http://www.independent.ie/business/worl ... 40052.htmlThe crude economics of why filling up is cheaper during a global oil warRichard Curran Published 13/11/2014 | 02:30
Motorists have every reason to be confused in recent months. As they drive home from work they hear about growing political tension with Russia over Ukraine, in Syria, in Libya, in Nigeria and other oil producing states.
Yet as they pull in at the filling station, they see the price of petrol has fallen. Major political crises in oil-producing countries usually drive up the international price of oil. But the price of Brent Crude, for example, is down from $112 a barrel in late June to around $84.
The drop of 25pc doesn't mean a similar price reduction at the pumps. One reason is that so much of a litre of petrol is taken up in taxes (around 57pc) which do not fluctuate with the price of oil. In fact when petrol costs 161c per litre of petrol, the state is taking all but 69c in a raft of charges including excise, bio-fuel obligations, levies and VAT.
Subtract the distributor and retailer's margin from 69c, and if oil fell by 10pc it would only knock a few cents off the price of a litre.
However, the fall in petrol pump prices comes at a good time in the Irish economic cycle. It is easing up motoring and business costs as the economy is growing again.
We may be deeply unhappy about how much we pay in fuel taxes, but petrol prices are not as high as in Italy for example (177c) or Greece (173c). Most surprising is the massive price of petrol in Norway (192c) which has its own oil.
Imagine the Irish budget giveaways our politicians would opt for if we had our own oil. The Norwegians are so astute, they have put all of their oil revenues into a sovereign wealth fund, which has $860bn in the bank set aside for a rainy day. It would want to be some rainy day! But that is another story.
Back to the falling oil price. It now appears that prices have been falling as part of an enormous geo-political game being played out between the United States and Saudi Arabia on one hand, and Russia and Iran on the other.
Weaker demand for oil in Europe and China is part of the reason for the fall. But it had been widely expected that Saudi Arabia would cut production by now in order to restore the price back up to above $100 per barrel. Saudi produces close to 10m barrels per day, similar to Russian output. A $20 fall in the oil price, costs Saudi Arabia about $200m per day.
A lower oil price hurts all producers, but hits Russia among the hardest. Two-thirds of its exports and half of its national revenues come from oil and gas. Its currency has been falling dramatically in value, something which will drive up the price of imported consumer goods, including food, in which it is a net importer.
Russia needs oil to sell at around $110 a barrel to balance its books. Venezuela needs it to be $160. Iran needs $130. The United States can seriously curtail the economic might and swagger of Vladimir Putin by keeping oil prices low. It needs Saudi Arabia to want to do the same thing.
This is exactly what happened in the 1980s when falling oil prices cost the Soviet Union billions of dollars and contributed to its demise. The Saudis backed the Ronald Reagan-led government and kept pumping out the black gold even as prices kept falling.
Ronald Reagan's son, Michael, writing for online magazine Townhall.com, suggested that oil could be the key to putting Putin back in his box. "Oil was the only thing the Soviets had in the 1980s that anyone in the rest of the world wanted to buy, besides ICBMs and H-bombs, and they weren't for sale."
Russia's former prime minister Yegor Gaidar wrote in his book 'A Long Time' that the oil price fall in the mid-1980s was the main cause of the USSR's collapse. In 1986, for example, the Soviets suffered losses of $8bn, equivalent to about $24bn today.
Oil was not the only factor but it played its part in a series of events that culminated in the fall of the Berlin Wall 25-years ago.
Back in the 1980s Saudi Arabia was happy to back the US because of the Soviet invasion of Afghanistan. The Saudis saw it as an act of naked aggression against a Muslim country. Today, the situation is a lot more complicated. Saudi Arabia would frown upon Russia's backing for the Assad government in Syria. The Americans don't like Assad either but at the same time are actually bombing Assad's enemy, ISIS.
There are other complicating factors. Lower oil prices are hitting the US's relatively new fracking and shale gas interests. These have added billions to the US economy and have kept oil prices down for domestic users in the US.
Fracking is built on technology which needs oil to sell at least $60 a barrel to be profitable. Fracking involves pumping massive amounts of water, sand and chemicals into rock to extract oil and gas.
Companies involved in the industry have seen their shares rocket since 2010, but they have been falling badly in recent months.
One company, called Silica Holdings, provides the material that is blasted into the rock. Silica's share price has fallen from $73 in early September to $43 now. This has knocked $1.6bn off its market capitalisation in just two months. The Americans probably have bigger fish to fry. They want to enjoy the economic edge that the fracking phenomenon has given them. But they are also concerned about Putin's muscle flexing, not just in Ukraine, but in the wider region.
The fracking industry has made some new technological developments that have got its minimum price per barrel down to about $60. So they are still in business and in profit.
A fall in valuations won't cause too big a problem. The facking shale is still there. The technology is still there and as long as oil stays above $60 per barrel, they are still in business.
A low international oil price will force the Russian economy to contract next year and its currency situation could get quite perilous.
The Russians have been putting a brave face on it by saying a weaker rouble will lift their exports. However, their dependence on oil and gas products is enormous. Gains for exporters of other goods will be outweighed by the higher cost of importing consumer goods.
But a full-blown Russian currency crisis could have bigger knock- on effects in international markets. It might give Putin a bloody nose, but could hurt more than Russia.
Some commentators believe the US and Saudi Arabia versus Russia oil war is just a conspiracy theory. They suggest the Saudis are just keeping oil prices relatively stable at a time when so many producers around the world are in turmoil. It's about keeping market share.
The real test of that will probably come on November 29, when the next OPEC meeting is due to take place and where the Saudis will have an opportunity to announce they are cutting back on production to raise oil prices, if they wish.
An oil price proxy war is how major powers now resolve conflicts. Military action isn't necessary. There are a lot of factors, from Donetsk and Riyadh to Moscow and Dakota, affecting the number that appears on that petrol pump when we pull up for a fill.
