Will the Middle East support Washington’s ‘oil sanctions’ to Russia?

Will the Middle East support Washington’s ‘oil sanctions’ to Russia?

Dr. Vugar Bayramov

Chair of CESD, Azerbaijan
www.cesd.az

The price of 1 barrel of crude oil again dropped to $ 82 in the world market. The description of the market is very simple: demand is declining whereas the supply still remains high. Unlike Russia’s expectations, Saudi Arabia not only decreased oil production, but also applied for price discounts in the oil export. Namely, ‘Saudi Aramco’ which represents the country mentioned above, has made $ 1 discount per barrel exported to Asia, and also 40 cent discount per barrel exported to the USA.

On the other hand, ‘Vest Texas Intermediate’ is intended to re-estimate the forecasted price of the ‘black gold’, although forecasts for 2015 in terms of oil price have been adjusted a while ago. As a result the price was declined by $ 10 per barrel.

The gasoline price has dropped to its lowest level since 2010 in the USA. The proposed price per gallon which is $ 3.25 for gasoline in the USA has decreased to 80 cent per liter. Whereas Russia keeps its status as the biggest oil producer, the recent changes in the world market warn about the weakening position of our northern neighbor.

Namely, daily production of Russia, Saudi Arabia, and the USA is accordingly 10.9 million, 9.8 million, and 8.5 million barrel. However, the USA obtains 3 million barrels of liquid petroleum per day from the production of gas. The USA now exports 400 thousand barrels of oil per day to the world market, meanwhile, the country was able cutting oil import by 8.7 million barrel per day since 2007. In addition, Libya has become allied to the West and also increased its daily oil production from 240 thousand barrels to 800 thousand barrels.

Of course these are simple aspects of the world oil market that are visible. It is clear that the USA tries to restrict Russia’s main income resources severely. The oil price in the world market is more important for Russia. Oil, and oil products, as well as gas totally represent 67% of total export of Russia to the World. That’s why the oil price is more important for the Kremlin than for Siberia where the production occurs. Crude oil represents $ 54 of every product worth $ 100 that Russia exports. Although the demand leads for the price setting in the world oil market, it seems that the weakening of Moscow depends more on Saudi Arabia than on the USA.

The main issue is that there is a “price floor” for the slumps in oil price in the world market. This is the cost or value of oil production. It is clear that clever producers will never be interested in making a loss by selling oil at price lower than the costs. On the other hand, the main roles in exporting strategic goods belong to terms of future contracts and, not to forget, incessancy of production. These contracts and agreements can make oil producing countries sell oil products at prices lower than costs. To calculate the costs caused by stopping and resuming the oil production is not a simple issue. In the cost structure of crude oil the Middle East has the main role: The cost per barrel of oil produced by Arabs in offshore production is of 27$ while the respective price for onshore production is of 41$. In Russia, the target of sanctions applied by the rest of the world, 51$ per barrel are spent for production in the onshore zone while the costs for the production in deep water reaches 56$ per barrel. In America, the production of one barrel of oil on land requires 65$. In the arctic part the cost of production reaches 75$.

Consequently, the situation is clear: if the oil price falls lower than 75$, only the USA will be a “country operating with loss”. But in the USA the loss is very relative. The reason for this is that the oil resources of the USA are usually used for local consumption and demand. An increase in oil prices in the world market does not seem attractive for the USA with a production of 400 thousand barrel per day. In addition, the USA imports more than its production. All in all, the loss in local production can be compensated with the benefits gained through lower import costs. Importing approximately 300 million barrels of oil, the USA purchases the “black gold” mainly from Canada and Saudi Arabia: in total import the Northern Neighbor’s part is 18.6% and Saudi Arabia’s share is 12.4%.

In addition, the USA tries to meet its demand with exports from Venezuela and Mexico: in the oil import of the USA these countries have shares of 11.1% and 10.4% respectively. Thus, the slump in the black gold’s price has no crucial impact on the USA who produces 11 million barrels per day. On the contrary it can get benefits from cheap imports from the other side of the ocean. Naturally, here the country which could compensate the USA not only in economic terms, but also politically, is only Canada. These types of steps are not discussed in the relations between Washington and Ottawa and in North America people rarely argue with each other. It means that the main focuses have turned to Riyadh. The decrease of the oil price to $ 55 per barrel does not cause any problem to the profit generated by Saudi Arabia, who is the biggest oil producer in the world. It is clear that the slumps in each barrel mean less “green paper” for the Arabs: even though the most modern accounting software is facing challenges in calculating Arabic wealth, this situation is not a crucial issue for them. On the other side, while holding more than 2 trillion dollars of investment in the United States it has no significance for Saudi Arabia to fulfill the rules of the game of Washington, not only in its political meaning, but also concerning economic value. But the residents of Riyadh who are adapted to a warmer climate, do not want to feel cool spring weather. Hard spring weather is usually ordered by Washington. The USA has enough influencing tools to Riyadh, which, on the other hand holds a central control in world oil market in order to regulate the rules. A cooperation of Washington with the Arabs promises a long, dark winter for the Kremlin.

In this regard, if the tensions between Washington and Moscow continue, the USA could achieve a decrease in oil prices to 60 or 55 dollars per barrel in the world market. This tendency would not bring serious losses to the partners of the USA. Not only the long-term continuation of this level of oil prices, but already six months, would be enough to cause a serious concussion to Russia’s economy. It is also known in Washington that, ‘Beijing’s Guys’ who benefited from reductions in oil prices will not violate the rules of the game for a long time. Nobody wants to grapple with extra problems in that country where the business, particularly the export, dictates politics. The natural or man-made declined in oil prices to the stated level will not cause losses for Near East countries and Saudi Arabia, even including transportation costs. These world prices will allow them to continue receiving benefits. In contrast, this situation shakes only the Kremlin, who will have to sell oil at lower prices than their production costs in this situation. This could further lead to flurry in financial and real sectors.

It has to be taken into account that the decline of oil prices to $ 60 per barrel is the ‘red line’ for Russia who struggled for a long time to build socialism which failed. The state reserves of Russia are not sufficient to defend the country for a long time. In general, the concept of reserve of those countries, seen from the aspects of population and geography, is relative. Thus, the denouement of Russia is more commentated in Riyadh than in Washington. It seems that the final decision is not satisfactory for Russia’s elite. As a result, after the war in Ukraine, ‘Russia is very cautious about its car that gasoline should come to an end which drives irregularly on the end of uncertain way’. Russians may not have electricity, particularly in the upcoming long and dark winter.

October, 27, 2014

Baku, Azerbaijan

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