronics and auto-parts exporters. But
experts say the export downturn was offset by rapid growth in domestic businesses, such as retailers, food processors, beverage companies,
cement makers, and mobile telecom providers. Overall, the Mexican economy is expected to grow 4% this year, while corporate profits have
increased 28% on an annual basis in the first half. The profit
growth has pushed up prices of domestic-centered
stocks such as TV network Grupo Televisa, which should benefit from greater advertising expenditures. Its shares are up 20% this year.
Another rising star is America Movil, the regional wireless carrier controlled by tycoon Carlos Slim. Its stock has soared 30% this year. One
reason for the fat profits at big Mexican companies: lax regulation. That has made it easy for monopolies and oligopolies. ``They make a lot of
money, and that's good for their stock,'' says Mario Epelbaum, Latin America strategist at Morgan Stanley. While that may seem good for
investors in the short run, Mexico's failure to complete the structural reforms that would make the economy more competitive could cramp
growth over the long haul. Even so, stockpickers see continued upside potential. ``Mexico
is a growth story, an emergingmarkets story, and a valuation story, and I think it will be one of the big winners this year,'' says Geoffrey Dennis, a
Latin America equities strategist at Smith Barney. A winner? No one's saying that about the S&P 500.
Mexican economic collapse spreads worldwide
Dallas Morning News 95
November 28
With the exception of 1982 - when Mexico defaulted on its foreign debt and a handful of giant New York banks worried they would
lose billions of dollars in loans - few people abroad ever cared about a weak peso. But now it's
different, experts say. This time, the world is keeping a close eye on Mexico's unfolding
financial crisis for one simple reason: Mexico is a major international player. If its
economy were to collapse, it would drag down a few other countries and thousands of
foreign investors. If recovery is prolonged, the world economy will feel the slowdown. "It
took a peso devaluation so that other countries could notice the key role that Mexico plays
in today's global economy," said economist Victor Lpez Villafane of the Monterrey Institute of Technology. "I hate
to say it, but if Mexico were to default on its debts, that would trigger an international
financial collapse" not seen since the Great Depression, said Dr. Lpez, who has conducted comparative
studies of the Mexican economy and the economies of some Asian and Latin American countries.
A decline in oil prices will cause a domino effect in Mexico, destroying the economy,
increasing poverty, and sparking massive waves of immigration
Brodrick 7
Sean, editor of Red-Hot Canadian Small-Caps, investment director of The Sovereign Society, the world’s leading publisher of offshore asset
protection strategies and global investment opportunities, The Quiet Energy Crisis, 3/7
And that’s when this
problem becomes a geopolitical powder keg … An Oil Decline Would Set Off
a Domino Effect in Mexico I already told you that 55% of Pemex’s sales went right into government coffers last year. On
top of that, Mexico relies on oil exports for about 40% of its revenue. So Cantarell’s decline is a big problem
for Mexico’s President Felipe Calderon, who won a narrow victory in last year’s election. Any major decline in oil
revenues will force Calderon to cut government spending. That’s a big problem since he’s
already having a hard time containing popular discontent! For example, tens of thousands of angry
Mexicans marched through Mexico City recently to protest rising corn prices (due to demand for corn-based ethanol). More than
25% of Mexico’s rural population (and 11% of the urban population) lives in extreme poverty. For these people, cheap
corn tortillas are the difference between eating and going hungry . Calderon has vowed to raise
spending on social programs, but that will be hard to do with less oil money coming in. If Cantarell’s production collapses, Pemex’s
revenues will dry up, and a huge chunk of the Mexican government’s budget will vaporize. Social spending won’t go up — it
will go down. We’re already seeing something like 250,000 Mexicans enter the U.S. illegally every year. With more
than 25 million Mexicans living in poverty, how many more will trek north if Cantarell collapses
and the government lacks the money to fund social programs?
High Oil Prices Bad – Airlines
High oil prices will crush the airline industry
Brown 5
author or coauthor of 50 books, founder of the Earth Policy Institute, February 16th, 2005
Lester R., Earth Policy Institute, “CHINA REPLACING THE UNITED STATES AS WORLD'S LEADING CONSUMER”, http://www.earthpolicy.org/Updates/Update45.htm, Accessed August 15th, 2007
Airlines, both passenger travel and freight, will continue to suffer as jet fuel prices climb, simply
because fuel is their biggest operating expense. Although industry projections show air passenger travel growing by some
five percent a year for the next decade, this seems highly unlikely. Cheap airfares may soon become history.
