Tags: oil | prices | depression

Suppliers Feeling the Sting of Oil Prices

Monday, 15 Dec 2008 05:03 PM

 

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The depression — let's call it what it is — leaves us, well, depressed. But there is very good news from around the world. Our enemies are collapsing under the strain of dropping oil and gas prices.

What we had all hoped conservation and offshore drilling would achieve, the global economic collapse is accomplishing: the defeat of OPEC, Iran, Chavez, Putin and the weakening of the financial underpinnings of Islamist terrorism. In each of these nations, the hold of the dictator is weakening as, one after the other, they face the consequences of dropping oil prices.

In Iran, the sanctions imposed by the United Nations, the aggressive efforts of the U.S. government, and the actions of states like California, Florida, and Missouri to ban pension investments in companies that do business with Iran are having a big effect.

Unable to expand its oil production for a lack of foreign investment, Iran faces the need to slash its budget drastically as energy revenues, the source of 85 percent of its income, crash.

Iranian President Ahmadinejad is announcing harsh austerity measures. Having based his budget on $50-$60 oil, he now must recast it for at a $40-per-barrel level. He boasts of cash reserves of $23 billion, but that sum won't last long unless he makes major cuts. (Do the math: A shortfall of $25-barrels per day multiplied by 4 million barrels a day, multiplied by 365 days equals $36.5 billion, more than he's got on hand.)

The question for Ahmadinejad and for the Ayatollah who stands behind him is, Can their regime survive economic collapse? Unable to buy social peace by handouts and subsidies, will the top blow off a country that hates the regime, is predominantly very young, and is only 40 percent Farsi?

Chavez, in Venezuela is not in any better shape. Because of corruption and incompetence, Venezuelan oil production has dropped from over 3 million barrels per day when Chavez took over to about 1.7 million today. As long as oil prices were quadrupling, it didn't matter, but when they crashed, a harsh wind of reality blew in the door.

Chavez was losing popularity before the oil price dropped. He lost a constitutional referendum to give himself lifetime tenure, and he just lost his municipal elections in the largest cities and states in the nation. After knocking out most of the major opposition candidates on phony charges of corruption, he managed to hang on to the governorships of the small, rural provinces, but he lost the cities — even the poor areas of the cities voted against him.

Now, beset already by food shortages and galloping inflation, Venezuela has to make do with less subsidization and drastic cuts. Feeling cold times ahead, Chavez is desperately pressing ahead with a new attempt to abolish term limits in a vote set for the end of February, but, if he falls short, which we think he will, he could be out in a matter of months.

Chavez' client-states, Ecuador, Nicaragua, and Bolivia, have to face life without subsidies. Evo Morales, the head of Bolivia who got elected pledging to allow cocoa cultivation again, already faces a virtual civil war as the energy-rich half of his country wants autonomy and, possibly, independence. Argentina, whose corrupt regime has held onto power by massive borrowing from Chavez, must now seek sustenance from the global markets, only recently burned by its default on its foreign debt. Fat chance.

Putin's Russia, which so recently threw its weight around by invading Georgia, faces perhaps the biggest hit of all to its economy. Producing 10 million barrels per day, Russia will be hit the hardest by the collapse of prices. (Again, do the math: Assume Russia budgeted $60 oil prices and the price drops to $40. With $20 per barrel multiplied by 10 million barrels per day multiplied by 365, that's a $73 billion annual shortfall.)

With a GDP of only about $1.4 trillion, Russia faces the loss of about 5 percent of its economy. And Russian oil production has dropped by 1 million barrels per day for each of the past two years. With prices at rock bottom and nationalization an ever-present threat, who is going to invest in increasing Russian production?

And what of OPEC and the economic base of the Islamist terrorists? Countries like the United Arab Emirates, Qatar, and Kuwait will be OK because they have small populations among whom to divide their oil earnings.

Saudi Arabia will make it because of its massive production and relatively small population. But every other OPEC nation has a large population where the ruler, usually a dictator, buys social peace with oil money.

The pressure to stay in power will be so intense that these leaders will force production as high as they can to offset the shortfall. The result is that there will be constant deflationary pressure on oil prices, a vicious cycle that will impoverish all the right people.

© Dick Morris & Eileen McGann

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