Bad news for Russia as oil price plummets

The price of oil is of crucial importance to the global economy. Last week major oil producers agreed to keep it low. That’s good news for many countries, but it is disastrous for Russia.

Oil is much more than a source of energy. It has become the lifeblood of global economics and politics. It’s a business worth $3.4 trillion a year and its price and availability shapes the history of our times.

Last week members of OPEC, some of the largest oil-producing nations, gathered in Vienna. Despite oil being at its cheapest for four years they rejected cutting production (which would have raised the price). The oil price has since dropped to $70 a barrel.

This policy is led by Saudi Arabia which hopes to maintain its market share of the world’s energy. It’s engaged in a price war with the US. When oil was over $100 a barrel, the US began producing more oil from its domestic shale reserves. However this costs more than just pumping oil from the ground as Saudi Arabia does and may not be not economic at $70.

However cheap oil is good for much of the world. It puts money into the pockets of consumers, via lower prices for petrol and all goods and services where energy is a big component of the price. If they spend this cash it boosts national economies. For the EU in particular, with little or no growth, that is a very hopeful sign. Economists estimate that the current oil price, if sustained, could add over 0.5% to global economic growth, perhaps even 0.8%.

For others, however, low oil prices are disastrous. Many countries with oil reserves expected oil to be over $100 a barrel for the next few years and planned their spending with that in mind.

Russia in particular is now in considerable difficulty. More than two-thirds of its export earnings come from energy. The value of its currency, the rouble, has fallen by 23% in three months. Western sanctions over Russian actions in Ukraine have also caused pain. More generally, years of kleptocracy have had a corrosive effect. Much of the country’s wealth has been divided among President Putin’s friends. All this spells hard times for Russia.

No fuel like an old fuel

Some believe Putin’s Russia is strong enough to withstand this downturn with its foreign-exchange reserves of some $370bn. Add in the resilience of the Russian people, who tend to blame deprivation on foreigners, and the view from Moscow is that Putin has perhaps two years in which to improve the situation.

Others fear that Putin’s aggressive foreign policy could accelerate a crisis. Further interference in Ukraine could lead to stronger sanctions by Western countries. A partial block on oil exports would fell the economy. Had Putin spent more time bolstering Russia’s economy than enriching his friends, the country might not find itself so vulnerable now.

You Decide

  1. Is a lower oil price a good or bad thing?
  2. Would an economic downturn make it more or less likely that Russia would pursue an aggressive foreign policy?

Activities

  1. Research three other oil-producing states (begin with the Expert Links) and see whether they are better placed than Russia to survive a period of low oil prices.
  2. Investigate the history of oil production and produce a timeline of the important events and discoveries which led to its current importance.

Some People Say...

“For a country to have oil is more a curse than a blessing.”

What do you think?

Q & A

Why does cheap oil matter?
It means a likely boost to many countries’ economies and with more growth comes potentially more jobs and higher wages. Much of the world has yet to recover from the financial crisis of 2008 and anything which offers a return to high employment and improved productivity should be welcomed.
Why is cheap oil bad for some countries?
For oil-producing countries — including the UK — it means there will be less money paid for oil and that means the government will receive less tax. Many government budgets are severely strained at the moment and a reduction in expected revenue means further cuts may have to be made in public services.

Word Watch

OPEC
The mission of the Organisation of Petroleum Exporting Countries is to secure a steady income for its member states and to influence world oil prices through coordinating production. It was founded in 1960 and now has 12 members.
$100
The economic prospectus for an independent Scotland produced by the Scottish National Party before last September’s referendum expected the oil price would remain around $110 a barrel for the foreseeable future.
Kleptocracy
This is a form of political and government corruption where the government exists to increase the personal wealth and political power of its officials and the ruling class at the expense of the wider population.

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