oil prices core georgetown

8/9/2019 Oil Prices Core Georgetown

http://slidepdf.com/reader/full/oil-prices-core-georgetown 1/196

Uniqueness



Oil Prices High



General

Future oil prices will remain high — buyers are leaving the

market

Ausick 2!" — Paul Ausick, Energy Editor at 24/7 Wall Street, 2-17-2014, “!e "il#utures $arket% Prices Are &ig! 'ecause (o)ody Wants to Play,* 24/7 Wall Street,!tt+%//247allstco./energy-)usiness/2014/02/17/t!e-oil-utures-.arket-+rices-are-!ig!-)ecause-no)ody-ants-to-+lay/Gasoline prices in the Unite# $tates have risen nearly si% cents a gallon in

the past month, and t!e s+ot +rice or a )arrel o West eas nter.ediate W3cru#e oil has risen &rom '(")*+ at the en# o& ,ecember to '(()-" now,ater a )rie soourn last eek a)o5e 6100 a )arrel We noted $onday .orning t!atgasoline +rices re.ain a)o5e 6 a gallon in e5ery state, it! a national a5erage o64 a gallon, and e note so.e o t!e te.+oral reasons or t!e !ig!er +rices 8

Pu.+ +rices are not likely to all .uc! in t!e net e .ont!s as re9neries enter

t!e turnaround +eriod !en t!ey sto+ +roducing c!ea+er inter gasoline and )egin.aking .ore e+ensi5e su..er uel8 .here may be a more &un#amentalchange also keeping cru#e oil prices high at a time when U)$) pro#uction

is at its highest level in more than a #o/en years0 the &utures market is

being aban#one# by non1commercial ie, s+eculati5e3 participants) vencommercial participants are looking to get out o& the tra#ing business"ccidental Petroleu. :or+ (;SE% "<;3 !as said t!at it ill “reduce* its +ro+rietarytrading )usiness and &ess :or+ (;SE% &ES3 is trying to sell its &etco tradingo+eration8 As these market participants leave the market3 &ewer buyers

remain3 which lowers the &utures price that pro#ucers can get as a he#ge

&or &uture pro#uction) !e result is an increase in +rice s+reads )eteen current

cas! s+ot +rices and utures +rices — cas! +rices rise and utures +rices all !atleads to a .arket condition called )ackardation8 !e olloing c!art s!os t!edi=erence )eteen t!e current W +rice +er )arrel and t!e +rice 12 .ont!s out 8

As more players e%it the &utures market3 there are &ewer buyers willing totake the long si#e o& the bet on &uture cru#e prices) .he result coul# well

be lower inventories, a result already noted )y t!e nternational Energy AgencyEA3 in its .ost recent re+ort%8 At t!e end o >ece.)er ?glo)al@ co..ercialin5entories stood at 2,B .illion )arrels, t!eir loest a)solute le5el since 200C$oreo5er, t!e stock de9cit to 95e-year a5erage le5els idened slig!tly to 10.illion )arrels, t!e 9rst ti.e t!e 100 .illion )arrel le5el !as )een eceeded since.id-20048 !ere is e5idence t!at as )ackardation increases, stock+iles decrease

4ru#e prices remain high an# so #o re5ne# pro#uct prices Energyecono.ist P!ili+ Derleger notes in !is latest eekly nesletter%8 ooking to t!euture, e see no reason or co..ercial in5entories to increase !e .arket o=ersno incenti5e at t!e .o.ent to )uild stocks o t!e contrary, it is i.+osing groing+unis!.ents on t!ose !o !old oil #or t!is reason, e agree it! t!e EA t!at t!eglut ill )e .ore and .ore elusi5e8 n ot!er ords3 prices will remain high an#probably rise even higher as commercial inventories are #rawn #own tlooks like su..er dri5ing is going to )e e+ensi5e 8



ow $upply

OP4 Oil prices will continue to rise — low supply &rom >raq

turmoil

cGovern *!- — 'o) $cJo5ern, sta= riter at 'oston &erald, N-14-14,“E+erts% Jas +rices ill rise,* 'oston&erald,!tt+%//)oston!eraldco./)usiness/)usinessR.arkets/2014/0N/e+ertsRgasR+ricesRillRriseGas prices in the Unite# $tates will continue to rise as OP48s secon#1

largest oil pro#ucer &en#s o total collapse at the han#s o& e%tremists,e+erts say8 .he price o& oil rose to '!7" yesterday as t!e crisis in raG reac!eda e5er +itc! Oil prices rose more than - percent t!is eek alone, and e+ertsare orried t!e continued 5iolence could !a5e an ongoing e=ect on +rices at t!e+u.+8 “.he violence an# turmoil in >raq is alrea#y aecting oil prices an#

have booste# the price to a !71month high,* said $ary $cJuire, director o

+u)lic and legislati5e a=airs at AAA Sout!ern (e England “ >t8s likely that we8llsee an increase this week or the week a&ter at the pump as the result o&our new oil prices);E Fear in oil1pro#ucing countries can have a #rastic

eect on the bottom #ollar)

http://bostonherald.com/business/business_markets/2014/06/experts_gas_prices_will_rise






A.0 $hale <oom owers Prices

ow prices &rom shale oil boom is only temporary) ong1term

prices are still on the upsi#e)<eschloss *!" — $orris 'esc!loss, econo.ist at t!e >esert Sun, N-17-14, “HS

S!ale "il 'oo. :al.s Jlo)al "il Prices, Oetains A5aila)ility,* !e >esert Sun,!tt+%//desertsunco./story/.oney/industries/.orris)esc!lossecono.ics/2014/0N/17/us-s!ale-oil-)oo.-cal.s-glo)al-oil-+rices-retains-a5aila)ility/10NB4CC1/W!at t!e ")a.a Ad.inistration eit!er ails to understand, or is o)li5ious to, is t!att!e orld is increasingly de+endent on America8s three year1ol# :&racking;

boom t!at has li&te# U)$) oil pro#uction by about three million barrels per#ay to more than eight million barrels currently Si.ultaneously, :anada !asadded anot!er one .illion 'P>, al.ost eclusi5ely ro. t!e “tar sands* o Al)ertaPro5inceLs At!a)asca region 'uilding t!e rans-:anada < oil +i+eline ould

o)5iously accelerate :anadian crude s!i+.ents to HS Jul :oast re9neries,)uilding A.ericaLs daily crude oil a5aila)ility to o5er 10 .illion )arrels +er day,likely to++ing todayLs leaders, Oussia and Saudi Ara)ia8 .his is o& particular

importance3 as the i##le ast an# Iorth A&rican oil 5el#s have retracte#by an estimate# +)= million <P,3 #ue to civil wars in i)ya, distur)ances inraG, ci5il ar in Syria, ideological tri)al strie in (igeria, and sanctions i.+osedagainst ran Also, it! Euro+e de+ending on OussiaLs oil and natural gas +i+elinesrelying on 0 o t!eir crude oil, sanctions or ot!er econo.ic +uniti5e actionsagainst Oussia, ould reak tur.oil on t!e Euro+ean econo.y, already teetering ont!e edge o a ne recession8 According to relia)le energy e+erts, the break#own

in oil supplies previously in#icate# woul# rise &rom the current '!7* per

barrel &or Cest .e%as >nterme#iate3 an# appro%imately '!!= &or <rentcru#e to an estimate# '!=7 to accommo#ate universal cru#e oil nee#s3

were it not &or America8s :&racking surge);E W!ile :!ina continues tore+resent t!e +i5ot +oint or t!e u+/don direction o oil +ricing, as t!e orldLslargest user, 'eiingLs econo.ic direction ill .agniy t!e +rice .o5e.entsort!co.ing in t!is yearLs second !al HS de.and, !ic! is !anging in at around1B .illion )arrels +er day !as already closed t!e i.+ort ga+ to 2 o its totalconsu.+tion ro. N0 as late as 200 Alt!oug! t!ere are di5ergent sc!ools ot!oug!t regarding t!e direction o oil +ricing in t!e net e years, t!ere isunani.ity t!at t!e )alance o +ricing +oer !as s!ited ro. t!e tur)ulent $iddleEast, (ort! Arica and Oussia to !o Guickly and 5olu.inously t!e HS oil

+roduction ca+a)ility and re9ning +otential can )e )roug!t to .arket8 Wit! HSstock+iles .ounting in t!e inter.ediate ti.era.e, a near-ter. +rice dro+,es+ecially in lig!t o a Sout!east Asian de.and cut, could 9nd HS centralin5entories in a te.+orary o5erstock .ode !is could e5en )eco.e .ore se5ere iran and raG, containing t!e second and t!ird largest glo)al oil reser5es resol5e t!egeo+olitical +ressures t!at !a5e reduced t!eir e+orts) E However3 a realistic

longer term outlook3 which envisions a worl#wi#e #eman# growing &rom

current (7 million barrels per #ay now3 to !27 million <P, within the ne%t



#eca#e3 woul# in#icate global prices sharply on the upsi#e3 with the U)$)an# 4ana#a8s ma%imum output becoming the global center o& gravity in

the oil worl#)E A &aint thun#erclap3 alrea#y being hear# is the cutback in

capital e%pen#itures by oil giants %%on obil3 4hevron3 an# Joyal ,utch$hell3 as e%ploration costs soar3 awaiting the opportunities by these lea#

corporations to be assure# o& e%pan#ing economic #eman# an# theacceptance o& higher prices with it)

Oil prices will stay high3 shale oil boom will not change prices

<a#iali ++! — $att 'adiali, editor o STA Oesource Oe+ort, -1-2014, “W!y

gasoline +rices are so !ig! in s+ite o t!e s!ale )oo.,* !e :ru,!tt+%//t!ecruco./s!ale-oil-is-)oo.ing-)ut-youre-still-+aying-0-to-9ll-u+-your-gas-tank-t!is-is-!y/ !ad ust ra++ed u+ .y talk to a s.all grou+ o +ri5ate-eGuity olks !en a !andent u+ in t!e )ack o t!e roo.U8 “Cill the shale oil boom #rive the price o&

gasoline #ownI*8 get t!is Guestion all t!e ti.eU tLs t!e 9rst t!ing +eo+le askater tell t!e. !o great and +roli9c s!ale oil is8 'ut the answer is no) An# the

reason is simple K e%ports)E Ce e%port a lot o& petroleum out o& the U)$)3

which takes the e%tra supply out o& our market an# keeps the price o& thestu we want K gasoline an# #iesel K high8 n >ece.)er 201, t!e HSe+orted t!e .ost +etroleu. +roducts in t!e 1 years t!at t!e HS go5ern.enttracked t!e data8 kno, kno, you .ay !a5e !eard t!at itLs illegal to e+ortcrude oil W!ile t!atLs tec!nically trueU we still e%porte# !+")L million barrels

o& :Iot Oil; in >ece.)er) Iot Oil is cru#e oil that was re5ne# into gasoline3

et &uel3 or #iesel) So.e o t!e e+orts arenLt e5en useul +roductsU ust +artiallyre9ned oil8 !atLs !o re9neries get around t!e e+ort )an n 201, e sent 1

)illion )arrels o (ot "il a)road !atLs a 12 increase ro. 2012 .he question t!at !ad wasU where #i# it all goI8 !e anser to t!at Guestion is in t!e ta)le)elo co))led t!is toget!er ro. data +u)lis!ed )y t!e HS Energy nor.ationAd.inistration EA3 > broke #own the values to show the percent o& U)$)

e%ports to various countries an# regions) As you can see3 it goes all over

the worl#U8 8 8 So i you are looking or t!e reason it costs you 60 to 9ll u+ t!e gastank in your :a.ryU )la.e t!ose guys .hey keep buying3 so the re5ners keep

selling And it! t!e latest de5elo+.ents in Oussia, HS re9ners .ay 9nd ne.arkets in Euro+e too ;ou can read .ore a)out t!at !ere



A Uniqueness — Price $hocks 4oming Iow

Jising volatility inevitable — >raq pro#uction #isruptions cause

price shocks

<aw#en *!* — o. 'aden, En5iron.ental Editor or !e nde+endentondon3, N/1N/2014, “ong years o oil +rice sta)ility are at risk, 'PLs to+ econo.istarns,* !e nde+endent, !tt+%//inde+endentcouk/nes/)usiness/nes/long-years-o-oil-+rice-sta)ility-are-at-risk-)+s-to+-econo.ist-arns-B404C!t.l

scalating violence in >raq threatens to unleash an oil price spike that

woul# put an en# to t!e greatest +eriod o price stability or nearly !al acentury, <P8s chie& economist has warne#)

!e unusually !ig! le5el o #isruption to glo)al oil +roduction since t!e Ara) S+ring)egan in 2011 has been matche# by a sharp rise in U$ oil output as a resulto its racking )oo. !is !as ke+t su++lies constant and +rices sta)le, according to'PLs :!risto OV!lHS oil +roduction soared )y 11 )illion )arrels last year t!e )iggest rise in t!ecountryLs !istory as t!e racking co.+anies increasingly turned t!eir tec!nologyro. gas to oil !is )alanced out t!e disru+tion to su++lies in t!e +ast t!ree yearsin Arica and t!e $iddle East, !ere outages !a5e )een running at .illion )arrelsa day, co.+ared it! ust 100,000 a day in t!e +re5ious decade, 'P 9gures s!oWit!out t!e disru+tions, t!e oil +rices ould !a5e tu.)led, !ile without the

surge in U$ pro#uction they woul# have soare#, says $r OV!l“!is is t!e t!ree-year +eriod !ic! !as seen t!e least +rice 5olatility since oil+rices ere no longer regulated in 1B70 t!e orld !ad only !ad t!ese disru+tions!ic! e !a5e seen in t!e last t!ree years since t!e )eginning o t!e Ara) S+ringyou ould !a5e seen oil +rices s+iking and a discussion a)out strategic reser5erelease and da.age to t!e econo.y and all t!e rest o it“And at t!e ot!er etre.e, i e !ad only seen t!ese .assi5e HS oil +roductionincreases you ould !a5e seen +rices co.ing under +ressure and talk o "+eccuts,* $r OV!l added'ut !e arned t!at, sooner or later3 the perio# o& price stability woul# come

to an en# K with the problems in >raq looking like a key conten#er to upsetthe status quo)

Oil prices increasing3 multiple reasons

eMine *!2 — Ste5e eDine, Was!ington :orres+ondent or XuartK, N-12-14,

“"il +rices arenLt co.ing don any ti.e soon, and raG is ust t!e latest reason,*XuartK, !tt+%//GKco./2200C2/oil-+rices-arent-co.ing-don-any-ti.e-soon-and-iraG-is-ust-t!e-latest-reason/.he upheaval in >raq threatens to e%acerbate a three1year1ol# tren# in

which unusual geopolitical #isruptions have become the new normal) Akey impact—high oil prices when analysts say bulging new supplies shoul#

be sen#ing them &ar lower8 !at is )ecause much o& the geopolitical turmoil

http://www.independent.co.uk/news/business/news/long-years-of-oil-price-stability-are-at-risk-bps-top-economist-warns-9540548.html






has been in or involve# oil1pro#ucing countries) :Ce are witnessing the&ailure o& the petro1state3; 4itigroup8s hea# o& commo#ity research3

#war# orse3 tol# Nuart/)8 H+ until 2011, an a5erage o 00,000 )arrels o oil aday as o= t!e .arket at any one ti.e or .aintenance and ot!er reasons, a5olu.e t!at triggered no +erce+ti)le +rice 5olatility e.+orary aberrations like

Hurricane 6atrina took 1 .illion )arrels o= t!e .arket in 200, and t!e 200attack on >raq re.o5ed 2 .illion )arrels a day8 'ut starting in 2011, t!edisru+tions oten )egan to eceed 2 .illion )arrels a day A.ong t!e cul+rits eret!e Arab $pring and ollo-on u+risings, the chaos in Iigeria3 >ran sanctions

an# o& course Jussia presi#ent Mla#imir Putin8s crypto1invasion o&Ukraine8 !en last Yuly, ibyan militants stor.ed oil e+ort acilities and s!utt!e. don As o no, t!e country +u.+s ust one-eig!t! o t!e 1N .illion )arrelso oil a day it +roduced )eore $ua..ar Na#ha58s ouster in 2011 All in all,about +)= million barrels o& oil a #ay have been o the market aroun# theworl# since last &all) .hose barrels have oset a !)L million1barrel1a1#ay

surge o& supply &rom the U$) As a consequence3 oil prices have continue#

to soar) An# this increase has been e%acerbate# recently by 4hina8srecor#1setting hoar#ing o& oil)