Airline industry critical to global economic growth
US office of Aviation 2006
http://ostpxweb.dot.gov/aviation/whowearec.htm
The
air transport industry is a key driver of economic growth with a global economic impact of $1.7
trillion, including over 30 million jobs. The actions of the airline industry, therefore, have a direct impact
on the public both here and abroad and are watched closely by Congress, the courts, foreign countries and
consumers.
High Oil Prices Bad – China
A sharp increase in oil prices will cripple China’s economy
Learsy 5
Commodities trader and member of the Wilson Council at the Woodrow Wilson International Center for Scholars, Raymond J., “Over a Barrel:
Breaking the Middle East Oil Cartel” pg. 219
Even the
Chinese economic miracle soured as manufacturers had to pay 65 percent, 80 percent, and
even 100 percent more for their rapidly rising oil imports. Given the enormity of China's overseas
trade, their forced export and import cutbacks rippled through the global economy, further
depressing already struggling trading partners, especially South Korea and Japan. In Europe, exploding fuel costs derailed
efforts by the French to rein in budget deficits as demanded by the European Union. Forced into a corner, the government had to cut
popular public programs, thus inciting riots in the streets and efforts to bring down the government.
Similar scenes played out across the capitals of Europe, where generous social-welfare programs, long taken for granted but no longer
affordable, had to be axed.
A strong Chinese economy is key to avoiding worldwide economic collapse
Brown 5
author or coauthor of 50 books, founder of the Earth Policy Institute, February 16th, 2005
Lester R., Earth Policy Institute, “CHINA REPLACING THE UNITED STATES AS WORLD'S LEADING CONSUMER”, http://www.earthpolicy.org/Updates/Update45.htm, Accessed August 15th, 2007
China is now importing vast quantities of grain, soybeans, iron ore, aluminum, copper, platinum, potash, oil and natural gas, forest products for
lumber and paper, and the cotton needed for its world-dominating textile industry. These massive imports
have put China at
the center of the world raw materials economy. Its voracious appetite for materials is driving up not only commodity prices
but ocean shipping rates as well. The new industrial giant’s need for access to raw materials and energy is shaping its foreign policy and security
planning. Strategic relationships with resource-rich countries such as Brazil, Kazakhstan, Russia, Indonesia, and Australia are built around longterm supply contracts for products such as oil, natural gas, iron ore, bauxite, and timber. These strategic ties it is forming are welcomed in
countries like Brazil as a counterweight to U.S. influence. China’s
eclipse of the United States as a consumer nation
should be seen as another milestone along the path of its evolution as a world economic leader. Its
record-high domestic savings and its huge trade surplus with the United States are but two of the
more visible manifestations of its economic strength. It is now China, along with Japan, that is buying the U.S. treasury
securities that enable the United States to run the largest fiscal deficit in history. The United States, the world’s leading debtor nation,
is now heavily dependent on Chinese capital to underwrite its fast-growing debt. If China ever decides
to divert this capital surplus elsewhere, either to internal investment or to the development of oil,
gas, and mineral resources elsewhere in the world, the U.S. economy will be in trouble. China is no
longer just a developing country. It is an emerging economic superpower, one that is writing economic
history. If the last century was the American century, this one looks to be the Chinese century.
High Oil Prices Bad – Russia
High oil prices in Russia lead to over spending which will collapse the Russian economy
Moscow Times, 2006
Kasyanov Warns of Crisis by Decade's End, June 20, pg LN//WDC-Guy
Putin increased social spending by 11 percent last year in the wake of the protests.After a
fall in oil prices, protests over the government's inability to fund its promised social
spending would be directed by left-wing radical forces, Kasyanov said. "It will be people who have nothing
to lose," he said "I don't want to let this happen. We in Russia have already lived through so
many revolutions and crises. But what the authorities are doing now is leading to this
situation," Kasyanov said Another former liberal prime minister, Yegor Gaidar, an economist who ran
Yeltsin's first Cabinet in the early 1990s, also warned in a news conference last week that
profligate spending during a period of unusually high oil prices could result in economic
collapse "The main point is that nobody can predict the oil price," Gaidar said. "If we want to avoid another economic disaster,
we should not repeat the mistakes of the Soviet Union."
