An Oily Chicken in Every Pot

For critics of Russia’s Prime Minister (and termed-out former President), Vladimir Putin, the dramatic fall in oil prices at the end of 2008, which collapsed the buying power of the ruble, contracted the GDP, destroyed jobs by the millions and devastated the Russian stock market, was “all good” news. It seems that what was perceived as Putin’s draconian hold on the source of political power was proportionately linked to the price of oil. Similar stories have been told of Venezuela ’s Huge Chávez and Iran ’s Mahmoud Ahmadinejad; with expensive oil, they had money to offer blessings to followers and sympathetic global leaders.

When oil prices fell, so did their ability to sway their followers and influence alliances. Unlike the oil-rich Sheikdoms, which have very few residents and lots of oil, these nations had larger populations with larger needs. And promises were made that no longer could be funded; foreign debts needed to be paid. People seeking political reform hoped that this economic devastation would at least motivate change.

Okay everybody, the price of oil is rising. When it fell below $40/barrel (almost to $30!), things looked pretty bleak for global leaders whose power floated on oil. But that was then, and the price of oil looks very much like it is headed towards the OPEC target of $75/barrel, still about half of its all-time high ($147.27 to be exact) in 2008 in July after some announced Iranian missile tests. With Fed Chairman Bernanke chastising Congress on June 3^rd over spiraling federal budget deficits and the likely increased cost of borrowing to finance them (which will fire up inflation), in dollar terms – even assuming the oil-rich nations continue to value oil in dollars – that cost could spiral even higher. We’re in the mid-$60s/barrel now.

Things are not exactly rosy in Russia yet – her stock market is still 44% below the 2007 market high, but whose isn’t these days – but instead of a “let’s change it all now” vector of reform, those who might have otherwise challenged the incumbents are forced to adopt a more “we have just have to wait and see” attitude. One dollar change in the price of oil translates into $1.7 billion a year according to some Russian analysts.

The June 3^rd New York Times: “‘The oil price is going up, everything seems to be in order, so why change?’ Sergei M. Guriev, dean of the New Economic School in Moscow and a board member of the state-owned Sberbank, said by telephone. ‘If oil prices go back to where there is no budget deficit, then it will be business as usual.’…State banks, for example, are rolling over loans to failing companies rather than requiring them to restructure in bankruptcy, as is the case with General Motors in the United States , on the premise that the Russian economy will quickly turn around, along with the value of oil… ‘The big problem with this crisis is it may be too short for Russia ,’ Roland Nash, the chief strategist at Renaissance Capital, a securities firm in Moscow , said in an interview.”

In the end, the price of oil is inevitably heading upwards – it is a commodity that is in high demand that is of limited supply. For those who thought alternative energy was a nice theory but hardly an immediate necessity in a time of falling oil prices, it is time to think again. The value of America ’s political and economic power cannot constantly revolve around a black or brown unctuous sticky substance. The future of great nations should not rely on the compressed rot of millennia of dead plants and animals. And it doesn’t really matter that much if that oil is found here in the U.S. – it is a commodity… demand anywhere will drive the price up everywhere. “It’s the economy, stupid!”

I’m Peter Dekom, and I approve this message.