Oil Prices ow



General

ow oil prices inevitable — ( reasons

4olombo *( — Yesse :olo.)o, #or)es econo.ic analyst, N-B-2014, “B Oeasons

W!y "il Prices $ay 'e &eaded #or A 'ust,* #or)es,!tt+%//or)esco./sites/essecolo.)o/2014/0N/0B/B-reasons-!y-oil-+rices-.ay-)e-!eaded-or-a-)ust/.hough the U)$) shale oil boom o& the past several years has le# to a

renewe# surge o& #omestic oil pro#uction as well as an oil glut3 crude oil+rices !a5e re.ained stu))ornly !ig! .here are a growing number o& reasons,!oe5er, why cru#e oil prices are likely to 5nally e%perience a bust in the

not1too1#istant &uture) a5oid .aking 9r. +redictions a)out t!e oil .arket)ecause t!ere are so .any conMicting 5aria)les t!at a=ect oil +rices, ro. su++lyand de.and, geo+olitics !ic! is in!erently un+redicta)le3, and t!e glo)al.onetary en5iron.ent, )ut it is i.+ortant to )e aare o several &actors t!at

have a high probability o& pushing cru#e oil prices lower in the ne%t coupleo& years)E !@ .he unwin#ing o& recor# speculative bullish betsE o +ro+ u+t!e glo)al econo.y ater t!e 200C 9nancial crisis, glo)al central )anks dra.aticallycut interest rates and +rinted trillions o dollars ort! o ne currency 5iaGuantitati5e easing +rogra.s %tremely stimulative monetary environments

increase the #esirability o& har# assets such as oil an# other commo#ities

because they are a he#ge against currency #ebasement an# the

associate# risk o& ination8 #or t!e +ast !al-decade, institutional in5estors!a5e cla.ored into t!e crude oil .arket, causing +rices to soar 140 +ercent ro.t!eir +ost-9nancial crisis los !e c!art )elo s!os t!at large crude oil uturess+eculators green line under c!art3 are currently .aking a record )et o 42,1N

net contracts on t!e continued a++reciation o oil +rices%8 !e data t!at a. citingco.es ro. t!e HS :o..odity #utures rading :o..issionLs eekly:o..it.ents o raders :"3 re+ort t!at s!os t!e aggregate nu.)er o uturesand o+tions contracts t!at are !eld )y t!ree di=erent categories o utures .arket+artici+ants% large s+eculators, s.all s+eculators, and co..ercial !edgers8 arges+eculators t!e grou+ t!at is +lacing t!e record )ullis! crude oil )et are ty+icallyin5est.ent unds t!at trade in a trend-olloing .anner, !ic! .eans t!at t!eytend to ca+ture t!e .iddle +art o .arket .o5es, )ut are oten rong at i.+ortant.arket turning +oints !e nature o t!e large s+eculatorsL trend olloing tradingsyste.s cause t!e., as a grou+, to )et .ost aggressi5ely rig!t )eore t!e trendre5erses As t!e old Wall Street adage goes, “!en e5ery)ody gets to one side o

t!e )oat, it usually ti+s o5er* #or t!is reason, large s+eculators )eco.e an e=ecti5econtrary indicator !en t!eir aggregate trading +ositions reac! etre.e le5els,eit!er on t!e u+side or t!e donside8 W!ile etre.e aggregate trading +ositionscan +ersist or Guite a !ile, as is t!e case in t!e crude oil .arket or t!e +ast eyears, t!ey are still a relia)le indication t!at a +oerul .arket re5ersal is likely tooccur !en t!e +ro+er catalyst e5entually a++ears and sends s+eculators !eadingor t!e eits So ar, no )earis! catalyst !as +resented itsel in t!e crude oil .arket,)ut t!e ot!er +oints t!at L5e listed in t!is +iece .ay co.)ine to or. a +erect



stor. t!at 9nally causes t!e oil .arket to crack8 2@ .he :smart money; isgrowing increasingly bearish8 >n the &utures market3 there is a buyer &or

every seller3 an# a bull &or every bear on a contract-)y-contract )asis3 #ore5ery utures contract currently )eing !eld )y )ullis! large s+eculators in t!e oil.arket, t!ere is so.eone on t!e o++osite side o t!e trade n t!e current crude oil

.arket, it is t!e co..ercial !edgers t!at are taking t!e eact o++osite +osition ast!e large s+eculators%8 :o..ercial !edgers are t!e actual +roducers and users ocrude oil t!e Eons and 'Ps3 !o utiliKe t!e utures .arket as a or. o insuranceagainst ad5erse +rice .o5es :o..ercial !edgers are considered to )e t!e “s.art.oney* )ecause, ater all, t!ey are t!e +!ysical crude oil .arket and !a5e 9rst!andinor.ation a)out uture su++ly and de.and trends8 :o..ercial !edgers no!a5e a record 44,4B2 net contract s!ort +osition in t!e crude oil utures .arket,!ic! indicates t!at t!eir greatest concern is not an increase in crude oil +rices, )uta s!ar+ decline :o..ercial crude oil !edgers are aare o .any o t!e )earis!+oints t!at a. discussing in t!is article, !ic! likely e+lains !y t!ey are !ea5ily!edging against a co.ing crude oil )ust8 +@ .he global monetary environment

is tightening8 As discussed in +oint [1, t!e crude oil +rice )oo. o t!e +ast !al-decade is due in large +art to t!e incredi)ly sti.ulati5e .onetary en5iron.ent t!at!as )een created )y central )anks in a des+erate atte.+t to +ro+ u+ glo)alecono.y ater t!e 9nancial crisis (o t!at une.+loy.ent is alling and t!e risk oan i..inent deMationary crisis !as )een reduced in t!e HS and HF to .aorcountries t!at are running XE “.oney +rinting* +rogra.s3, t!e current glo)alecono.ic cycle is .o5ing into a +!ase in !ic! sti.ulati5e central )ank +olicies ill)e gradually +ared )ack and e5entually re5ersed8 !e HS #ederal Oeser5e ise+ected to co.+lete t!e ta+ering or ending o its XE +rogra. )y t!e end o 2014,!ile t!e #ed #unds Oate is e+ected to start rising as early as 201 Si.ilarly, 'anko Ya+an is no +re+aring or t!e e5entual ending o its A)eno.ics .onetary +olicyno t!at it is .uc! closer to ac!ie5ing its 2 +ercent inMation target 'ank oEngland is considering +lans to start raising interest rates in t!e co.ing years asell, !ic! is a +recursor to t!e ta+ering o its XE +olicy8 !e Euro+ean :entral'ank, !oe5er, is )ucking t!e .onetary tig!tening trend ater cutting its)enc!.ark interest rate last eek )y 10 )asis +oints to 01 +ercent andintroducing a de+osit interest rate o negati5e 010 +ercent !e E:' is alsoconsidering launc!ing its on Guantitati5e easing +rogra. in t!e uture Hnlike t!eHS #ederal Oeser5eLs XE +rogra.s, a Euro+ean XE is not likely to )e as su++orti5eor crude oil +rices )ecause e5en .ere ru.ors regarding it !a5e eakened t!e euroand )oosted t!e HS dollar in t!e +ast .ont!, !ic! !as +ut donard +ressure onco..odities +rices $any co..odities, including oil, are +riced in HS dollars, socentral )ank +olicies t!at are )ullis! or t!e dollar are ty+ically )earis! orco..odities +rices !e si.ultaneous tig!tening o HS .onetary +olicy and t!eloosening o Euro+ean .onetary +olicy could set t!e stage or a +oerul )ull.arket in t!e HS dollar8 .he U)$) Fe#eral Jeserve8s policies are by &ar the

most important monetary variable &or cru#e oil prices3 so its tighteningover the ne%t &ew years represents the en#ing o& one o& the key #riving

&orces behin# cru#e oil8s bull market o& the past hal&1#eca#e) >n a##ition3

the massive ination an# imminent currency #evaluation that many

commo#ities tra#ers ha# e%pecte# to occur as a result o& quantitative



easing programs has not materiali/e# an# is unlikely to in the near &uture8

-@ .he shale oil boom is increasing supply8 Surging (ort! A.erican oil+roduction, courtesy o t!e recent HS s!ale and :anadian oil sand )oo.s, isdra.atically reducing HS oil i.+orts and !as e5en led to a glut o lig!t, seetcrude oil in t!e Hnited States8 >n the past 5ve years3 U)$) oil pro#uction

e%perience# a sharp reversal o& its long1term #owntren# an# recently hit atwenty15ve year high%8 (et HS oil i.+orts ell to a 2C-year lo in 201 as aresult o t!e s!ale oil )oo.%8 HS oil +roduction is e+ected to gro to B2 .illion)arrels a day in 201 and BN .illion )y 201N, !ic! ould .ake t!e HS t!eorldLs largest oil +roducer, a!ead o e5en Saudi Ara)ia and Oussia :anadaLs oilsand )oo. is e+ected to )oost t!e countryLs oil +roduction )y 00,000 )arrels +erday to ac!ie5e a total +roduction o B .illion )arrels +er day in 201, .uc! o!ic! ill )e e+orted to t!e Hnited States8 As t!e orld largest oil consu.er, t!eHnited StatesL oil )oo. !as signi9cantly decreased t!e countryLs reliance on oreignsources o oil, +articularly ro. t!e 5olatile $iddle East !is is one o t!e .ainreasons !y glo)al oil +rices !a5e re.ained relati5ely Mat or t!e +ast se5eral yearsdes+ite t!e Ara) S+ring re5olutions t!at led to an C0 +ercent decrease o i)yan oil+roduction and ot!er disru+tions, as ell OussiaLs recent in5asion o easternHkraine According to oil analyst ysle 'rinker, oil +rices .ay !a5e soared to as !ig!as 610 a )arrel it!out t!e increase o HS oil +roduction8 A glut o lig!t, seetcrude oil is e5en or.ing in t!e Hnited States as a result o rising do.estic oil+roduction as ell as t!e HS crude oil e+ort )an t!at dates )ack to 1B7 "ilco.+anies and oil-+roducing states suc! as eas and (ort! >akota are +us!ing to!a5e t!e e+ort )an lited so t!at t!e HS can e+ort so.e o its neound energy)ounty to t!e glo)al oil .arket W!ile s!ale oil de+osits are ound t!roug!out t!eorld, ot!er countries ace greater diZculties in t!eir atte.+ts to re+licate t!e HSoil s!ale )oo.8 !e sa.e tec!nologies t!at !a5e ena)led t!e oil s!ale )oo. racking and !oriKontal drilling !a5e also led to a nearly 40 +ercent increase inHS natural gas +roduction since 2007 (o one o t!e loest cost uels, naturalgas is e+ected to urt!er reduce t!e Hnited StatesL reliance on oil, +articularly orelectricity generation, !eating, c!e.ical .anuacturing, and e5en trans+ortation8

!e !ig! +rice o oil in t!e +ast decade !as )een a .aor dri5ing orce )e!ind t!eHS s!ale energy )oo. )ecause it ena)led t!e use o ne drilling tec!nologies t!atould not !a5e )een econo.ically 5ia)le at loer +rices .he continuation o& the

U)$) shale energy boom in the ne%t &ew years is likely to put pressure on

cru#e oil prices in accor#ance with the principle3 :the only cure &or high

prices is high prices);E =@ Pro#uction is starting up again in manycountries E Oil pro#uction an# e%ports are poise# to begin again in many

countries that e%perience# severe #isruptions in recent years%8 ran% AterWestern econo.ic sanctions ere +laced on ran due to its nuclear +rogra. causeda near-colla+se o its econo.y and currency in 2012, t!e nation a++ears ready tostrike a deal so t!at it can e+ort its oil to t!e West again "++en!ei.er oil analyst#adel J!eit clai.s t!at t!e ran-related “su++ly risk +re.iu.* accounts or 20-0+ercent o t!e +rice o oil, !ic! ould disa++ear and send +rices to t!e 67-6Crange once a deal is 9nally struck it! t!e West 1 .illion .ore )arrels o oil +erday could enter t!e .arket !en ranLs nuclear issue is resol5ed8 raG% raGLs oil+roduction recently !it a 0-year !ig! as its oil industry re)uilds ater t!e ar and



decades o underin5est.ent raG !as t!e orldLs 9t!-largest +ro5en oil reser5es,and se5eral !undred t!ousand .ore )arrels o oil +er day are e+ected to co.eonline t!is year alone8 i)ya% i)yaLs oil +roduction +lunged )y o5er C0 +ercentro. 1N .illion )arrels a day to ust 27,000 )arrels a day ater t!e countryLsre5olution in 2011 W!ile i)yaLs oil situation re.ains 5olatile due to +rotests t!at

!a5e s!ut don +i+elines and +orts, an e5entual resolution could dou)le +roductionto 00,000 )arrels a day8 DeneKuela% >es+ite nu.erous +olitical c!allenges t!at!a5e reduced DeneKuelaLs oil +roduction in t!e +ast decade, eo >rollas, t!e !ead o t!e :entre or Jlo)al Energy Studies, e+ects 20,000 .ore )arrels o oil +er day toco.e online t!is year Euro+ean energy co.+anies Eni S+A and Oe+sol SA !a5esigned deals last eek to in5est u+ to 600 .illion eac! to de5elo+ DeneKuelaLsPerla oil 9eld, !ic! is considered to )e one o t!e .ost i.+ortant disco5eries o t!e+ast decade8 *@ OP48s limite# ability to boost prices by cutting

pro#uctionE W!en oil +rices dro++ed signi9cantly in t!e +ast, "PE: countriesould cut t!eir oil +roduction to )olster t!e +rice o oil Growing 5scal #e5cits in

many OP4 nations in recent years3 !oe5er, make it &ar more #i9cult to

cut oil pro#uction because these countries can no longer aor# the loss o&oil revenues8 "@ Global oil #eman# is slowing8 ed )y :!ina and ot!ere.erging nations, glo)al oil de.and s+iked in t!e years olloing t!e 200C 9nancialcrisis, !ic! contri)uted to oilLs )ull .arket Since 20113 oil #eman# growth hasslowe# signi5cantly to a hal&1#eca#e low largely #ue to the ongoing

economic slow#own in 4hina an# emerging economies0E L@ .he global

economic :recovery; is actually another bubbleE As discussed in t!e last+oint, oil #eman# an# prices are highly #epen#ent on global economicgrowth !e 9nancial crisis and su)seGuent Jreat Oecession as !at +o++ed t!e200C oil )u))le ater +rices reac!ed nearly 610 +er )arrel Ater t!e +rice o oilsank in late-200C, t!e +ost-200B econo.ic reco5ery !el+ed oil +rices to rise 140+ercent ro. t!eir 9nancial crisis lo8 Hnortunately, .y etensi5e researc! !asound t!at t!e glo)al econo.ic reco5ery t!at !as dri5en oil +rices !ig!er is actuallyan arti9cial, )u))le-dri5en reco5ery t!at call a “'u))leco5ery* n a des+erateatte.+t to +re5ent a deMationary de+ression, central )anks +u.+ed trillions odollars ort! o liGuidity into t!e glo)al 9nancial syste. and cut interest rates to5irtually Kero +ercent n s!ort order, ne econo.ic )u))les started )allooning in:!ina, e.erging .arkets, :anada, Australia, (ordic countries, co..odities, tec!startu+s, and HS eGuities and !ousing +rices, to na.e a e read .y'u))leco5ery article or .ore inor.ation3 Pro+erty and credit )u))les are inMatingonce again all around t!e orld in a +attern t!at is 5ery si.ilar to t!e last decadeLs)u))le t!at caused t!e 9nancial crisis in t!e 9rst +lace8 !is c!art s!os t!at:anadaLs !ousing and !ouse!old de)t )u))le is e5en orse t!an t!e HSL )u))lelast decade%8 !ese days, it .akes no di=erence !et!er you look at t!e c!arts o+ro+erty +rices and de)t in :anada, or in Australia, (oray, &ong Fong, :!ina, orSinga+ore\ t!e c!arts all look t!e sa.e and s!o t!e sa.e classic )u))le +attern