Numerous economic factors make high oil prices dangerous for Russia - increases
inflation, stalls reforms, capital flight
Channel NewsAsia 4
“High Oil Prices,” Lexis, 8/8/2004
Moscow could, however, have trouble keeping inflation below 10 percent this year because of
increased liquidities provided by oil revenue, warned Andrei Klepach, in charge of
forecasting at the economic development ministry. Stephen O'Sullivan of the investment group UFG said:
"Record oil prices are good for the state's coffers but they do not encourage reforms" that are key to the
development of Russia's economy. The international ratings agency Standard and Poor's stressed in mid July that there was a
growing risk of Russian reforms slowing down as they ran into resistance from political and industrial interests as well as from
public opinion. A government awash in oil revenue could easily be tempted to delay unpopular
structural economic reforms. Capital flight that plagued Russia in the 1990s could increase this year as
well. Gref has estimated that net capital outflows would reach 8.5 billion dollars this year, while in
January authorities had been counting on a net inflow. "The Yukos crisis has played a role
in the capital flight," Kantorovich said. "Investors prefer to put their capital elsewhere."
A drop in oil prices will only be good for Russia’s economy
Banking and Stock Exchange, Finance, Economics 6
(Russia) September 13, p. lexis
"The stabilization fund and international reserves are growing on high oil prices ," says Vladimir
Tikhomirov, senior economist at Uralsib financial corporation. It makes not sense to make any forecast in this respect, he believes.
Everything depends on the oil price assumed for calculations. For example, according to the Finance Ministry, by 2009, the
stabilization fund will come to 3.9 trillion rubles, while the Ministry of Economic Development and Trade came up with the figure
1.5 times larger. However, the last week saw sagging oil prices. If the trend is long-term, the threat is not to meet indicators voiced by
German Gref, said Vladimir Tikhomirov sharing misgivings of Belenkaya. Regardless of the external economic
situation and the fate of international reserves and stabilization fund benchmarks announced
by Gref, according to experts, their volume, which has already been accumulated, will save
the country from serious economic troubles. Moreover, according to Tikhomirov, the Russian
economy will even benefit from drop in oil prices because, on the one hand, inflation pressure
will be eliminated and on the other, the incentive to modernize economy will finally emerge.
Low oil prices are key to Russian economic reforms
EU-Russia Centre 7
Round Table, Stockholm Sweden, February 13, http://www.eu-russiacentre.org/assets/files/Stockholm%20RT%2013%202.pdf
One of the participants said he shared the approach introduced by Carnegie’s expert Lilia Shevtsova. She thinks that any
changes in Russia are only possible through a crisis . For example, a sharp drop in oil prices
would fuel much needed reforms. So far, the reforms were either stopped by the current
Russian leadership, or conducted inefficiently. These examples include the alcohol crisis triggered by the
government’s attempt to computerise the market regulations, failed pension reform, and monetarisation of social benefits that led to
popular uprisings in many regions.
