Friday, January 20, 2017

Drill baby, drill

What is interesting about the new White House commitment to drill for lots of domestic oil is that it is not what Vladimir Putin would want. The Russian economy's biggest problem is the low cost of oil. (The price per barrel is up from the really low point it reached last year, but at $52 a barrel that is half of what it was 2.5 years ago.) Oil prices dropped because fracking in the U.S. and elsewhere created an oil glut in the worldwide market.

Russia pretends to be a diversified European-style economy, but in reality its economy is more like Saudi Arabia. It is heavily dependent on hydrocarbons (both oil and gas). That is why Russia's economy has tanked in recent years, and that's also why Putin has recently adopted such an aggressive foreign policy. He can keep his popularity up by stirring up Russian nationalism, and he stirs up Russian nationalism by doing things like intervening in Ukraine and Syria, and taking a combative stance to NATO. As long as the Russian people are rallying to their flag, they won't notice that they are getting poorer. Or at least that is the theory/ The strategy is not sustainable, and I think Putin knows that. That is why, even though Russia is not a member of OPEC, Putin took the lead on getting that group to restrict oil production to drive oil prices up. Russia's economy depends upon oil prices returning to their early 2014 level. That means restricting the supply of oil to clear away the global glut.

But U.S. domestic oil production is a major cause of the current glut. If the U.S. drills even more, that glut is just going to get worse and oil prices will drop further, which will screw over countries whose economies are dependent on oil. It will especially be bad for the OPEC countries and non-OPEC countries that agreed to restrict their oil production last month. Not only will each barrel sell for less, but countries honoring the restriction will have less barrels to sell.

Now that we are in the Trump era, it will be interesting to watch how the President deals with instances where Trump's policies collide with clear Russian interest. This is one of those instances.