!e orld is caug!t u+ in an e+ide.ic o +ost-200B )u))les, )ut t!e 5ast .aority o +eo+le are co.+letely unaare and in denial8 &ere are a e terriying statisticst!at s!o !o dangerous :!inaLs econo.ic )u))le is%8 :!inaLs total do.esticcredit .ore t!an dou)led to 62 trillion ro. 6B trillion in 200C, !ic! is eGui5alentto adding t!e entire HS co..ercial )anking sector8 'orroing !as risen as a



s!are o :!inaLs national inco.e to .ore t!an 200 +ercent, ro. 1 +ercent in200C8 :!inaLs credit grot! rate is no aster t!an Ya+anLs )eore its 1BB0 )ustand A.ericaLs )eore 200C, it! !al o t!at grot! in t!e s!ado-)anking sector8

!e +ost-200B econo.ic )u))les are t!e +ri.ary reason !y t!e glo)al econo.ystarted groing again )ecause )u))les create te.+orary grot! )oo.s )eore

ending in crises Chen the post1277( bubbles pop3 global economic growthis going to sink ?an# there will not be a quick recovery like last time@3which will re#uce #eman# &or oil8 (@ .he en#ing o& the commo#ities

supercycle8 As .entioned in t!e last +oint, co..odities are one o t!e key)u))les t!at !a5e identi9ed Arti9cial, de)t-dri5en econo.ic grot! in :!ina andot!er e.erging .arket nations co.)ined it! t!e un+recedented ocean o central)ank liGuidity caused co..odities +rices to tri+le since 2002%8 &undreds o )illionso dollars ort! o in5est.ent ca+ital cla.ored into co..odities as in5estors )eganto treat co..odities as a ne long-ter. asset class, si.ilar to eGuities and )onds$any o t!ese in5estors also 5ieed co..odities as a ay to +lay t!e :!ina ande.erging .arkets )oo.8 Oecord !ig! co..odities +rices s+urred a .assi5e glo)ale+loration and etraction )oo. t!at is no leading to groing gluts in nu.erousco..odities, +articularly grot!-sensiti5e co..odities like co++er and iron ore, asrising su++ly is .et it! sloing de.and ro. :!ina and e.erging .arkets Asstated earlier, “t!e only cure or !ig! +rices is !ig! +rices* W!en t!e +ost-200Bglo)al econo.ic )u))le +o+s, )elie5e t!at commo#ities prices will 5nally

e%perience a true bust

ong1term oil prices are slumping #ramatically

Pre/ioso 2+ — Yeanine PreKioso, >e+uty Editor at Oeuters, energycorres+ondent, 201 Jerald oe) Aard Winner, 2--14, “Analysis% As HS de)ates

oil e+orts, long-ter. +rices slu.+ )elo 6C0,* Oeuters,!tt+%//reutersco./article/2014/02/0/us-oil-+rices-slu.+-analysis-idHS'OEA120J02014020ong1term U)$) oil prices have slumpe# to recor# #iscounts 5ersus Euro+es)enc!.ark 'rent, with some contracts #ropping below 'L7 in a #ramatic

#ownturn t!at .ay intensiy +roducers calls to ease a crude e+ort )an8 Oil &or#elivery in ,ecember 27!* has tumble# '+)=7 a barrel in t!e 9rst to eekso t!e year, trading at ust 67B4 on #riday aternoon, its lowest price since

277() .hat is an unusually abrupt move &or longer1#ate# contracts t!at arety+ically .uc! less 5olatile t!an +ro.+t crude #or .ost o last year, t!e contracttraded in a narro range on eit!er side o 6C4 a )arrel8 .he shi&t in prices on

either si#e o& the Atlantic is even more #ramatic &urther #own the curve3with ,ecember 27!( U)$) cru#e now tra#ing at a recor# #iscount 5ersus t!eeGui5alent Euro+ean 'rent contract !e s+read !as dou)led t!is .ont! to nearly61 a )arrel, data s!o8 .he #rop in so1calle# Dlong1#ate#D U)$) oil &utures

e%ten#s a broa# #ecline that has pushe# prices as much as '!= lower intwo years) >t also coinci#e# with an abrupt #rop in near1term &utures3

which &ell by nearly '( a barrel in t!e o+ening eeks o 2014 a.id signs oi.+ro5ing su++ly ro. i)ya@



.he long1term outlook &or global oil prices is #ecreasing — '"=

a barrel

pstein +2( — Jene E+stein, A.erican econo.ics editor at 'arronLs $agaKine,

-2B-14, “&ere :o.es 67 "il,* 'arronLs,!tt+%//online)arronsco./nes/articles/S'00014240111B0N0047B4B220BB21CN0.he long1term outlook &or global oil prices is lower3 perhaps much lower,gi5ing a strong )oost to t!e HS econo.y !ile +otentially cri++ling t!e econo.y o Dladi.ir Putins Oussia Mast new #iscoveries o& oil an# natural gas in the U)$)

an# aroun# the globe coul# #rive the oil price to as low as '"= a barrel

over the ne%t 5ve years &rom a current '!77)E .he #eman# si#e3 too3 will

put pressure on the supremacy o& petroleum) #or t!e 9rst ti.e in its 10-year!istory, t!e internal co.)ustion engine can )e run eZciently on alternati5e uelsro. a nu.)er o sources, including natural gas As t!ese alternati5es are

increasingly introduced, glo)al consu.+tion o oil ill slo its grot! and Mattenout8 8 4itigroupBs hea# o& global commo#ity research3 #war# orse3

believes the combination o& attening consumption an# rising pro#uction

shoul# mean that Dthe '(71a1barrel oor on the worl# oil price over thepast &ew years will become a '(7 ceiling)D Cithin a new tra#ing range with

a '(7 ceiling3 orse sees an average o& '"= as plausible)8 8 !ats a ar cryro. t!e old +aradig., +ro.oted in t!e +ast 40 years, !ic! +osited e5er-greaterde.and or +etroleu. as de5elo+ing econo.ies gre, and a slodon on t!esu++ly side -- t!e loo.ing +ros+ect o Q+eak oil,Q !ere)y glo)al +roduction .aesout and alls into decline o t!e contrary, uncon5entional sources o crude oiltotaling .ore t!an a trillion )arrels -- t!e eGui5alent o .ore t!an 0 years o etra

su++ly -- !a5e )een disco5ered in t!e +ast 95e years .he maority isrecoverable at '"= or less3 an# much is now being tappe#)E

Oil prices are hea#ing #own &or the ne%t &ew years

4onerly !+ — 'ill :onerly, econo.ic and )usiness analyst, -1-1, “"il Price

#orecast or 201-2014% #alling Prices,* #or)es,!tt+%//or)esco./sites/)illconerly/201/0/01/oil-+rice-orecast-or-201-2014-alling-+rices/Oil prices are hea#e# #own3 an# > mean #own at least '27 a barrel) .he

key reason is that prices have been high) >t8s not a para#o%3 but a result o&

the long time lags in oil pro#uction)8 "il +rices ere airly sta)le ro. 1BCNt!roug! 2001, a5eraging ust 620 +er )arrel !en +rices started rising, s+iking to614 ust as t!e recession )egan .he price o& oil has been above 'L7 &or the

past two an# a hal& years) Cith rising prices has come a #ramatic increase

in e%ploration activity) >uring t!e era o lo +rices, t!e nu.)er o drilling rigs ino+eration around t!e orld as 1,B00 on a5erage\ no e are at nearly dou)le t!at+ace, and e !a5e )een or nearly t!ree years8 >rilling acti5ity results in oil+roduction, lasting or .any years ater t!e drilling is o5er ake a look at t!e



acco.+anying c!art o drilling rigs and total +roduction >rilling u.+ed u+ ater t!eoil +rice !ikes o 1B7 and 1B7B 'y 1BCN, increased oil +roduction )roug!t +ricescras!ing don "il e+loration Guickly olloed suit8 Production, !oe5er, continuedto gro long ater ne drilling declined W!en drilling as !ig!, .uc! o t!e acti5ityas e+loratory—trying to 9nd t!e oil W!en +rices ell, t!e riskiest drilling .ade no

sense W!at as let as in-9ll !e oil 9eld !ad )een identi9ed, and urt!er ellsere needed to )est utiliKe t!e resource !ese ells are airly lo risk, it! !ig!reards co.+ared to t!e cost o t!e drilling rig As a result, even low levels o&

#rilling activity le# to substantial increases in global pro#uction8 .o#ay

we8ve ha# mo#erately strong #rilling activity &or several years) Iew 5el#shave been i#enti5e# an# #elineate#) Iow we8ll see &airly mil# #rilling

activity but continually increasing pro#uction)E >n the past year

pro#uction has been so&t3 barely growing3 but that8s a reection o& weak

#eman#) >n the short run3 pro#uction can be #iale# back to save more oil&or the &uture) >n the long run3 though3 pro#uction capacity rules the

roost)E W!at o de.andI ,eman# shoul# grow a little slower than the global

economy Hnless t!e orld starts to )oo.—an unlikely scenario, gi5en +ro)le.s inEuro+e and t!e Hnited States—pro#uction capacity will grow &aster than

#eman#3 pulling prices #own8 W!at o +eak oil orriesI !e conce+t is otensound !en looking at one ell—)ut e5en a single ell ill so.eti.es )e re-orkedto increase its out+ut #or t!e orld as a !ole, the peak oil theory &ails to

consi#er that higher prices lea# to greater e%ploration &or new oil 5el#s3

greater in15ll #rilling o& establishe# 5el#s3 better care o& ol#er wells3 an#

#evelopment o& new technology &or all o& these &unctions) .he worl#8s oilpro#uction will peak when the cost o& 5n#ing new oil rises an# the

#evelopment o& alternative energy makes the value o& oil #ecline)E Over

the coming &ew years3 look &or oil prices to #ecline at least below 'L7 abarrel an# quite possibly more)



High $upply$hale <oom

Future oil prices &alling #ue to high supplies

Frie#man an# <erthelsen !- — (icole #ried.an, energy .arkets re+orter

at WSY, and :!ristian 'ert!elsen, sta= riter at WSY, 2-11-14, “HS oers :rude-"il"ut+ut "utlook or 2014, 201,* Wall Street Yournal,!tt+%//onlinesco./nes/articles/S'10001424027020N02047B770C1CBCBN074.he U)$) will &ace a tighter supply1an#1#eman# picture &or cru#e oil an#petroleum pro#ucts this year an# ne%t than previously e%pecte#3

government &orecasters sai# uesday8 .he U)$) nergy >n&ormation

A#ministration lowere# its &orecasts &or U)$) oil1pro#uction growth in 27!-

an# 27!= in its s!ort-ter. energy outlook, an# raise# its e%pectations &or thecountryBs consumption o& oil pro#ucts)8 !e HS is likely to +roduce C42 .illion)arrels a day o crude oil t!is year, don ro. C4 .illion )arrels a day in t!e EAs

+re5ious orecast )ut still u+ ro. 744 .illion )arrels a day in 201 #or 201, t!eEA orecasts +roduction o B1B .illion )arrels a day o oil, don ro. B2B .illion)arrels a day +re5iously8 .he output &orecasts were a#uste# because o&

Din#ications that severe weather this winter has cause# temporaryslow#owns in completing new wells3Q according to t!e EA8 !e EA e+ectsconsu.+tion o oil +roducts to reac! 1CB1 .illion )arrels a day in 2014 and 1CB7.illion )arrels a day in 201, u+ ro. +rior orecasts or 1CCC .illion )arrels a dayt!is year and 1CBN .illion )arrels a day net year8 o !el+ 9ll t!e ga+, t!e HS .ayneed to i.+ort .ore oil t!an e+ected !e EA orecasts net i.+orts o oil and oil+roducts at 2 o HS oil de.and )y 201, a !ig!er s!are t!an +re5iously orecast)ut still t!e loest le5el since 1B71 HS reliance on oreign oil +eaked at .ore t!an

N0 o do.estic de.and in 2008 .he >A e%pects net imports to #ecline&rom *)2 million barrels a #ay last year to =)-( million barrels a #ay this

year an# -)*= million barrels a #ay in 27!=)E U)$) oil pro#uction has beenrobust because o& hy#raulic &racturing an# hori/ontal #rilling techniques

that have enable# energy pro#ucers to tap into supplies trappe# in shale1

oil 5el#s)E HS +roduction +eaked in 1B70, !en it reac!ed an annual a5erage oBN .illion )arrels a day, t!e EA said8 !e agency raised its e+ectations or glo)aloil consu.+tion to B1N2 .illion )arrels a day t!is year and B2BB .illion )arrels aday net year, u+ ro. B0N .illion )arrels a day in 201 $ost o t!e grot! illco.e ro. de5elo+ing nations, es+ecially :!ina8 :onsu.+tion a.ong t!eindustrialiKed nations t!at co.+rise t!e "rganiKation or Econo.ic :oo+eration and

>e5elo+.ent is e+ected to stay relati5ely Mat, !ile e.erging-.arket econo.iessuc! as :!ina ill account or Qal.ost allQ consu.+tion grot!, t!e EA said 8 n201, non-"E:> de.and ill o5ertake Mat "E:> de.and or t!e 9rst ti.e,eceeding it )y nearly 1 .illion )arrels a day8 .he >A sai# it e%pects worl#

supplies to increase by !)" million barrels a #ay in 27!- an# !)- millionbarrels a #ay in 27!=, it! .ost o t!e grot! co.ing ro. countries outside t!e"rganiKation o t!e Petroleu. E+orting :ountries—es+ecially t!e HS, :anada and'raKil8 U)$) energy o9cials e%pect global an# #omestic cru#e prices to



international competitors, Standard T PoorLs said in a re+ort t!is eek8

$ean!ile, several nations have yet to unleash their own vast shale

reserves3 potentially throwing another wrench into energy prices) .he U)$)

is the only country so &ar to see a high level o& shale oil an# gaspro#uction8 !e s!ale )oo. !as +ro5en to )e a +ositi5e de5elo+.ent or re9ners

looking o5erseas to Euro+e, Ya+an, :!ina, atin A.erica and ot!er regionsAccor#ing to $P3 e%ports o& re5ne# pro#ucts have surge# by more than*7Q to about !)" million barrels a #ay since 27!78 STP added t!at !ile notas signi9cant, .ore uel-eZcient auto.o)iles are +us!ing do.estic uel de.andloer and t!us reeing u+ oil to )e re9ned into +roducts or e+ort 8 Oe5enues,o+erating e+enses and credit .etrics o certain HS re9ners !a5e strengt!ened,STP e+lained, es+ecially or re9ners located close to s!ale +lays8 .he report also

sai# the :rising ti#e; o& U)$) e%ports is putting pressure on various :ari))ean re5ners to cut back or close o+erations n so.e .arkets, like lo-sulur diesel, gasoline and et uel, A.erican re9ners are taking .arket s!are ro.so.e Euro+ean co.+etitors8 'eore t!e ra+id increase in HS oil out+ut, A.ericaas a .aor destination or Euro+ean gasoline) .he country8s nee# &or importe#gasoline has #ecrease# signi5cantly, !urting re9ners in Euro+e andtransatlantic s!i++ers t!at ould nor.ally )ring gasoline to t!e HS and lo-sulurdiesel )ack to Euro+e8 STP noted !o so.e o t!e .ore so+!isticated HS re9nersere +ut at a disad5antage once t!e s!ale )oo. kicked o= $any re9ners .odi9edacilities to +rocess !ea5ier crude, not t!e lig!t, seet crude )eing +roduced ats!ale +lays8 .he move was inten#e# to prepare re5neries &or an e%pecte#

supply increase an# price #rop &or heavier cru#e) ig!t, seet W crude usedto trade at a +re.iu. to 'rent and !ea5ier grades like $aya, )ut the rapi#

increase in U)$) shale pro#uction has reverse# that relationship)E aws

largely prohibiting U)$) cru#e oil e%ports have also kept the price o& C.>an# other #omestic cru#e slates relatively low, STP said8 So.e la.akers inWas!ington, including Oe+u)lican Sen isa $urkoski o Alaska, !a5e called or t!eHS to lit t!e e+ort )an t!at )egan in t!e 1B70s Oil giant %%on obil ?RO3!as also 5oiced su++ort or suc! a .o5e, citing a proecte# -7Q ump in U)$)

liqui# supplies by 27-78 "5erseas S!ale Potential8 Jlo)al energy pro#ucers

have yet to embark on their own shale boom3 even as countries likeJussia3 4hina an# Argentina sit on large amounts o& technically

recoverable shale oil an# gas8 &oe5er, it re.ains to )e seen !at +ortion ot!ose reser5es are econo.ically reco5era)le8 “Alt!oug! great +otential eists oruture s!ale-deri5ed !ydrocar)on +roduction, it re.ains to )e seen !at +ercentageo non-HS s!ale resources can )e etracted at a +ro9t,* STP e+lained in ase+arate re+ort8 Oussia is esti.ated to !a5e t!e largest s!ale oil reser5es o 7)illion )arrels, according to t!e Energy nor.ation Ad.inistration !e HS is (o 2it! C )illion )arrels, olloed at a distance )y :!ina, Argentina and i)ya 8 :!inais )elie5ed to !a5e 1,11 trillion cu)ic eet o reco5era)le s!ale gas !e EAesti.ates t!at Argentina !as C02 trillion cu)ic eet, !ile t!e HS is ourt! at NNtrillion Algeria likely !as t!e t!ird-largest s!ale gas reser5es 8 W!ile t!e HS energyindustry !as roared a!ead, s!ale reser5es o5erseas ace se5eral de5elo+.ent!urdles suc! as a lack o drilling resources, land oners!i+ issues and go5ern.entregulations8 Also, t!e c!aracteristics o s!ale can 5ary ro. country to country, so



tec!niGues t!at ork in t!e HS .ay not )e directly a++lica)le to ot!er nations 8

“Alt!oug! t!ese !urdles ill slo s!ale reser5e de5elo+.ent outside (ort!A.erica--and in so.e instances .ay .ake +roduction uneasi)le--we e%pect that

global shale pro#uction will become increasingly signi5cant beyon# 2727,*STP said

