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Syria as Russia's oil price tool

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The opening paragraph in the Financial Times' May 31, 2013 review of Thane Gustafson's history of the Russian oil industry, Wheel of Fortune: The Battle for Oil and Power in Russia, says it all:

In no other big economy do oil and gas play such a vital role as in Russia. They account for two-thirds of its exports, half its budget revenue and nearly one-third of economic output. In a real sense, the history of Russia's oil industry since the collapse of communism is the history of the country itself.

Over the last weeks, since the inception of the demonstrations in Egypt for president Morsi's ouster, to the sarin gassing of innocents in Syria these past days, the price of oil has skyrocketed more than 15 percent for WTI crude from near $95/bbl in June to over $110/bbl and Brent crude closing this past week at over $116/bbl.

After Saudi Arabia, the most immediate beneficiary of this spiking of oil prices is Russia -- now, together with the Saudis, the world's largest oil producer, with 7 million barrels/day being shipped into the export market. Clearly the higher the price of oil, the greater the benefit to Russia and the largesse of the Putin government, whose domestic economic policies and well being are principally funded by oil revenues.

To keep the pot boiling in the Middle East, the Russians have been the long-standing and grievously irresponsible defenders of Iran and its nuclear program, while freely arming Syria's Assad government with a full array of weaponry including highly advanced anti-aircraft weapons system. This while forever rendering meaningful UN action moot through threat of a Security Council veto. Even after Syria's devastating use and murder of innocents by sarin gas, Russian foreign policy can well be categorized as a form of shameless extortion that has embroiled the region in turmoil and risks its devastation, all to the benefit of ever higher oil prices.

Clearly the price of oil has become a strategic imperative of Russian foreign policy. It is high time that the United States and the world, through the member states of the International Energy Agency, signal to the market, to the Russians and the world at large that should the situation in the Middle East deteriorate further, because the Russian have made unified international action through the United Nations unworkable by their calculated threat of veto at the Security Council and their bellicose defense of alleged Syrian murderers, that both the United States and the IEA members will release the necessary quantities of their Strategic Petroleum Reserves to contain the consequent increase in the price of oil being spiked through Russia's bellicose policies, and bring a semblance of rationality back to the oil market. The quantity of oil drawn down from the strategic reserves will in all likelihood be far less than anticipated, because it will persuade the commercial allies of the Russians, the commodity derivatives gamblers and traders, to vacate the field, absent having a sure, ever higher price to bet on.

Taking meaningful economic steps vs. Syria and Iran's disruptive ally, Russia, might well have a significant impact. An economically disabled Russia would dramatically lessen the hubris of both the Syrians and the Iranians.

In rationalizing Syria's use of chemical weapons and supporting Iran in flagrantly building its bombs, Russia is endangering the world. Without Russian support, Syria and Iran may well sing a different tune.

According to a study by Citigroup Russia, funding President Putin's campaign commitments will require levels of oil prices of $150/bbl or higher to keep the budget in balance.

It is also long past time that the grotesque distortion in oil prices be brought to heel. The excessive trading and political manipulation of oil prices has long since left all vestige of supply and demand.

In April 2011, with WTI trading at $100 barrel, the Exxon Mobil president and chairman told a Senate Committee that trading, speculation, created an overprice in oil of $30 to $40 a barrel.

 In other words, that the real price for oil should be in the $60/bbl to $70/bbl range, a price that would probably signal the end of the Putin Presidency and Russian malignity.

Today, U.S. natural gas, a uniquely domestic American production being traded on the same U.S. exchanges as crude oil, and being consumed in its entirety domestically and thereby free of the distortionary international trading on world exchanges and political influences impacting those of crude oil prices, is quoted at $3.53/mmbtu, delivering the equivalent energy of a barrel of crude oil that would have to be priced at $21 per barrel to be competitive.

Is there a lesson here?

Huffington Post

September 10 2013, 12:05

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