The best research indicates that a massive and prolonged decline in oil prices wouldn’t
hurt Russia’s economy in the worst-case scenarios
Petrachkova 6
Alexandra, Translated by Elena Leonova, Vedomosti, October 5, p.A3, A NON-FRIGHTENING CRISIS; Strategic Research Center calculates the
impact of low oil prices, p. lexis
HIGHLIGHT: What
will happen to the Russian economy if oil prices fall?; After modelling the
consequences of a prolonged decline in oil prices, the Center for Strategic Research has
concluded that even if prices fall below $25 per barrel, the Russia economy won't be hurt
as badly as it was in 1998. After modelling the consequences of a prolonged decline in oil prices, the Center for Strategic
Research (CSR) has concluded that even if prices fall below $25 per barrel, the Russia economy won't be hurt as badly as it was in
1998. True, by the fourth consecutive year of low oil prices, inflation would rise to 40%, the budget deficit would reach 7.7% of GDP,
and the ruble could depreciate by 60% against the dollar. But the CSR maintains that things won't get that bad. To mark a visit to
Russia by one of the world's leading specialists in competitive economies, Harvard University Professor Michael Porter, the CSR
collaborated with the Transition Economy Institute (IEPP) and the Energy Policy Institute on a study of the potential consequences
of a decline in oil prices. The researchers looked at a scenario in which the price of Brent crude
falls from its current level to below $25 per barrel within two years, and remains at that
level for three more years. The release of these research results is well-timed: as Aton Investment analyst Dmitri
Lukashov points out, the price of Urals crude has dropped by 20% over the past two months. In assessing the consequences for the
Russian economy, the CSR excluded revenues transferred to the Stabilization Fund and the growth of gold and currency reserves in
2006. "We understand that the results turned out to be worse than they might have been, but this approach is justified," says CSR
President Mikhail Dmitriev. The economists considered two scenarios for the government's
behavior in the event of an abrupt decline in oil prices - responsible and irresponsible (no measures taken to cut
state spending) - and compared them to the indicators for 1998. It turns out that no combination of circumstances
can leave Russia as badly off as it was eight years ago. Back then, GDP fell by 5.3%; but if oil prices sink to
$25 per barrel, GDP would fall by 2.5-4.5%, depending on the government's actions. A responsible government would not allow the
ruble to be devalued by more than 70%, while an irresponsible government would permit a devaluation of over 130% (the ruble fell
by 250% in 1998). Inflation would reach 40-48% (also depending on the government's actions), whereas in 1998 prices rose by 84%.
True, the budget deficit would be twice as high as it was in 1998: 7.1-7.7% of GDP compared to 3.4% of GDP. But if the government
dips into the Stabilization Fund and cuts spending, the deficit would be just over 2% of GDP. IEPP analyst Ilya Trunin notes that the
Stabilization Fund, along with the gold and currency reserves built up over the good years and Russia's low level of foreign debt, give
the Russian economy a reserve of endurance which would alleviate the impact of a drop in oil prices. The research report says: "For
the first time in 30 years, Russia has a chance to avoid economic and political upheaval - but in order to do this, Russia needs to
continue pursuing responsible economic policies." "We might argue about the details, but the conclusions are right," says Yevgeny
Gavrilenkov, chief economist at Troika Dialog. During the 1990s, imbalances accumulated between
monetary-crediting policy and budget policy, and budget deficits grew, while the ruble
exchange rate was fixed. "The present-day situation is nothing like that, so a fall in oil
prices would lead to a smooth transformation, not a crisis . The government would have to cut ineffective
budget spending, and GDP growth would slow - but it wouldn't stop. UralSib Bank economist Vladimir
Tikhonov maintains that the consequences would be less severe than the CSR predicts. Budget spending might be cut, but this would
primarily affect state investment, according to Tikhomirov. The government wouldn't cut the kind of spending that works to increase
consumer demand. Given the current level of reserves, it wouldn't be difficult to support the ruble exchange rate; and the main
causes of inflation are non-monetary, says Tikhomirov: "If state spending is maintained, the Stabilization Fund would
be sufficient for four years."
High Oil Prices Bad – Mexico
High oil prices are devastating for Mexico’s economy
Business Week 5
September 29, 2005, “Will Energy Prices Zap Mexico? Higher oil prices have usually been a boon to the
economy. Trouble is, the country imports much of its refined fuel”
At first blush, the hike in oil prices wrought by the twin tempests of late summer -- hurricanes Katrina and Rita -- is
good news for Mexico. After all, costlier oil has always meant more money for the
government. And there has been a strong positive correlation between the strength of the Mexican peso and the price of crude.
But in fact, the runup in energy prices poses problems for the Mexican economy . For starters,
Mexico imports both refined gasoline and natural gas . Second, the government-controlled oil
concern, Pemex, may have difficulty passing on higher costs to the country's consumers.