Oil prices #ecreasing an# stabili/ing as a result o& U$ energy

in#epen#ence

Hill *!( — Patrice &ill, sta= riter, N-1B-14, “HS oil Mo !el+s kee+ +rices in

c!eck as t!reats rise o5erseas,* !e Was!ington i.es,!tt+%//as!ingtonti.esco./nes/2014/un/1B/us-oil-Mo-!el+s-kee+-+rices-in-c!eck-as-t!reats-/I+age]allAmerica8s growing energy in#epen#ence is paying maor #ivi#en#s thisspring3 helping to keep a li# on &uel prices #espite su##en threats to maor

global oil supplies in >raq an# Jussia that in the past woul# have sent

prices soaring8 Sunni $usli. etre.ists !o !a5e taken o5er large +ortions onort!ern raG !a5e s!on t!eir illingness to use oil su++lies as a ea+on, takingcontrol o5er t!e nationLs )iggest re9nery in 'aii te.+orarily Wednesday ater!a5ing sa)otaged a .aor +i+eline unneling oil t!roug! urkey or e+ort8 !eirad5ance on 'ag!dad and regions art!er sout! t!reatens to cri++le raGLs a)ility toe+and out+ut at its .ost +roli9c and i.+ortant sout!ern oil 9elds as ell,+otentially dealing a )lo to :!ina and ot!er oil-t!irsty Asian nations t!at erelooking to raG or su++lies in t!e uture8 !e raG crisis ollos OussiaLs takeo5er o:ri.ea and its )acking o re)els 9g!ting t!e Fie5 go5ern.ent in eastern Hkraine,+ro.+ting t!e HS and Euro+e to t!reaten )road sanctions on OussiaLs econo.y,including its 5ital oil sector Suc! sanctions !a5e t!e +otential to t!rottle oil e+orts

ro. t!e orldLs to+ +roducer and de+ri5e .uc! o Euro+e o a critical source ooil)E >n the past3 either o& these two maor threats to oil supplies — an#

certainly both o& them together — woul# have sent worl# oil prices soaringan# pushe# prices at U)$) gas pumps to uncom&ortable an# possibly

unprece#ente# levels) <ut that is not happening, and analysts are attri)utingt!e relati5e cal., it! +re.iu. crude +rices !a5ing risen .oderately to a rangearound 610N a )arrel in (e ;ork so ar t!is eek, to the gusher o& oil coming

out o& America8s heartlan#, !ic! is hol#ing #own prices)8 'en $ontal)ano,researc! director or t!e Energy Policy Oesearc! #oundation nc, said t!e surge inHS oil out+ut ro. t!e 'akken, Eagles #ord and ot!er big shale &ormations inthe nation8s mi#section not only has create# an embarrassment o& oil

riches that is mo#erating energy prices in the U)$)3 but it is also giving theworl# a substantial margin o& e%cess pro#uction capacity that ispreventing the kin# o& astronomical spike in global oil prices seen #uring

comparable oil crises in the past)E :Oil prices woul# likely be '27 to '-7

#ollars per barrel higher than they are now3; in t!e 612 to 610 range, andt!e "PE: oil cartel ould )e struggling to address s!ortages, $r $ontal)ano toldt!e e)site Oeal :lear Energy :Cithout the increase in U)$) oil pro#uction

over the past &ew years3 OP48s e%cess capacity woul# be at or near



/ero)*8 Pu.+ +rices rose .odestly to around 6N7 a gallon on a5erage t!is eekor regular gasoline in t!e ake o last eekLs etre.ist takeo5er o nort!ern raG,according to Jas)uddyco. !ey re.ain ust slig!tly a)o5e t!e 6N a5erage le5elt!is s+ring and t!e 6N1 le5el +osted a year ago, and ar )elo t!e le5els o5er 64!ere gas +rices regularly landed )eore t!e s!ale oil )oo. 8 !e restraint in uel

+rices is not entirely ne, t!oug! it !as )een noticea)le t!is eek $r $ontal)anosaid t!e glut o oil co.ing out o t!e $idest !as !ad t!e )ene9cial e=ect o!olding don oil +rices or se5eral years >t enable# the worl# to easily absorb

the loss o& ! million barrels a #ay o& premium cru#e pro#uction caused )yt!e colla+se o i)yaLs oil industry se5eral years ago, as ell as t!e su)seGuent losso 1 .illion to 1 .illion )arrels a day o ranian crude e+orts )ecause o a HS-led sanctions regi.e since 2012 (eit!er o t!ose e5ents !ad .uc! i.+act on orldoil +rices — in a de+arture ro. t!e +ast8 “Sanctions against ran, ci5il ar in i)ya,and general unrest in t!e $iddle East !a5e all !ad .ini.al e=ects on +rice 5olatility— t!anks to t!e HS energy renaissance,* said Yared $eyer, a +olicy analyst at t!e$an!attan nstitute or Policy Oesearc! “.he most important contribution to

oil8s price stability has been the substantial increase in U)$) pro#uction);

U$ shale boom lowering prices3 especially light oil in 4ana#a

ewis 2= — Ye= eis, energy re+orter, 2--14, “&o t!e HS s!ale )oo. is

+utting +ressure on Al)ertaLs lig!t oil,* !e #inancial Post,!tt+%//)usiness9nancial+ostco./2014/02/0/!o-t!e-u-s-s!ale-)oo.-is-+utting-+ressure-on-al)ertas-lig!t-oil/IRRlsa])12-0d

he U)$) shale boom is poise# to cut #eman# &or Alberta8s light oil, a.id.ounting ears o a glut and calls ro. energy co.+anies to ease restrictions one+orting crude ro. HS s!ores8 $tea#y pro#uction gains &rom the U)$)

<akken an# the agle For# shale play in .e%as coul# overwhelm U)$)re5neries by mi#127!* an# #rive #own prices unless legislators in Was!ingtonease restrictions on e+orts, analysts at O': :a+ital $arkets said in a re+ortWednesday Sa5e or s!i+.ents to :anada, t!e HS +ro!i)its e+orts o crude oilunder a )an t!at dates to t!e 1B70s8 “;ouLre going to co.e to a all at so.e +oint!ere t!ereLs too .uc! oil and no!ere to +ut it in t!e HS it!out oil e+orts)eing alloed,* said eo $ariani, senior HS analyst it! O': in Austin, e8 “Att!at +oint e certainly ould sus+ect t!at i e donLt !a5e e+orts t!en youLregoing to start to see +retty dra.atic oil-on-oil co.+etition, !ere guys are trying toco.+ete or sales it! t!e sa.e re9ners and end users* 8 W!et!er t!e HS allose+orts could !a5e signi9cant ra.i9cations or Al)erta ,eep #iscounts on

Cestern 4ana#a $elect3 the key heavy oil marker3 have narrowe#substantially against the Cest .e%as interme#iate benchmark &rom a yearago)E <ut light oil is un#er increasing pressure Ed.onton Par, a lig!t oil)lend, +lunged .ore t!an HS620 )elo W in >ece.)er, according to Scotia)ank 8

Prices have snappe# back , “)ut t!ink t!at t!ere is a risk )ecause o t!e !ugeand Guite re.arka)le de5elo+.ent o lig!t, tig!t oil,* said Patricia $o!r, 5ice-+resident and co..odity .arkets s+ecialist at t!e )ank in oronto8 :anadian "ilSands td, !ic! ons t!e largest s!are o t!e Syncrude :anada td +roect, said



Yan 0 sales o its synt!etic crude oil sold or 610C4 under W in t!e ourt!Guarter !e oil etc!ed a 622 +re.iu. in t!e sa.e +eriod a year ago8 !eco.+any arned in5estors t!at rising HS +roduction could +us! sales to .oredistant re9neries, leading to !ig!er trans+ortation costs Molatile prices :willpersist &or several years until additional +i+eline or ot!er deli5ery ca+acity is

a5aila)le to deli5er crude oil ro. Western :anada* to ne .arkets, t!e co.+anytold in5estors8 !e +ros+ect o a HS oil glut “is a risk and t!e key reason !ySuncor and otal decided not to go a!ead it! anot!er u+grader in Al)erta,* $s$o!r said !e !ugely e+ensi5e +lants con5ert ra )itu.en into re9nery-ready oil 8

!e to co.+anies last year scra++ed +lans to )uild t!e 611N-)illion Doyageur.ega-+lant, earing t!e +roect ouldnLt )e co.+etiti5e it! loer-cost s!ale oil8

“!atLs starting 5ery .uc! to +lay out as e e+ected,* Suncor c!ie eecuti5eSte5e Willia.s said t!is eek “W!at eLre seeing no is t!e Doyageur-ty+ein5est.ent, itLs 5ery diZcult to ustiy doing t!at*8 O': esti.ates t!e HS canacco..odate anot!er to .illion )arrels a day o +roduction grot! )eore testingre9nery and storage li.its Output coul# slow without e%ports i& C.> prices

#rop below U$'L73 $r $ariani said8 “We donLt oresee t!e sa.e +ro)le.!a++ening or !ea5y oil,* !e added “!e real issue in t!e HS is lig!t oil*



A.0 >raq 4onict >ncreases Prices

Oil prices are #ecreasing3 >raq conict only has temporary

eect3 an# U$ output rising

$henk *2* — $ark S!enk, sta= riter or 'loo.)erg (es, N-2N-14, “W "ilSli+s to o-Week o as raG "ut+ut Seen Oising,* 'loo.)erg,!tt+%//)loo.)ergco./nes/2014-0N-2N/)rent-alls-or-second-day-as-iraG-out+ut-seen-rising!t.lCest .e%as >nterme#iate oil #roppe# to a two1week low an# <rent &ell on

signs that the insurgency in >raq won8t curb output an# as U)$) stockpilesclimbe#)E >raq8s cru#e e%ports will increase ne%t month3 Oil inister Ab#ul

6areem al1uaibi sai# yesterday Government &orces repelle# an attack )yt!e Sunni sla.ic State in >raq and t!e e5ant on t!e 'aii re9nery nort! o'ag!dad U)$) cru#e stockpiles rose by !)"- million barrels to +LL)! million

last week , t!e Energy nor.ation Ad.inistration said yesterday8 “Prices are

retreating because the insurgency hasn8t ha# a material impact on the>raqi pro#uction an# we might be looking at a gain in e%ports,* said Jene$cJillian, an analyst and )roker at radition Energy in Sta.ord, :onnecticut“Prices are consoli#ating !ere ust )elo t!e nine-.ont! !ig!s*8 C.> or Augustdeli5ery slippe# ** cents3 or 7)* percent, to 610C4 a )arrel on t!e (e ;ork$ercantile Ec!ange >t was the lowest settlement since Sune !! #utures areu+ 7 +ercent t!is year8 <rent &or August settlement &ell "( cents3 or 7)"

percent, to end t!e session at 61121 a )arrel on t!e ondon-)ased :E #uturesEuro+e ec!ange >t was the lowest close since Sune !* Prices !a5e increased22 +ercent t!is year8 !e Euro+ean )enc!.ark crudeLs +re.iu. to W narroedto 677 ro. 670 yesterday

Oil prices are slipping again3 >raq conict is rece#ing

Sohnson *2= — :!risto+!er Yo!nson, Energy :orres+ondent or Oeuters, N-2-

14, “"il alls )elo 6114 )ut raG conMict cur)s losses,* Oeuters,!tt+%//inreutersco./article/2014/0N/2/.arkets-oil-id(F'(0#00XO20140N2<rent cru#e slippe# below '!!- a barrel on Ce#nes#ay as the risk o&supply #isruption in >raq appeare# to rece#e an# a&ter a rise in U)$)

inventories pointe# to ample stockpiles &or the worl#Bs biggest oil

consumer)8 "il !as .ade s!ar+ gains in t!e +ast to eeks as concerns o5er9g!ting in raG, "PE:s second-largest +roducer and e+orter, +us!ed t!e (ort! Sea)enc!.ark a)o5e 611, its !ig!est since Se+te.)er8 'ut with e%ports &rom

>raqBs southern terminals running near recor# levels an# most o& thecountryBs oil5el#s in the peace&ul south3 &ar away &rom the $unni

insurgency3 worries about supply have been easing8 'rent :"c1 dro++ed N0cents to 611CN a )arrel )y 07 J$, ater gaining 4 cents on uesday Prices,u+ al.ost N +ercent o5er t!e +ast to eeks, have rece#e# &rom a nine1month

top o& '!!=)"! reache# on Sune !()E D.he risk o& losing some >raqi oil

pro#uction is not /ero3 but it is very low, -10 +ercent, t!ink,Q said :arsten



#ritsc!, senior oil and co..odities analyst at :o..erK)ank in #rankurt8 Q'ut t!etail risk ill kee+ oil +rices ele5ated or no &ence, e+ect 'rent to stay a)o5e6110 or t!e ti.e )eingQ8 Sunni insurgents are )attling go5ern.ent orces orcontrol o raGs )iggest re9nery - t!e 00,000-)arrels-+er-day 'aii co.+le - t!at!as )een under t!reat or nearly to eeks since .ilitants o5erran nort!ern cities

?>%nN(0P1P"@8

Qarkets have alrea#y &actore# in the >raq situation 1unless something more chaotic happens) .he threat o& supply #isruptionsis rece#ing,Q said A5tar Sandu, senior co..odities .anager at P!illi+ #utures8

HS crude :c1 cli.)ed 20 cents to 610N2 a )arrel t !it 61070 in early Asiantrade ater ederal oZcials a++ro5ed e+orts o condensate, an ultra-lig!t oil, in a.arginal relaation o a 40-year )an on HS oil e+orts HS crude closed don 14cents in t!e +re5ious session Analysts say alloing .ore HS oil to )e e+ortedcould !el+ tig!ten t!e do.estic .arket, +us!ing u+ +rices HS oZcials !a5e toldenergy co.+anies t!ey can e+ort a 5ariety o condensate i it !as )een .ini.allyre9ned, a HS :o..erce >e+art.ent s+okes.an con9r.ed to Oeuters, alt!oug!!e said t!ere !ad )een Qno c!ange in +olicyQ toards crude e+orts 8 Iews o& a

rise in U)$) cru#e oil an# gasoline stocks helpe# #rag oil prices lower)E U)$)cru#e inventories rose by - million barrels in the week to Sune 273 to +L2)*

million barrels3 compare# with analystsB e%pectations &or a #ecrease o& !)*

million barrels, data ro. t!e A.erican Petroleu. nstitute s!oed on uesday8

:rude stocks at t!e :us!ing, "kla!o.a, deli5ery !u) rose )y 424,000 )arrels, t!eAP said ?>%n^<(047'00@ ?>%n2(0P1&(@8 !e HS go5ern.ents Energynor.ation Ad.inistration EA3 releases its data or t!e eek ended Yune 20 lateron Wednesday ?EA/S@

Oil prices will #ecrease in the long run #espite >raq 5ghting

,eshpan#e *22 — A)!is!ek >es!+ande, co..odities analyst at ondon-)ased (atiis, N-22-14, “:rude oil outlook% :rude oil +rices can rise a)o5e 6120 iraG crisis escalates,* 'usiness Standard, !tt+%//)usiness-standardco./article/.arkets/crude-oil-outlook-crude-oil-+rices-can-rise-a)o5e-120-i-iraG-crisis-escalates-1140N2200772R1!t.lOver the past week3 <rent cru#e prices have increase# by close to '= abarrel ?'2)= a barrel &or C.>@3 introducing a clear raG risk +re.iu. .he one1

year high in oil prices was triggere# by the su##en eruption o& an Al

Nae#a1linke# militant insurgency in nort!ern raG last eek, raising ears osu++ly s!ortages and a ci5il ar t!at .ig!t also dra in oil-ric! neig!)ours raG ist!e second largest +roducer o crude oil in t!e "rganiKation o !e Petroleu.

E+orting :ountries "+ec38

!e successs in nort!ern raG o t!e sla.ic State inraG and al-S!a. SS3 clearly de.onstrates t!e etent to !ic! t!e country is atrisk o racturing along religious and et!nic ault lines SS +oses a t!reat not only toraGs sta)ility )ut also to raGs oil su++lies and energy inrastructure !e re9neryat 'aii, near $osul, is no under SS control Wit! a ca+acity o 10,000 )arrels aday, it is t!e countrys )iggest t su++lies oil +roducts to 'ag!dad and .ost o t!enort!ern +ro5inces 'aii is also a .aor +ro5ider o +oer to 'ag!dad 'y targetingraGs oil acilities, as it did it! t!e Firkuk-:ey!an +i+eline in t!e +ast and 'aii



no, SS is under.ining )ot! go5ern.ent re5enue and essential energy su++liesuel and +oer38 (e5ert!eless, it! t!e .aority o raGs o+erational oilinrastructure located eit!er in t!e S!ia-do.inated ar sout! or t!e nort!easternFurdis! autono.ous region guarded )y 1B0,000 troo+s3, it is unlikely t!at raGs oilsu++ly ill )e .aterially a=ected, unless t!e conMict escalates su)stantially W!at is

.ore orrying is t!e risk t!at SS .ig!t ad5ance into 'ag!dad, t!reatening t!e+otential )reakdon o raG as a so5ereign entity8 We e+ect strong su++ort or'rent +rices o5er t!e net e eeks, due to t!e raG-related risk +re.iu. Weret!ere to )e a with#rawal o& a substantial portion o& >raqBs +)+ million barrels

a #ay cru#e oil supply &rom the market, t!is coul# take global sparecapacity #angerously close to /ero3 suggesting an increase in cru#e oil

prices well above '!27 a barrel E5ents in 2007-0C see c!art3 are clearly ourclosest guide to !o !ig! +rices could go in suc! a scenario n t!e su..er .ont!s,OpecBs remaining spare capacity woul# be insu9cient to meet peak#eman# Saudi Ara)ia is currently +roducing close to B7 .n )arrels a day, it!s+are ca+acity o only 2 .n )arrels a day)E High oil prices pose a signi5cant

threat to t!e ndian econo.y <eing heavily #epen#ent on importe# cru#e oil3a rise in oil prices woul# #amage the governmentBs 5scal balance an#

wi#en its current account #e5cit) !e ru+ee ould t!en eaken and t!eco.)ination ould result in !ig!er inMationary +ressure)E Over the longer term3once the >raqi crisis is resolve#3 there are goo# reasons why oil prices

shoul# &all) .he nee# &or Cestern powers to work closely with >ran coul#

lea# to a swi&ter resolution o& the latterBs nuclear ambitions3 thereby

releasing a##itional >ranian oil on global markets once the U$ an#uropean Union embargoes are li&te#) .here is also the prospect o&

greater autonomy &or the 6ur#ish regional government in >raq3 whose

attempts to e%port cru#e via .urkey have so &ar been thwarte# by<agh#a#)E



inks



Iegative



2I4 — ink <oosters

Oil prices are on the brink — pro#uction increases an# >raq

#isruptions are balance#3 but small changes in pro#uction

cause maor price swings<aw#en *!* — o. 'aden, En5iron.ental Editor or !e nde+endent

ondon3, N/1N/2014, “ong years o oil +rice sta)ility are at risk, 'PLs to+ econo.istarns,* !e nde+endent, !tt+%//inde+endentcouk/nes/)usiness/nes/long-years-o-oil-+rice-sta)ility-are-at-risk-)+s-to+-econo.ist-arns-B404C!t.l,?:risto OV!l is 'PLs to+ econo.ist@“.his is an eerie quiet) .his is a market on e#ge an# it will remain eerilyquiet until it becomes clear who gets the upper han# in t!ese t!ings t!at areco.+letely unrelated t!e #isruptions or steady pro#uction growth in t!e HS,*sai# $r JThl, +ointing out t!at so ar t!is year e !a5e seen )ot! ele.entscontinuing to increase “!is is a s!eer coincidence% t!ey !a5e not!ing to do it!eac! ot!er !ere is no cons+iracy t!eory And t!at means it won8t last &orever K

it will &all o a cli either si#e*Asked !et!er +ro)le.s in raG ould end t!e +rice sta)ility, $r OV!l said% “tLsanot!er +iece in t!e +icture !ic! outlined ou have this tension between

rising #isruption an# rising new pro#uction Chat eventually will happen is

that we will see these #isruptions get out o& han# or we will see thepicture #ominate# by increases in pro#uction) very kin# o& #isruption !ic! )eco.es )igger can tilt the balance in a certain way and raG is noece+tion to t!at*

Future e%pectation makes the link imme#iateFel#stein L — $artin #eldstein, Proessor o Econ at &ar5ard, +resident e.eritus

o t!e (ational 'ureau o Econo.ic Oesearc!, c!air.an o t!e :ouncil o Econo.icAd5isers under President Oeagan, “We :an oer "il Prices (o*, !e Wall Street

Yournal, 7/1/200C, !tt+%//onlinesco./nes/articles/S'1214CNC00C717C1Hnlike +eris!a)le agricultural +roducts, oil can )e stored in t!e ground So !en ill an oner o oil reduce+roduction or increase in5entories instead o selling !is oil and con5erting t!e +roceeds into in5esti)le cas!I Asi.+li9ed anser is t!at !e ill kee+ t!e oil in t!e ground i its +rice is e+ected to rise aster t!an t!e interest ratet!at could )e earned on t!e .oney o)tained ro. selling t!e oil !e actual +rice o oil .ay rise aster or sloert!an is e+ected, )ut t!e decision to sell or !old3 t!e oil de+ends on t!e e+ected +rice rise !ere are o courseconsiderations o risk, and o t!e i.+act o +rice c!anges on long-ter. consu.er )e!a5ior, t!at co.+licate t!e oiloners decision and t!ereore t!e )e!a5ior o +rices !e "rganiKation o Petroleu. E+orting :ountries t!e

"PE: cartel3, it! its strong +ricing +oer, still +lays a role 'ut t!e unda.ental insig!t is t!at owners o& oilwill a#ust their pro#uction an# inventories until the price o& oil is

e%pecte# to rise at the rate o& interest3 appropriately a#uste# &or risk t!e

+rice o oil is e+ected to rise aster, t!eyll kee+ t!e oil in t!e ground n contrast, i t!e +rice o oil is not e+ected

to rise as ast as t!e rate o interest, t!e oners ill etract .ore and in5est t!e +roceeds .he

relationship between &uture an# current oil prices implies that ane%pecte# change in the &uture price o& oil will have an imme#iate impact

on the current price o& oil !us, !en oil +roducers concluded t!at t!e de.and or oil in :!ina and

so.e ot!er countries ill gro .ore ra+idly in uture years t!an t!ey !ad +re5iously e+ected, t!ey inerred t!at







t!e uture +rice o oil ould )e !ig!er t!an t!ey !ad +re5iously )elie5ed !ey res+onded )y reducing su++ly andraising t!e s+ot +rice enoug! to )ring t!e e+ected +rice rise )ack to its initial rate &ence, it! no c!ange in t!ecurrent de.and or oil, t!e e+ectation o a greater uture de.and and a !ig!er uture +rice caused t!e current

+rice to rise Si.ilarly, cre#ible reports about the &uture #ecline o& oil pro#uction in

Oussia and in $eico implie# a higher &uture global price o& oil and t!at also reGuired an

increase in t!e current oil +rice to .aintain t!e initial e+ected rate o increase in t!e +rice o oil "nce t!is relationis understood, it is easy to see !o nes stories, ru.ors and industry re+orts can cause su)stantial Muctuations in

current +rices all it!out anyt!ing !a++ening to current de.and or su++ly " course, a rise in the spotprice o& oil triggere# by a change in e%pectations about &uture prices will

cause a #ecline in the current quantity o& oil that consumers #eman#

current su++ly and de.and ere initially in )alance, t!e "PE: countries and ot!er oil +roducers ould res+ond )yreducing sales to )ring su++ly into line it! t!e te.+orary reduction in de.and A rise in t!e e+ected uturede.and or oil t!us causes a current decline in t!e a.ount o oil )eing su++lied !is is !at !a++ened as t!e

Saudis and ot!ers cut su++ly in 2007 (o !ere is t!e good nes Any policy that causes thee%pecte# &uture oil price to &all can cause the current price to &all, or to rise less

t!an it ould ot!erise do n ot!er ords, it is possible to bring #own to#ayBs price o& oil

with policies that will have their physical impact on oil #eman# or supplyonly in the &uture) #or ea.+le, increases in government subsi#ies to #evelop

technology that will make &uture cars more e9cient3 or tighter stan#ar#s

that gra#ually improve the gas mileage o& the stock o& cars3 woul# lower

the &uture #eman# &or oil an# there&ore the price o& oil to#ay) Si.ilarly, increasing

t!e e+ected uture su++ly o oil ould also reduce todays +rice !at all in t!e current +rice ould induce ani..ediate rise in oil consu.+tion t!at ould )e .atc!ed )y an increase in su++ly ro. t!e "PE: +roducers andot!ers it! so.e current ecess ca+acity or a5aila)le in5entories Any ste+s t!at can )e taken no to increase t!euture su++ly o oil, or reduce t!e uture de.and or oil in t!e HS or else!ere, can t!ereore lead )ot! to loer+rices and increased consu.+tion today

ven small changes in the oil market have large price eects

Ierurkar !! — (eeles! (erurkar, 4-1-2011, s+ecialist in energy +olicy, “HS "il

.+orts% :ontet and :onsiderations* :OS,

!tt+%//asorg/sg+/crs/.isc/O417N+d ,omestic supply #isruptions can also shi&t tra#e ows Ater !urricanesFatrina and Oita s!ut in oil +roduction in t!e HS Jul o $eico, HS i.+ortsincreased )y around 07 $)/d )eteen Yuly and "cto)er 200 !e increase as inre9ned +roducts\ !urricanes s!ut don .ore re9ning ca+acity t!an crude oil+roduction :rude i.+orts ell Su++ly disru+tion in countries t!at are nottraditionally .aor sources o HS i.+orts .ay still !a5e signi9cant i.+lications ort!e Hnited States )ecause t!ey raise t!e +rice o oil orldide .he oil market is

globally integrate#, re9ners can s!it t!e crude t!ey use, and re9ned +roductsare interc!angea)le co..odities\ so a #isruption anywhere can aect oil

prices everywhere #or instance, t!e Hnited States i.+orted only around 01 $)/d

o oil ro. i)ya in 2010 #or contet, t!e HS consu.ed a)out 1B2 $)/d in 20103$ost o i)yaLs crude su++ly ent to Euro+e 'ut !en unrest s!ut don i)yaLse+orts in #e)ruary 2011, glo)al +rices rose, including +rices or oil i.+orted intot!e Hnited States ro. else!ere and oil +roduced do.estically Jlo)al su++ly asreduced and Euro+ean re9ners !ad to look to ot!er oil sources, )idding u+ t!ose oil+rices to secure su)stitute su++lies 10 .he price o& oil may rise until it makes

up &or the amount o& supply no longer available #ue to the #isruption) .his

can occur by price rising enough that some consumers no longer #eman#

http://www.fas.org/sgp/crs/misc/R41765.pdf

http://www.fas.org/sgp/crs/misc/R41765.pdf



oil an#or suppliers bring a##itional pro#uction to market) 11 $any oilpro#ucers an# consumers are inelastic to price changes !en considering!o .uc! to su++ly or consu.e, es+ecially in t!e s!ort run, so seemingly small

#isruptions can lea# to more signi5cant percent changes in the price o&oil) ven anticipation o& #isruptions can contribute to higher oil prices

'uyers and sellers o oil .ake risk-eig!ted decisions no a)out uture co..ercialand 9nancial needs Anticipate# #isruption risks aect the price at whichthey are willing to buy an# sell oil) Argua)ly, a signi9cant +ortion o t!eincrease in oil +rices ro. unrest in i)ya, Egy+t, 'a!rain, and else!ere isattri)uta)le to concerns t!at unrest could s+read to ot!er oil e+orters in t!e $iddleEast and (ort! Arica #or .ore on t!is, see :OS Oe+ort O41NC, $iddle East and(ort! Arica Hnrest% .+lications or "il and (atural Jas $arkets, )y $ic!ael Oatnerand (eeles! (erurkar >isru+tions to oil +roduction reduced su++ly, sloed su++lygrot! in recent years, and created concerns a)out uture su++ly !is co.)inedit! rising oil de.and, resulting ro. ra+id econo.ic grot! in se5eral countries, asell as ot!er 9nancial, geologic, co..ercial, and +olitical actors, contri)uted to t!erise in oil +rices during t!e 2000s So.e selected e5ents t!at +layed a role in recent+rice de5elo+.ents are +resented in #igure 4

Perception o& &uture #eclines in #eman# cause imme#iate

sellos — #rives process even lower

$hiller - — Oo)ert S!iller, Proessor o Econ at ;ale, “Are e running out o oil

Again3I* Proect Syndicate, 10/2N/2004, !tt+%//+roect-syndicateorg/co..entary/are-e-running-out-o-oil--again--3<ut what matters &or oil prices no and in t!e oreseea)le uture is the perception o&

the story, not t!e a.)iguities )e!ind it >& there is a perception that prices will be

higher in the &uture3 then prices will ten# to be higher to#ay) !at is !o .arkets

ork it is generally t!oug!t t!at oil +rices ill )e !ig!er in t!e uture, oners o oil reser5es ill tend to+ost+one costly in5est.ents in e+loration and e+ansion o +roduction ca+acity, and t!ey .ay +u.+ oil at )eloca+acity !ey ould rat!er sell t!eir oil and in5est later, !en +rices are !ig!er, so t!ey restrain increases in

su++ly %pectations become sel&1&ul5lling3 oil prices rise an# a speculative

bubble is born 'ut i& owners o& oil reserves think that prices will &all in the

long run3 they gain an incentive to e%plore &or oil an# e%pan# pro#uctionnow in or#er to sell as much oil as possible be&ore the &all .he resulting

supply surge #rives #own prices3 rein&orces e%pectations o& &urther

#eclines3 an# pro#uces t!e in5erse o a s+eculati5e )u))le% a collapse in prices



Oil %ploration — U)$) ,rilling

U)$) Oil e%ploration raises global prices

$trauch !+ — (ick Strauc!, 11/1/201, Studied engineering at t!e Hni5ersity o

Pitts)urg!, “Econo.ics o "=s!ore "il* !tt+%//+ittedu/_n+s1B/trends!t.lFuel prices can be greatly re#uce# by oshore oil #rilling) >& oil pro#uctionincreases3 total supply increases) &oe5er de.and does not c!ange "ne ot!e .ost )asic t!eories o econo.ics states t!at t!e .ore su++ly, t!e loer t!e+rice, and t!e .ore de.and, t!e !ig!er t!e +rice >& we #rill more3 only supplychanges so prices #ecrease) Also, e are +roducing t!is oil do.estically(aturally, !en selling anyt!ing a s.art )usiness.an ants to .ake .oney ro.t!e transaction ust like oreign nations do !en t!ey sell us t!eir oil e +roduce.ore o our on oil e can sell to oursel5es at a rate !ere t!e +roducer is +ro9ting)ut not at t!e sa.e !ig! e+ense to t!e +urc!aser >& we pro#uce oil3 we create

competition &or other nations) Chen our &oreign #eman# &or oil #ecreases3

&oreign provi#ers will have a surplus o& oil) .o be able to sell it3 they willhave to #ecrease their prices V+W) #uel +rices t!e.sel5es ill decrease, )ut !ati.+lications does t!is !a5e or t!e A.erican +eo+le and or .e as an engineerIPersonal trans+ortation ill )e c!ea+er Jasoline ill decrease ro. its current 0to 6400 +er gallon +rices !is .eans e ill )e s+ending less o our .oney on usttrying to get to ork to .ake .oney $y at!er orks an !our ro. our !ouseE5ery eek !e s+ends a)out to +ercent o earnings on dri5ing !is does notsound like .uc!, )ut !en all ot!er cost and taes are accounted or to +ercent isa large a.ount o .oney !e only !ad to +ay 6200 +er gallon o gasoline, oura.ily could !a5e t!ousands o dollars .ore !e sa.e goes or .any A.ericans,and or co.+anies owering &uel costs means shipping costs less) #ood +rices

ould dro+ !is could decrease +o5erty in A.erica :ost o li5ing ould go dongreatly "n a larger scale it ill lessen t!e rate t!at A.erica is dee+ening in de)t tcould !el+ us to )eco.e a 9scally res+onsi)le nation once again !e sta)ility o t!eA.erican econo.y ill )e i.+ro5ed i e e+and o=s!ore drilling "il +rices !a5ean enor.ous i.+act on t!e econo.y Oshore oil #rilling can lessen our

