Thursday, October 23, 2008

Yea, Now We're Winning ... Kind Of

Over breakfast, I found myself reading an article in the european edition of the Financial Times discussing the impact of the precipitious fall in world oil prices.

Now that the price of a barrel of oil has fallen by 50% from its peak, bringing it down to around $70 to $75, the writer was noting that this is likely to have a positive impact on the west but a much more significant and negative effect in the east.

It seems that the national budgets in Iran and Venezuela, for example, only balance when oil trades at $95 per barrel or above; that figure is $70 for Russia, making them about break even today but clearly much worse off than before Wall Street withered. (This is of course a game the US doesn't even get close to playing, thanks mostly to dwindling oil output and a budget deficit that beggars belief.)

Add to the above an analysis by Deutsche Bank that says the marginal production cost for crude is between $65 and $80 a barrel - by implication also therefore the trading range that things should settle into over the long term - and it's hard to see how even with OPEC trying to trim output and push prices back up again that we will see much in the way of upwards pricing pressure.

Ultimately, it was economics that brought the collapse of the Soviet Union, not some inate demand from the proletariat for the wholesale adoption of democracy. Over the past years, Iran's burgeoning balance sheet has unnaturally emboldened the state in both its rhetoric and the surpression of internal anti-government dissidents. Being flush with cash makes it much easier to covertly fund terrorist activities elsewhere and also creates a thick insulating blanket against the negative effects of any sanctions applied by the western powers. Take away that comforter and it makes you wonder if falling oil prices may ultimately do more to bring stability to the middle east than the reverse trend ever could, especially as meddlesome forces get increasingly distracted by niggling domestic issues like, shall we say, trying to stay in power?

Oh, and the dollar is finally worth something again. Funny old world, innit?

No comments: