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RIA Novosti

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Oil prices and Russia's return to superpower status

16:11 13/10/2005

MOSCOW. (RIA Novosti political commentator Peter Lavelle) International oil prices have scaled heights not seen in 25 years and there are many reasons to believe that they are here to stay. 

Forecasting long-term oil prices is a hazardous exercise at best. In the past, geopolitical instability has wrecked the most carefully designed petroleum price projections. In the 1970s, the Arab-Israeli conflict sent crude prices soaring. Much closer to the present, the Iraq war and instability in the Greater Middle East, worker unrest in Nigeria and a confrontational Venezuelan leadership toward the United States have also strongly influenced how economists forecast future oil prices.

Dealing with geopolitical instability will always be part of the equation when making oil price projections, but there may be an issue in play today that makes the present and near-term very different from the past 25 years: a structural shift recasting the balance between supply and demand. For most of the last quarter century the unpredictability of supply drove oil prices; for the next quarter century the driver will be supply dynamics that could see the price stay higher for longer than it has before - and Russia the key player in this new arrangement.

Higher and sustained oil prices should be expected based on the combination of uncertainty about supply (geopolitical instability), projections of continued long-term strong demand from China and India with huge populations of more than one billion people apiece and experiencing robust growth, as well as the inevitable weakening of OPEC. Add to this the petroleum reserve growth has appeared to plateaued over recent years even as prices have soared and global inventories have consistently declined as a percentage of consumption, making petroleum a more volatile, and by implication more expensive, commodity.

What does this mean for Russia?

Assuming a sustained oil price regime of $50 a barrel over the next decade, President Vladimir Putin’s aim of doubling the country’s GDP by 2012, considered by most Russia watchers and economists in 2002 (when the target was announced)  as delusional, would not be possible – but will actually occur a year later. During the next decade, Russia’s average monthly income would rise from the current $300 to $1,386, bolstering strong support for the current consumption boom; the country’s nominal dollar-based GDP would be $2.8 trillion (this year’s figure is expected at $743 billion), surpassing Spain’s; and Russia’s per capita GDP would be $20,073, chasing Portugal’s $25,658.

Trade and budget numbers look just as attractive at $50 a barrel. Revenue from crude oil and gas exports (price-wise closely tied to crude prices, but not in terms of demand) would total to almost $200 billion in 2015 for oil and gas exports of $343 billion. For this year, Russia is forecast to export about $123 billion worth of oil and gas for total exports of $230 billion. At the same time, Russia would continue to sustain a robust fiscal surplus and the stabilization fund is projected to hold $557 billion in 2015, an increase from 2005 estimate of $48 billion.

The international investment house major Goldman Sachs has upgraded its long-term oil price from $45 a barrel to $60 a barrel and the highly respected International Bank Credit Analyst publication now estimates the price of crude will average $50 a barrel over the next five years. Other industry sources have even suggested the sky-high price at $100 a barrel.

While $100 a barrel appears to be over the top as forecast, changes in the world’s geopolitics and structural changes in related to petroleum demand are not. Under a regime a $100 a barrel, the world appears to be a very different place, particularly for Russia.

Putin’s aim of doubling GDP by 2012 would be achieved in 2011. Russians would be recognized as being among the world’s great consumers with disposable an income for new all kinds of products, including cars, mobile phones, computers and other big-ticket items. At $100 a barrel, the average monthly income of the average Russia would increase from $300 in 2005 to $2,270 in 2015. Russia’s dollar-denominated per capita GDP would be $33,061 and its nominal dollar-denominated GDP ahead of the UK and Germany. 

At $100 a barrel, export revenue from crude oil and gas would be in the area of $400 billion in 2015 and totaling all exports at $570 billion. The total fiscal budget surplus would be projected at an average 7.4% of GDP 2006 – 2015, and the stabilization fund could conceivably accumulate a breathtaking $1.5 trillion by 2015.

The figures mentioned above are impressive, if not simply amazing. There are many issues related to government policy directives, inflation, taxes on mineral tax resources, and currency appreciation, use of the stabilization fund, and balance of trade that could dent the above numbers to one degree or another. Nonetheless, Russia’s key role in global demand of petroleum products cannot be ignored.

Like it or not, Russia is on the path of reconstituting the power and influence of the former Soviet Union in world affairs. There is an important difference though – Russia will regain this influence and power under 21st century terms: instead of a threatening conventional military and nuclear arsenal, it will take advantage of its vast oil and gas resources to regain its international prominence. Clearly a $100 barrel a dollar oil regime is not immediately in the cards, but it does demand the world to take pause. Even the conventional wisdom of a $50 a barrel should be a wake up call. –0-

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