#epen#ence on &oreign oil and i.+ro5e A.ericas 9nancial situation

>ncrease# U$ pro#uction lowers the global price o& oil

<lackwill an# O8$ullivan !- — Oo)ert 'lackill, Senior #ello at t!e :ouncil

o #oreign Oelations, and $eg!an "LSulli5an, Proessor o t!e Practice o

nternational A=airs and >irector o t!e Jeo+olitics o Energy Proect at &ar5ard,2/12/2014, “A.ericas Energy Edge% !e Jeo+olitical :onseGuences o t!e S!aleOe5olution* #oreign A=airs, !tt+%//oreigna=airsco./articles/14070/ro)ert-d-)lackill-and-.eg!an-l-osulli5an/a.ericas-energy-edge.he most #ramatic possible geopolitical consequence o& the IorthAmerican energy boom is that the increase in U)$) an# 4ana#ian oil

pro#uction coul# #isrupt the global price o& oil 11 which coul# &all by 27

percent or m ore) .o#ay3 the price o& oil is #etermine# largely by the

http://www.pitt.edu/~nps19/trends.html

http://www.pitt.edu/~nps19/trends.html



Organi/ation o& the Petroleum %porting 4ountries3 !ic! regulates+roduction le5els a.ong its .e.)er states W!en t!ere are une+ected +roductiondisru+tions, "PE: countries +ri.arily Saudi Ara)ia3 try to sta)iliKe +rices )yra.+ing u+ t!eir +roduction, !ic! reduces t!e glo)al a.ount o s+are +roductionca+acity W!en s+are ca+acity alls )elo to .illion )arrels +er day, t!e .arket

gets ittery, and oil +rices tend to s+ike u+ard W!en t!e .arket sees s+areca+acity rise a)o5e roug!ly si .illion )arrels a day, +rices tend to all #or t!e +ast95e years or so, "PE:Ls .e.)ers !a5e atte.+ted to )alance t!e need to 9ll t !eir+u)lic co=ers it! t!e need to su++ly enoug! oil to kee+ t!e glo)al econo.y!u..ing, and t!ey !a5e .anaged to kee+ t!e +rice o oil at around 6B0 to 61 10+er )arrel As a##itional Iorth American oil oo#s the market3 OP48s

ability to control prices will be challenge#) According to +roections ro. t!eHS Energy nor.ation Ad.inistration, )eteen 2012 and 2020, t!e Hnited Statesis e+ected to +roduce .ore t!an t!ree .illion )arrels o ne +etroleu. and ot!erliGuid uels eac! day, .ainly ro. lig!t tig!t oil !ese new volumes, +lus nesu++lies co.ing on line ro. raG and else!ere, coul# cause a glut in supply3

which woul# push prices #own 11 especially as global oil #eman# shrink s#ue to improve# e9ciency or slower economic growth) n t!at e5ent, "PE:could !a5e a !ard ti.e .aintaining disci+line a.ong its .e.)ers, e o !ic! areilling to cur) t!eir oil +roduction in t!e ace o )urgeoning social de.ands and+olitical uncertainty Persistently lower prices woul# create short &alls in the

revenues they nee# to &un# their e%pen#itures)

>ncrease in U)$) 4ru#e Oil e%ports woul# #rive #own the global

market price

<astasch !- — $ic!ael 'astasc!, Oe+orter at !e >aily :aller (es #oundation,

04/04/2014, !e >aily :aller “E+orting HS crude oil could "WEO gas +rices*!tt+%//dailycallerco./2014/04/04/re+ort-e+orting-u-s-crude-oil-could-loer-gas-+rices/

!e :# study as done on )e!al o t!e A.erican Petroleu. nstitute, t!e .ain HSoil lo))y, !ic! is +us!ing or t!e ederal go5ern.ent to lit its )an on crude oile+orts in t!e .idst o a .aor oil and natural gas )oo. AP> an# somelawmakers argue that allowing oil e%ports woul# )oost econo.ic grot! andlower oil prices because U)$) cru#e woul# increase the global supply3

#riving prices #ownwar#s) Gasoline costs are tie# to global markets an#

increasing supplies woul# save consumers at the pump) “:onsu.ers area.ong t!e 9rst to )ene9t ro. ree trade, and crude oil is no ece+tion,* said Fyle

sakoer, 5ice +resident or regulatory and econo.ic +olicy at t!e A.ericanPetroleu. nstitute :Gasoline costs are tie# to a global market3 an# thisstu#y shows that a##itional e%ports coul# help increase supplies3 +utdonard +ressure on t!e +rices at t!e +u.+, and )ring .ore o)s to A.erica,*sakoer added !e +us! on :a+itol &ill or ree trade in HS crude oil !as )eenAlaska Oe+u)lican Sen isa $urkoski Alaska is t!e countryLs ourt! largest oil+roducing state, according to go5ern.ent data) Jight now3 U)$) oil can only be

e%porte# i& it8s re5ne# 5rst3 this gives re5ners access to cru#e oil that is

http://dailycaller.com/2014/04/04/report-exporting-u-s-crude-oil-could-lower-gas-prices/






#iscounte# because the e%port ban hol#s #own #omestic prices .hismeans re5ners enoy a nice pro5t margin because they pay lower prices

&or cru#e than on international markets while selling gasoline an# other

pro#ucts at global market rates) "nly a !andul o .aor re9ners !a5e o++osedalloing crude oil e+orts ed )y .aor HS re9ner Dalero Energy, t!e o++osition

!as said t!at kee+ing crude oil in t!e HS ould en!ance energy inde+endence andgi5e t!e country an econo.ic ad5antage “t .akes .ore sense to kee+ crude oil!ere in t!e HS,* said Dalero s+okes.an 'ill >ay “t !as signi9cantly reducedA.erican de+endence on oreign oil, ke+t HS re9ning utiliKation !ig!, andinsulated A.erican consu.ers ro. geo+olitical s!ocks* 'ut t!e recent HS oil)oo. !as led to !uge +roduction increases, .ainly o lig!t crude oil and leasecondensate 'ut HS re9neries are largely eGui++ed to !andle !ea5ier crude co.ingro. Saudi Ara)ia and :anada !is .eans t!at “t!ere is a .is.atc! )eteen HSre9nery ca+a)ilities and t!e countryLs neound su++ly,* according to :# So t!ereis a .is.atc! )eteen !at re9neries can +rocess and t!e ty+e o oil co.ing out o t!e ground in t!e HS !is, along it! lagging energy inrastructure de5elo+.ent,.eans t!at t!ere is a groing glut o HS crude, !ic! is dri5ing don +rices orre9ners, )ut doing little to !el+ consu.ers o +etroleu. +roducts “U)$)

international tra#e in petroleum pro#ucts is not subect to volume

restriction &or imports or e%ports an# so U)$) pro#uct prices are set byinternational markets,*:# noted “Allowing U)$) cru#e e%ports re#uces U)$)

an# worl# petroleum pro#uct prices by mo#erating worl# cru#e oil prices and alloing or .ore eZcient re9nery o+erations*



Oil %ploration — General

>ncreasing global oil supply woul# re#uce prices

oors !2 — >r Fent # $oors, 12/14/2012, e+ert in glo)al risk .anage.ent,

oil/natural gas +olicy and 9nance, cross-)order ca+ital Mos, e.erging .arketecono.ic and 9scal de5elo+.ent, +olitical, 9nancial and .arket risk assess.entProessor in t!e Jraduate :enter or Social and Pu)lic Policy at >uGuesne Hni5ersity!tt+%//.oney.orningco./2012/12/14/201-natural-gas-orecast-si-)ullis!-reasons-!y-no-is-t!e-ti.e-to-)uy`, >ece.)er 14, 2012

A rise on the supply si#e woul# generally re#uce prices 3 especially i& the

number o& operators continues to increase ore gas moving on the

market &rom more suppliers results in a #ownwar# pressure on prices 8 !e

second dyna.ic, !oe5er, is .o5ing in t!e ot!er direction, enticing t!e increase indrilling and e+ansion o inrastructure8 !is actor considers t!e de.and side, andthere are at least si% maor tren#s colli#ing to increase t!e +ros+ects or gas

usage as e .o5e t!roug! 2018 As a result3 > e%pect natural gas prices tosee a 2=Q increase ro. current le5els !eres !y8 201 (atural Jas #orecast8 13 Winter :!ill ncreases (atural Jas >e.and8 !e 5rst actor dri5ing +riceincreases ill co.e &rom a col#er winter t!roug!out t!e Hnited States

raditionally, gas +rices !a5e )een Guite sensiti5e to seasonal s!its !e o5erly .ildinter in t!e East last inter as enoug! to de+ress gas +rices across t!e )oard n2011, (;$E< utures contracts declined to less t!an 62 +er 1,000 cu)ic eet or.illion 'Hs38 !e +rice !as reco5ered to as .uc! as 6B0 recently, alt!oug! it iscurrently don to a)out 60 (onet!eless, t!e reco5ery largely a result oco.+anies +ulling drilling rigs out o ser5ice and reducing t!e nu.)er o ne ells3co.)ined it! a colder inter, ill +ro5ide a )ase +us!ing t!e +rice to 64 as e

start t!e ne year8 !e ot!er 95e ele.ents are .ore directly a=ecting de.andincreases .o5ing orard !ese ill !a5e +ri.ary e=ects on t!e gas )alance)eteen antici+ated needs and drilling 5olu.e8 2/3 ndustrial and Petroc!e.icalHsage on t!e Oise8 !e secon# an# thir# elements are increasing in#ustrial

an# petrochemical uses or gas ndustrial use !as )een )uilding or a !ile, )utit is one o t!e last de.and actors to e.erge during an econo.ic reco5ery !at isno )eginning to kick in8 &oe5er, +etroc!e.ical usage is resulting in ana++reciating de.and situation Jas, natural gas liGuids, and )y+roducts arere+lacing crude oil and oil +roducts as eeder stock or an entire range o+etroc!e.icals - ro. sol5ents and +oly.ers, to +lastics and 9)ers8 !e intenseco.+etition o5er !ere t!e net QcrackersQ ill )e located in t!e HS is clear

testi.ony to t!e added de.and co.ing ro. +etroc!e.icals !ese acilities ill)reak don gas Mos, .aking t!e eeder stock ingredients .ore accessi)le !isde5elo+.ent is also +utting so.e additional eig!t on t!e +rocessing o QetQ gas,ra .aterial containing 5alue-added )y+roducts8 43 (atural Jas #leets E+andAcross t!e HS8 !e &ourth de.and actor is t!e increasing use o natural gas as a5e!icle uel We !a5e )een itnessing a rise in interest !ere or se5eral years, )utthe move to using liGue9ed natural gas IG@ an# co.+ressed natural gas 4IG3to re+lace gasoline and diesel !as )een gaining strengt! 8 Entire Meets o !ea5y-

http://moneymorning.com/2012/12/14/2013-natural-gas-forecast-six-bullish-reasons-why-now-is-the-time-to-buy%5C






O4$

,rilling in the O4$ lowers prices

e#lock L — Fennet! ' $edlock , 7/C/0C, #ello in Energy Studies at Oice

Hni5ersitys Ya.es A 'aker nstitute or Pu)lic Policy and an adunct assistant+roessor in t!e Econo.ics >e+art.ent at Oice, “"+en outer continental s!el*,!tt+%//c!ronco./o+inion/outlook/article/"+en-outer-continental-s!el-1B7CBC+!+A conMuence o actors is res+onsi)le or the recent price run1up at the pump"ne i.+ortant actor )e!ind t!e strengt! o oil +rices is t!e e+ectation oinadeGuate oil su++ly in t!e uture !is has le# to a #ebate regar#ing the

removal o& #rilling access restrictions in the HS "uter :ontinental S!elO4$3 According to t!e >e+art.ent o nteriors $inerals $anage.ent Ser5ice$$S3, t!e ":S in t!e oer 4C states currently under .oratoriu. !olds 1B )illion)arrels o tec!nically reco5era)le oil So.e analysts clai. t!at o+ening t!e ":S ill

not .atter t!at .uc!, as t!e Guantity o oil is only a)out to years o HSconsu.+tion 'ut a .ore a++ro+riate ay to look at t!e issue is t!is% t!e ":Scould +ro5ide additional +roduction o 1 .illion )arrels +er day o oil, our i.+ortde+endence on Persian Jul crude oil ould )e reduced )y a)out 40 +ercent$oreo5er, at 1 .illion )arrels +er day, t!e currently )locked ":S resource ouldlast a)out 0 years " course, opening the O4$ ill not )ring i..ediate su++lies)ecause it ould take ti.e to organiKe t!e lease sales and t!en de5elo+ t!e su++lydeli5ery inrastructure &oe5er, as #evelopment progresse#3 the e%pecte#growth in supply woul# have an eect on market senti.ent and e5entuallyprices !us, opening the O4$ shoul# be viewe# as a relevant part o& a

larger strategy to help ease prices o5er ti.e because an increase in activity

in the O4$ woul# generally improve e%pectations about &uture oil supplies)i&ting the current moratorium in the O4$ woul# also provi#e almost L7

trillion cubic &eet o& tec!nically recoverable natural gas that is currently o1limits) A recent study )y t!e 'aker nstitute indicates t!at removing current

restrictions on resource #evelopment in t!e ":S woul# re#uce utureliGue9ed natural gas import #epen#ence o t!e Hnited States and lessen t!einMuence o any uture gas +roducers cartel

O4$ #rilling causes a price #rop

Hastings !2 — >oc &astings, 7/2/12, Oe+u)lican re+resentati5e, c!air.an o

t!e &ouse (atural Oesources :o..ittee “President ")a.as o=s!ore drilling +lan.ust )e re+laced*, !tt+%//t!e!illco./)logs/congress-)log/energy-a-en5iron.ent/2B2B-+resident-o)a.as-o=s!ore-drilling-+lan-.ust-)e-re+laced.hough President Obama uses lo&ty rhetoric to claim support &or A.erican oiland natural gas pro#uction, the a#ministration chose to bury theannouncement o& this plan under .ountains o nes co5erage tLs no sur+riset!at during an election year the +resident doesnLt ant to !y+e a plan t!at

represents a giant step backwar#s &or A.erican energy pro#uction an#

http://www.chron.com/opinion/outlook/article/Open-outer-continental-shelf-1597898.php


http://thehill.com/blogs/congress-blog/energy-a-environment/239529-president-obamas-offshore-drilling-plan-must-be-replaced








,ecline in Oil 4onsumption ;ou can read t!is 5s a=Ls t!at clai. increased eZciency "O a sitc! torenea)les

Je#uctions in U$ oil consumption cause speculators to value

oil lower) .his #rastically cuts global prices)

etiv an# Fel# 7" Ste5e and oell, Proessor o +olitical science at "ld

>o.inion Hni5ersity and senior international oil .arkets analyst at t!e HS Energynor.ation Ad.inistration until $arc! 200N, “A.ericas "il $arket Poer% !eHnused Wea+on Against ran,* World Policy Yournal, + +roGuest3As is ty+ical o orld oil .arkets, t!is situation soon c!anged o oil +rices and resurgent econo.ic grot! s+urred

ra+id oil de.and grot! in Asia and else!ere 'ut su++ly couldnt kee+ u+ it! de.and Oil companiesB

un#er1investment in worl# capacity an# a series o& oil crises in Mene/uela3Iigeria3 an# >raq le# to a reversal o& the spare capacity situation by 277+)