And finally, Mexico's export industries are sensitive to factory demand north of the border . Oil
revenues make up 35% of Mexican government income, up from 30% a few years ago, when oil prices were lower. Through the first
five years of President Vincente Fox's six-year term, oil prices have been unusually high. The average price today of a barrel of
export Mexican crude is about 60% higher than the average historical price. The average over 2004-05 is expected to be just over
$36 per barrel. In the last two years of the Zedillo Administration, 1999 and 2000, it was slightly over $20. GOVERNMENT
SIDESTEP. The rise in crude prices has been a politician's dream: Thanks to higher revenues, noninterest expenditures could
continue growing more rapidly than tax income, while at the same time the public sector deficit fell as a percentage of GDP. The
deficit, as traditionally measured, should be 0.2% of GDP this year, down from 0.3% last year and 1.1% in 2000, Zedillo's last year in
office. The broader measure of the deficit -- the public sector borrowing requirement -- should be 2.2% this year, excluding the cost
of the voluntary retirement program. Why take the political heat for harder limits on the growth of current expenditures if oil prices
let you sidestep it? The Fox Administration has proposed legislation to limit the government's ability to use Pemex as its cash cow.
There's broad support in Congress, but not enough. The bill that can finally be approved might be better than nothing, however.
RISING GAS. Although oil revenues now only contribute around 14% of total export revenues, on the margin the level of oil prices
makes a big difference. In the first half of the year, the trade account deficit without oil revenues would have been four times higher
than it actually was -- $10.22 billion instead of $2.54 billion. The current account deficit would have been equivalent to 2.8% of GDP,
instead of 0.7%. But things look less rosy upon closer examination. Mexico is a net importer of natural gas ,
notwithstanding the prodigious natural-gas resources it is blessed with. Worse, Mexico imports gas from the U.S., itself a
net importer. Worse still, it's highly unlikely that the positive points in Fox's post-Katrina energy "Ten Commandments" -limited opening to private-sector participation -- will be approved. And it's very likely that subsidies proposed for
the oil industry will get the nod from Mexico's Congress. This is bad news for public-sector
finances. Mexico also imports gasoline and, as anyone who fills up in the U.S. knows, gasoline prices are
way up. Political realities and concern about inflation make it extremely unlikely that Pemex can pass on the higher prices for
imported gasoline to its customers. This is further bad news for the government finances, and for Pemex' ability to make muchneeded investments. MIGRANT MONEY. If the soaring cost of natural gas, or inability to refine enough gasoline to satisfy domestic
demand, led to effective actions to attack the problems head-on, that would be one thing. It doesn't seem likely, though. While
Pemex goes on burning off natural gas, the government is seriously considering building a liquefied natural-gas plant in a joint
venture in Peru. Pemex has already used the joint-venture strategy to build a refinery in Deer Park, Tex. Since the Mexican
Constitution forbids private participation in refining, Pemex exports oil to Texas, then ships it back to Mexico as gasoline. Higher
oil prices might also affect remittances -- monies sent back home by Mexicans working abroad -- which have
become nearly as important in limiting the size of the current account deficit as oil revenues. Between 1998 and 2000, net transfers
(almost entirely remittances) averaged $6.44 billion per year. In 2004 and 2005, net transfers should average more than $17.0
billion per year, which is nearly twice the size of the average current account deficit in each year. In the first six months of this year
alone, net remittances totaled $9.51 billion. Without remittances, but including oil revenues, the current account deficit would have
been 3.3% of GDP instead of 0.7%. Without remittances and without oil, it would have been a thumping $22.26 billion, or 6.1% of
GDP. MANUFACTURING PROBLEMS. To the extent the jump in gasoline prices in the U.S. channels more of migrants'
income into putting fuel in their tanks or heating their dwellings, it will cut into what they can afford to send
home. That's not to say remittances will fall, but it might mean they don't continue growing at last year's 23% rate, or the 17.2%
year-over-year rate of the first half of this year. There's also the question of the impact of high oil prices on the growth of Mexico's
manufacturing sector. Manufactured exports accounted for 81.7% of export revenues in the first seven months of the year, and
exports have consistently been an engine of growth in the past 15 to 20 years. Before Katrina, there were signs that Mexican
manufacturing (excluding maquiladoras -- border-area factories controlled by U.S. manufacturers) hadn't responded to the recovery
of the U.S. manufacturing sector this year with the same alacrity as in the past. To the extent Katrina and Rita mean
higher commodity prices -- or depress the growth of U.S. manufacturing -- it's more bad news for Mexican
manufacturers. Overall, it seems that while America's neighbor to the south escaped physical damage from the terrible latesummer storms, the economic toll may be serious.