Pre#ictably3 oil prices rose sharply, a++roac!ing 640 +er )arrel )y t!e end o 2004, 6N0 +er)arrel )y late 200-!en s+are ca+acity )otto.ed out at 1-1 $$'>, t!e loest it !ad e5er )een relati5e to total

orld oil su++ly-and close to 6C0 +er )arrel )y t!e all o 2007 >& oil prices rise when spare

capacity &alls3 what about the oppositeX >n &act3 history shows that when

spare capacity increases3 as it #i# in the mi#1!(L7s an# in the late !((7s3oil prices &all Chen spare capacity spikes3 oil prices can even collapse, as

occurred ater-a++ro+riately enoug!-t!e re5olution in ran during 1B7C and 1B7B !e oil +rice colla+se o 1BC-CNresulted ro. t!e .aor oil +rice s!ock o t!e late 1B70s, co.)ined it! a se5ere recession in t!e early 1BC0s !isconcurrence slas!ed HS oil consu.+tion )y N ..)d in ust 95e years, ro. 1CC $$'> in 1B7C to 12 ..)d in1BC As a result, orld s+are oil +roduction ca+acity surged, e5entually leading to t!e colla+se in oil +rices-ro.

nearly 640 +er )arrel in 1BC0 to ust 610 +er )arrel )y early 1BCN oday, there is strong reason to

believe that an increase in worl# spare oil pro#uction capacity woul#

cause oil prices to #ecline once again i not to t!e sa.e dra.atic degree3 >maginethat the Hnited States cut its oil consumption ro. currently +roected le5els o 24 $$'> )y

2020 )y $$'> o5er t!e net decade1 E5entually, the A.erican cut in consu.+tion ouldincrease orld s+are ca+acity ro. its current le5el o around 2 $$'> al.ost all o !ic! is in Saudi

Ara)ia and Fuait3 to .ore t!an = <, .his woul# return worl# spare oil

pro#uction capacity to levels not seen since late !((L an# early !(((3when oil prices plummete# to '!7 per barrel rue, it is unlikely t!at e ill see 6 10 +er

)arrel again, )ut with a maor re#uction in the traectory o& U)$) oil #eman# an#

a concomitant increase in worl# spare capacity3 we woul# likely see a

sharp #ecrease &rom the 'L71!77 per barrel prices we are currently

e%periencing2 &o could t!e Hnited States de5elo+ its latent oil .arket +oerI #irst and ore.ost,

achieving this goal woul# require a serious shi&t in U)$) energy policy)$uch a shi&t is achievable an# coul# sharply #ecrease HS and orld3 oil consumption, #ramatically altering oil market psychology Oil &utures

tra#ers who largely set the price o& oil woul# have to consi#er that

#eman# &or oil woul# #rop &rom current e%pectations) As a result, they woul#likely #ecrease the purchase o& oil &utures3 thus causing a #rop in the price

o& oil ven be&ore the impact o& AmericaBs new energy policies woul# be

&elt3 oil prices woul# almost certainly &all on the e%pectation by oil tra#ers



Iatural Gas

>ncrease in natural gas e%ports lowers global oil prices

,eutch !! — Yo!n >eutc!, Yanuary/#e)ruary 2011, #oreign A=airs, #or.er

>irector o :entral ntelligence and #or.er Hndersecretary o Energy, !e Jood(es A)out Jas, !e (atural Jas Oe5olution and ts :onseGuences,!tt+%//e).itedu/_c!e.istry/deutc!/+olicy/2011-!eJood(esA)outJas+d :ountries t!at i.+ort natural gas s!ould antici+ate .ore co.+eting sources o it,!ic! will lower prices and reduce concerns a)out t!e security o t!e gas su++lyIo longer, it see.s, will the worl# be #epen#ent on a &ew nations—>ran3

Natar3 Jussia3 $au#i Arabia3 an# .urkmenistan—that control the bulk o&

conventional natural gas reserves) :ountries t!at +roduce natural gas ill needto adust to loer re5enues ro. natural gas e+orts\ or so.e o t!e., t!eadust.ent .ay )e Guite se5ere and +otentially desta)iliKing As gas acts as a

substitute &or oil3 #eman# &or oil will &all3 putting #ownwar# pressure on

oil prices) !is ill lessen, )ut certainly not eli.inate, t!e geo+olitical inMuencet!at .aor oil-e+orting countries enoy today t is +er!a+s a +er.issi)leeaggeration to clai. a natural gas re5olution 'ut like all re5olutions, !et!er andto !at etent t!e )ene9ts are realiKed ill de+end on !o ra+idly t!e econo.icand +olitical syste.s ada+t to t!e c!ange

>ncreasing IG e%ports tanks oil prices

Jatner3 Par&omak an# uther !! — $ic!ael Oatner, Analyst in Energy

Policy, Paul W Paro.ak, S+ecialist in Energy and nrastructure Policy, and indaut!er, Analyst in En5iron.ental Policy, 11/4/11, HS (atural Jas E+orts% (e

"++ortunities, Hncertain "utco.es, :OS Ser5ice,!tt+%//assetso+encrsco./r+ts/O42074R20111104+d all t!e +ro+osed HS (J e+ort +roects ere o+erational today, t!e HnitedStates ould rank second )e!ind Xatar in glo)al e+ort ca+acity &oe5er, HS (Je+orts ill ace co.+etition in t!e glo)al (J .arket Jlo)al liGueaction ca+acityis +roected to al.ost dou)le )y 2020 see #igure 73, it! .any +roects .uc!urt!er along t!an t!e HS +roects 1N (J trade as u+ o5er 20 year-on-year in2010, accounting or 0 o all natural gas traded internationally 17 $ost (J soldin t!e orld is under long-ter. contracts, indeed to oil +rices !e long-ter.contracts are needed to 9nance t!e liGueaction acilities, usually t!e .oste+ensi5e +art o t!e (J su++ly c!ain, !ic! includes (J tankers, storage, and

(J i.+ort ter.inals U)$) natural gas prices are market1base#3 whichshoul# give U)$) IG e%port proects an a#vantage as the #ierential with

oil1in#e%e# price# natural gas can be more than #ouble the U)$) price see#igure 23 H)$) IG e%ports coul# a## to the pressure &or other countries to#elink their natural gas e%ports—eit!er as (J or )y +i+eline—ro. oil-indeed+rices &oe5er, HS (J e+ort +roects ill still need to enter into long-ter.su++ly contracts, usually 20 to 0 years, to o)tain 9nancing, !ic! .ay )e adiZcult !urdle to get o5er gi5en eisting .arket and 9nancial conditions Provi#ing

http://www.web.mit.edu/~chemistry/deutch/policy/2011-TheGoodNewsAboutGas.pdf

http://assets.opencrs.com/rpts/R42074_20111104.pdf

http://www.web.mit.edu/~chemistry/deutch/policy/2011-TheGoodNewsAboutGas.pdf

http://assets.opencrs.com/rpts/R42074_20111104.pdf



IG to countries that use oil &or heating or in#ustrial processes coul# also

#ecrease #eman# &or petroleum pro#ucts3 putting #ownwar# pressure on

oil prices )



Jenewables

U$ investments in alternative energy cause speculators to

value oil lower—sharply tanks prices globally imme#iately

etiv an# Fel# " — Ste5e and oell, Proessor o +olitical science at "ld>o.inion Hni5ersity and senior international oil .arkets analyst at t!e HS Energynor.ation Ad.inistration until $arc! 200N, “A.ericas "il $arket Poer% !eHnused Wea+on Against ran,* World Policy Yournal, + +roGuestAs is ty+ical o orld oil .arkets, t!is situation soon c!anged o oil +rices and resurgent econo.ic grot! s+urred

ra+id oil de.and grot! in Asia and else!ere 'ut su++ly couldnt kee+ u+ it! de.and Oil companiesB

un#er1investment in worl# capacity an# a series o& oil crises in Mene/uela3Iigeria3 an# >raq le# to a reversal o& the spare capacity situation by 277+)

Pre#ictably3 oil prices rose sharply, a++roac!ing 640 +er )arrel )y t!e end o 2004, 6N0 +er

)arrel )y late 200-!en s+are ca+acity )otto.ed out at 1-1 $$'>, t!e loest it !ad e5er )een relati5e to total

orld oil su++ly-and close to 6C0 +er )arrel )y t!e all o 2007 >& oil prices rise when spare

capacity &alls3 what about the oppositeX >n &act3 history shows that whenspare capacity increases3 as it #i# in the mi#1!(L7s an# in the late !((7s3

oil prices &all W!en s+are ca+acity s+ikes, oil +rices can e5en colla+se, as occurred ater-a++ro+riately

enoug!-t!e re5olution in ran during 1B7C and 1B7B !e oil +rice colla+se o 1BC-CN resulted ro. t!e .aor oil+rice s!ock o t!e late 1B70s, co.)ined it! a se5ere recession in t!e early 1BC0s !is concurrence slas!ed HSoil consu.+tion )y N ..)d in ust 95e years, ro. 1CC $$'> in 1B7C to 12 ..)d in 1BC As a result, orlds+are oil +roduction ca+acity surged, e5entually leading to t!e colla+se in oil +rices-ro. nearly 640 +er )arrel in

1BC0 to ust 610 +er )arrel )y early 1BCN oday, there is strong reason to believe that an

increase in worl# spare oil pro#uction capacity woul# cause oil prices to#ecline once again i not to t!e sa.e dra.atic degree3 >magine that the Unite# $tates cut its oil consumption ro. currently +roected le5els o 24 $$'> )y 2020 by + <, over

the ne%t #eca#e1 E5entually, the A.erican cut in consu.+tion woul# increase worl#

spare capacity ro. its current le5el o around 2 $$'> al.ost all o !ic! is in Saudi Ara)ia and Fuait3 to .ore t!an = <, .his woul# return worl# spare oil pro#uction capacity

to levels not seen since late !((L an# early !(((3 when oil prices

plummete# to '!7 per barrel rue, it is unlikely t!at e ill see 6 10 +er )arrel again, )ut it! a

.aor reduction in t!e traectory o HS oil de.and and a conco.itant increase in orld s+are ca+acity, we

woul# likely see a sharp #ecrease &rom the 'L71!77 per barrel prices we

are currently e%periencing2 &o could t!e Hnited States de5elo+ its latent oil .arket +oerI #irst

and ore.ost, achieving this goal woul# require a serious shi&t in U)$) energy

policy) $uch a shi&t is achievable an# coul# sharply #ecrease HS and orld3 oil

consumption, #ramatically altering oil market psychology Oil &utures

tra#ers who largely set the price o& oil woul# have to consi#er that

#eman# &or oil woul# #rop &rom current e%pectations) As a result, they woul#likely #ecrease the purchase o& oil &utures3 thus causing a #rop in the

price o& oil ven be&ore the impact o& AmericaBs new energy policies

woul# be &elt3 oil prices woul# almost certainly &all on the e%pectation by

oil tra#ers o& #eclining &uture U)$) oil #eman# A maor policy shi&t )y t!e

Hnited States coul# also move worl# oil markets out o& the high an%iety state

they have been operating in &or several years no% increase s+are ca+acity and .arket



aniety al.ost ine5ita)ly ill su)side, )ecause o t!e creation o a .argin o error in t!e e5ent o +ercei5ed t!reatsto su++ly or actual disru+tions

A shi&t towar#s alternative energy causes a #rop in Oil prices

,e4iantis L — >e5in >e:iantis, $asters candidate in Pu)lic Policy at &ar5ardLs Y#F Sc!ool o Jo5ern.ent, s+ecialiKing in de5elo+.ent econo.ics and internationaltrade, $arc!, “S+eculations on an "il ari=*!tt+%//reedo.24org/rational+ost/200C/0/2/s+eculations-on-a-2-oil-tari=/n t!e .id-ter., as in#ustries and generators begin to shi&t away &rom higher1

cost importe# oil, #omestic oil pro#ucers might begin buil#ing out unta++edArctic ca+acity and utilities .ig!t )egin di5ersiying t!eir energy +ortolios intoloer-cost ossil uels and alternative energy technologies oget!er, these

processes shoul# cause a more substantial #ecline in import volumes nt!e long-run, a .ore unda.ental shi&t away &rom a !ig!-car)on, !ig!-cost, oil-de+endent economy is likely to un&ol#3 at which point oil imports woul#

)egin to #ecline .ore +reci+itously as #eman# &or energy is al.ost co.+letelyreplace# with lower1cost substitutes !is +rogression is an ea.+le o aty+ical “adust.ent lag* ) .he worl# price o& oilX Again, in t!e 5ery s!ort-ter.e .ig!t e+ect a .odest decline, +artially o=setting t!e cost o t!e tari= Given

that America is one o& the worl#8s largest energy importers i.+ortingroug!ly 2/rds o its annual consu.+tion3, it ould still need to source oil eternallyor risk seiKing u+ its industrial ca+acity !us, aggregate i.+ort de.and ouldre.ain relati5ely sta)le and +rices ould likely settle so.e!ere )eteen 67 and6100 "5er t!e .id-to-long-ter., .aor "PE: su++liers ould !a5e roo. to loer +ricesgi5en t!eir loer relati5e cost o +roduction, !ile groing de.and ro. :!ina andndia ould +artially o=set declining A.erican de.and #inally, as the U)$) begins

to substitute away &rom oil as a key energy input in the long1run3 globalaggregate #eman# &or oil will inevitably #ecrease, assu.ing t!at e.erging.arket de.and doesnLt continue to gro at its current +ace in +er+etuity .his will

put consi#erable #ownwar# pressure on prices over time as oil e+ortersadust to a situation o etended ecess su++ly-at least !ile total glo)al oilreser5es re.ain relati5ely +lentiul

$mall shi&ts matter — oil prices are #etermine# at the margin

>si#ore L — :!ris sidore, Senior Writer at :(( $oney, Qs "PE: )eco.ingirrele5antI*

!tt+%//.oneycnnco./200/0B/1B/nes/econo.y/o+ecRuture/inde!t.

.he current oil prices are enough to cause so.e nations, +articularly in Euro+e, to )e looking

at oil +rice regulation and ot!er controls, as ell as more signi5cant government investment

in alternative energy, said #adel J!eit, oil analyst at "++en!ei.er .hatBs got the potential

to hurt some OP4 countries more than the current prices are helping3 !e

said Q.hey #onBt want to trigger proects that take even ! or 2 percent o o& #eman#3D !e said &e and Al!ai sai# even that small percentage o& current oil

http://money.cnn.com/2005/09/19/news/economy/opec_future/index.htm

http://money.cnn.com/2005/09/19/news/economy/opec_future/index.htm



usage being by alternative energy can have a serious eect on long1termoil prices) DPrices are #etermine# at the margin) Ce #onBt nee# a lot o&

alternative energy to #epress prices3D !e said W!ile so.e econo.ists and traders no

)elie5e t!at 640 a )arrel is t!e ne Moor or oil +rices, J!eit sai# prices still have the potentialto &all below those levels, and that coul# cause some regimes to &all) Q!ese

go5ern.ents are totally un+o+ular and re+ressi5e .he only thing they have going &or themis buying stability3 throwing money at their &rien#s an# enemies,Q said J!eit

Jenewable nergy woul# cause a #ecrease in Oil Prices by

creating competition

U4$ = — H:S, Hnion o :oncerned Scientists, :itiKens and Scientists or

En5iron.ental Solutions,Q 200, ucsusaorg/cleanRenergy/our-energy-c!oices/renea)le-energy/+u)lic-)ene9ts-o-renea)le!t.lOenea)les o=er )ene9ts not only )ecause t!ey can reduce +ollution, )ut )ecauset!ey add an econo.ically sta)le source o energy to t!e .i o HS generation

tec!nologies ,epen#ing on only a &ew energy resources makes the countryvulnerable to volatile prices and interru+tions to t!e uel su++ly As t!e 9gures!os, t!e Hnited States relies !ea5ily on coal, it! nuclear +oer and natural gassu++lying .ost o t!e rest (atural gas is generally considered t!e uel o c!oice orne +oer generation, )ecause it is cleaner t!an coal and so.eti.es lesse+ensi5e 'ut o5erreliance on natural gas could also create +ro)le.s Fossil &uels

are susceptible to supply shortages an# price spikes?2B@ Since .ostrenea)les do not de+end on uel .arkets, t!ey are not su)ect to +rice Muctuationsresulting ro. increased de.and, decreased su++ly, or .ani+ulation o t!e .arketAnd since uel su++lies are local, renea)le resources are not su)ect to control orsu++ly interru+tions ro. outside t!e region or country So.e industrial custo.er

trade grou+s !a5e su++orted ne renea)le energy de5elo+.ent +ri.arily or t!eirdi5ersity )ene9ts #or ea.+le, Associated ndustries o $assac!usetts, a tradegrou+ o .anuacturers, testi9ed in su++ort o a utility restructuring settle.entincluding a renea)les und, stating% Q#uel di5ersity is i.+ortant to t!e:o..onealt!s uture t ould not )e ad5isa)le to +lace all our eggs in t!enatural gas )asketQ?0@ An additional )ene9t o increase# competition &romrenewables1an# thus re#uce# #eman# &or &ossil &uels1coul# be lower prices

&or electricity generated &rom &ossil &uels) Se5eral analyses re5ieed in :!a+ter 2s!o t!at competition &rom increasing renewables coul# re#uce natural gas

prices A co.+re!ensi5e .odeling +roect o t!e (e England Jo5ernors:onerence ound t!at an aggressive renewables scenario3 in which

renewables ma#e up hal& o& all new generation3 woul# #epress natural gasprices enoug! to lead to a slig!t o5erall reduction in regional electricity +ricesco.+ared it! !at +rices ould )e i ne generation ca.e +ri.arily ro. ossiluels?1@ !e nations ossil uel de+endence also !as serious i.+lications ornational security, since t!e Hnited States could again )e orced to +rotect oreignsources o oil to .eet our energy needs >uring t!e Persian Jul War in 1BB1, HStroo+s ere sent in +artly to guard against a +ossi)le cuto= o t!e HS oil su++ly !e+u)lic continues to +ay taes to su++ort t!e +rotection o o5erseas oil su++lies )y

http://www.ucsusa.org/clean_energy/our-energy-choices/renewable-energy/public-benefits-of-renewable.html






HS ar.ed orces Oeliance on oreign oil also .akes t!e Hnited States 5ulnera)le touel +rice s!ocks or s!ortages i su++ly is disru+ted n 1BB7, a)out a t!ird o HS oilca.e ro. t!e $iddle East 'y 200, i energy +olicy does not c!ange, t!e country.ay )e relying on $iddle Eastern, and +ossi)ly :entral Asian, oil or to-t!irds o itssu++ly So.e analysts )elie5e t!at oil disco5ery +eaked in t!e early 1BN0s and t!at

a decline in glo)al oil +roduction, and t!e )eginning o increasingly !ig! +rices, illoccur it!in 10 to 12 years?2@ So.e regions, es+ecially (e England, still usesigni9cant a.ounts o oil or electricity generation e5en t!oug! nationide .ost oilis used or trans+ortation lectric vehicles3 especially i& powere# &rom

renewable sources3 coul# also play an increasingly important role inre#ucing oil use and e.issions ro. t!e trans+ortation sector And !ig!er oil+rices, a)sent suZcient uel co.+etition, could lead to !ig!er +rices or ot!er ossiluels

Alternative energy lowers oil prices

$tran# " — Yon Strand, C/1/07, Senior econo.ist, e+ert in en5iron.ental energy+olicy, !e Energy Yournal, “ec!nology treaties and ossil-uels etraction*!tt+%//goliat!ecnetco./co.s2/giR01BB-70BB7/ec!nology-treaties-and-ossil-uels!t.lAssu.e t!at a treaty ill lead to increased international unding o tec!nologyde5elo+.ents, !ic! in turn i.+lies a likeli!ood t!at a ne energy tec!nology ill)e de5elo+ed Assume that the alternative technology3 once #evelope#3implies a constant marginal energy cost3 lower than the ?assume#

constant@ cost o& e%tracting &ossil &uels) ?+@ Fossil &uels will then become

re#un#ant once the new technology is a#opte#3 an# no more &ossil &uelswill be e%tracte# &rom then on) 43 We assu.e t!at t!e ti.e it takes to de5elo+

suc! a tec!nology is stoc!astic, .odeled in a 5ery si.+le ay, as e+onentiallydistri)uted it! constant +ara.eter ?la.)da@it! e+ected +eriod untilde5elo+.ent eGual to 1/?la.)da@3 "ne so ar o5erlooked i.+lication o suc! ascenario is t!at t!e +ros+ect o de5elo+ing a ne and .ore eZcient energytec!nology ill a=ect incenti5es o ossil-uel +roducers to etract and .arket t!eresource, in )ot! t!e s!ort and t!e longer run n t!e .odel, dealt it! in Sections2- )elo, e assu.e t!at t!e ossil-uel .arket is co.+etiti5e on a glo)al scale,t!ere is no .arket uncertainty, and t!ere is initially a Kero +ro)a)ility o de5elo+ingan alternati5e tec!nology re+lacing ossil uels .he initial resource price ?priorto any technology treaty@ can then be shown to evolve accor#ing to the

so1calle# Hotelling rule3 whereby the growth rate &or the real resource

price ?net o& e%traction cost@ equals the real rate o& interest3 r3 in theeconomy 3 n Section 2 )elo e 9rst s!o t!at, when the technology treatyis in place3 the equilibrium price an# e%traction path &or the resource will

both shi&t as a result) Along the new price path3 the net resource price will

grow at the higher rate rb?la.)da@ .he entire resource price path shi&ts#own3 resulting in a higher volume o& e%traction at any given #ate until

the resource is &ully e%tracte#3 or until the new technology is #evelope#)

>ntuitively3 when &ossil1&uel pro#ucers are ma#e aware o& an increase#

http://goliath.ecnext.com/coms2/gi_0199-7309937/Technology-treaties-and-fossil-fuels.html






likelihoo# that their resource may become re#un#ant within a limite#&uture time perio#3 the incentive will be to e%tract it more quickly) #or agi5en de.and unction directed toard ossil uels, it! glo)al ossil-uel de.and adecreasing unction o t!e +rice, t!is .ust .ean a loer .arket +rice o uel

A push towar#s alternative energy will #rive #own oil prices —

OP4 will oo# the market

6ole " — Willia. Fole, “>es+ite rising +rices, "PE: a++ears to )e in no rus! to

raise its out+ut targets,* Se+te.)er Ct!,!tt+%//niti.esco./)usiness/local/articleRN2BeN)-)00-N02-)Na4-0Ne)072eN!t.l>& you remember what happene# in the !("7Bs look it u+ i you dont3 you will

5n# the biggest &ear OP4 has) >t is that oil prices will go up an# stay highlong enough to &uel investment into conservation an# alternative energy

sources to the point that a critical mass is reache# an# the nee# &or their

oil is greatly #iminishe# or replace# by other energy sources they #onBtcontrol) .hatBs eactly what starte# happening in the !("7Bs an# it took

OP4 opening up the tap to make oil cheap again o5er a decade to reverse

the tren#s !e result as t!at interest in conser5ation and alternati5e energyaned and in5est.ents dried u+ in t!e ace o c!ea+ oil again We are once again

nearing t!at +oint and you can e%pect to see OP4 oo# the market again i&

they see us getting serious with conservation an# alternative energy

sources that compete it!, or orse yet, actually replace #eman# &or their

oil "PE: alks t!e 9ne line )eteen +rice and de.and and ants to kee+ us!ooked u+ to t!eir oil like a )unc! o unkies on drugs !ile .aking as .uc! .oneyas +ossi)le

http://www.nwitimes.com/business/local/article_65239e6b-bf00-5602-b6a4-036eb072ef56.html






A.0 U$ Iot 6ey

<ig re#uctions in U$ oil consumption #rastically re#uce worl#

oil prices

4arey + — Yo!n, 'usiness Week, 2/24/0, leis3 ;et re#ucing oil use has to be #one u#iciously) A #rastic or abrupt #rop in

#eman# coul# even be counterpro#uctive) ChyX <ecause even a very

small change in ca+acity or #eman# BBcan bring big swings in price, e%plains Oaee5 ,hawan3 #irector o& the conomic Forecasting 4enter at Georgia

$tate Universitys Oo)inson :ollege o 'usiness #or instance, the slow#own in

Asia in the mi#1!((7s re#uce# #eman# only by about !)= million bbl) a

#ay3 but it cause# oil prices to plunge to near ' !7 a barrel So to#ay3 i& theU)$) succee#e# in abruptly curbing #eman# &or oil3 prices woul# plummet&ig!er-cost +roducers suc! as Oussia and t!e HS ould eit!er !a5e to sell oil at a )ig loss or stand on t!esidelines !e e=ect ould )e to concentrate +oer -- you guessed it -- in t!e !ands o $iddle Eastern nations, t!e

loest-cost +roducers and !olders o to-t!irds o t!e knon oil reser5es !ats !y Maed energy +olicies, suc!as trying to o5erride .arket orces )y rus!ing to e+and su++lies or .andating )ig uel eZciency gains, could do!ar.

U)$) #eman# is key to global oil prices K the A eliminates the

cause o& current high prices

Yakaria - — #areed, +!> in +olitical science ro. &ar5ard and or.er .anagingeditor o #oreign A=airs, (eseek, “>ont 'la.e t!e Saudis “, B/N,!tt+%//areedKakariaco./AO:ES/neseek/0B0N04!t.l'ut t!e .ore lasting solution to A.ericas oil +ro)le. !as to co.e ro. energy

eZciency American #eman# is the gorilla &ueling high oil prices11more thaninstability or the rise o& 4hina or anything else <etween !((7 an# 2777

the global tra#e in oil increase# by ()= billion barrels) Hal& o& that wasaccounte# &or by the rise in U)$) imports) America is consuming more

)ecause it is groing .ore--)ut also )ecause o5er t!e +ast to decades, it has

become much less e9cient in its use o& gasoline, t!e only .aor industrialcountry to slide )ackard !e reason is si.+le% t!ree letters--SHD n 1BB0 s+ortutility 5e!icles .ade u+ +ercent o A.ericas cars oday t!ey .ake u+ +ercent !ey 5iolate all energy-eZciency standards )ecause o an a)surd loo+!olein t!e la t!at allos t!e. to )e classi9ed as trucks

Je#uctions in U$ oil consumption cause massive ripples in the

oil market

Joberts - — Paul Oo)erts, :olu.nist &ar+erLs, !e End o "il, + B

Cithin the oil worl#3 no #ecision o& any signi5cance is ma#e without

re&erence to the U)$) market, nor is anyt!ing let to c!ance ndeed, t!e oil players watch

the American oil market as attentively as palace physicians once atten#e#

http://www.fareedzakaria.com/ARTICLES/newsweek/090604.html

http://www.fareedzakaria.com/ARTICLES/newsweek/090604.html



the royal bowels0 every hour o& every #ay3 every oil state an# company inthe worl# keeps an unblinking watch on the Unite# $tates an# strains to

5n# a sign o& anything — &rom a shi&t in energy policy to a tren# towar#

smaller cars to an unusually mil# winter — that might aect the colossal

U)$) consumption ) #or t!is reason, t!e .ost i.+ortant day o t!e eek or oil traders any!ere in t!e

orld is Wednesday, when the HS ,epartment o& nergy releases its eekly 5gureson American oil use, and !en, as one analyst +uts it, “the market makes up its min#

whether to be bearish or bullish);

American oil #eman# is the key &actor #riving oil markets

Joberts - — Paul Oo)erts, :olu.nist &ar+erLs, !e End o "il, + B

At the same time3 however3 the sheer e%tent o& American #eman# cou+led it!

t!e countryLs on )oo.ing +roduction t!e Hnited States is still t!e nu.)er t!ree oil +roducer3, gives Uncle

$am a #egree o& inuence over worl# oil markets an# worl# oil politics

that goes well beyon# anything the U)$) might achieve militarily America

is not only the biggest oil market in the worl#3 but the &astest1growing% in

t!e 1BBos, A.erican oil i.+orts gre )y .illion )arrels a day, .ore t!an t!e total oil consu.+tion o any

country ece+t :!ina and Ya+an, and t!at trend !as continued in t!e 9rst decade o t!e ne .illenniu. A&ter

the Unite# $tates3 no other market oers e%porters like Jussia or $au#i

Arabia the same opportunities &or both growth an# volume o& sales3 an#no oil pro#ucer3 whether country or company3 can aor# to miss out) oday, a

pro#ucer8s share o& the U)$) market is a critical measure o& that

pro#ucer8s political stan#ing an# &uture prospects Saudi Ara)ia, or ea.+le, is so

des+erate to .aintain its s!are o t!e HS .arket t!at it sells oil to A.ericans at a discount E5en oil states it!+rooundly anti-A.erican senti.ents — DeneKuela, i)ya, and until recently raG — are eceedingly cordial !en itco.es to selling or trying to sell oil to A.ericans



A9rmative



A.0 U$ Pro#uction ink

U$ oil e%ports have little to no impact on oil price or markets

Corstall *2= — i. Worstall, :ontri)utor to #or)es "nline, #ello at t!e Ada.

S.it! nstitute in ondon, N/2/2014, “!e HS o Allo :rude "il E+orts\ (ot !at tWill $ake $uc! >i=erence,* #or)es,!tt+%//or)esco./sites/ti.orstall/2014/0N/2/t!e-us-to-allo-crude-oil-e+orts-not-t!at-it-ill-.ake-.uc!-di=erence/Ce8ve the news that the U$ is to allow some cru#e oil e%ports &or the 5rsttime since t!e )an on t!e. as set in +lace in t!e 1B70s .his is good nes as itremoves an economic ine9ciency and re.o5ing econo.ic ineZciencies is

alays good nes3 but it8s not going to make all that much #ierence to t!e

nation as a !ole tLs really all a 9g!t )eteen t!e inde+endent crude +roducersand t!e inde+endent re9ners !ey, o)5iously, care a)out !o t!is goes, crudee+orts or no crude e+orts, )ut it .akes 5ery little di=erence to t!e rest o us

.he news isn8t that all cru#e e%ports are to be allowe#, sadly, but thatcertain sorts o& con#ensates are being, ell, really t!eyLre being re#e5ne#as being not cru#e an# thus e%portable%

!e HS go5ern.ent !as .o5ed toards liting a 40-year )an on oil e+orts )yalloing to co.+anies to sell ultra-lig!t oil to oreign )uyers

Pioneer (atural Oesources P<> -0C2, o r5ing, eas, and Enter+riseProducts Partners, o &ouston, !a5e )een told )y t!e 'ureau o ndustry andSecurity t!at t!ey can e+ort t!e oil, knon as condensate, !ic! can )eturned into gasoline, et uel and diesel

So.e +eo+le see. to )e rat!er o5er-!y+ing t!is%"il s!i+.ents could )egin as soon as August, in a .o5e t!at energy researc!

grou+ &S )elie5es could add .ore t!an 61 trillion B0)n3 to go5ern.entre5enues t!roug! 200, tri. uel +rices and create an a5erage o .ore t!an00,000 o)s a year

(o, not really, t!atLs not !atLs a)out to !a++en As )ackground you need tounderstand t!at HS +roduced crude cannot )e e+orted )ut re9ned +roductsgasoline, a5gas, !eating oil, all t!ose sorts o t!ings3 +roduced ro. HS crude can)e e+orted !e second t!ing you need to kno is t!at all o& these things, )ot!t!e crude and t!e re9ned +roducts, are !at is knon as :&ungible;) .here are

slight #ierences between A&rican3 i##le ast an# U$ cru#e, )eteen t!e+roducts o di=erent re9neries, but they8re all pretty much substitutes or eac!ot!er !us OicardoLs ron a o "ne Price co.es into +lay and t!eir +rices ill )e

t!e sa.e around t!e orld .inus t!eir costs o trans+ortSo, e ould t!us e+ect t!e +rice o HS +roduced crude to )e t!e sa.e as t!e+rice o (ort! Sea crude .inus any s.all tec!nical details like sul+!ur content andso on3 'ut one o t!e t!ings you .ig!t !a5e noticed is t!at or se5eral years not!ey !a5e not )een at t!e sa.e +rice W !ic! is HS oil deli5ered :us!ing, "F3!as )een trading .uc! loer, 10 to 1 loer, t!an 'rent !ic! is t!e )enc!.arkor ( Sea oil !e reason )eing t!at t!e su++ly o HS crude !as )een rising strongly



enoug! to tig!ten glo)al oil su++lies )y 1 .illion )arrels +er day i 'rent crudeere to all to 6B0 — t!at ould )e enoug! tig!tness to )ring +rices )ack a)o5e6100 n5est accordingly

Io impact on oil prices — U)$) #rilling #oesn8t cause global#eclines

cAuli !! — $ic!ael $cAuli= is a Senior (es :orres+ondent on :a+itol &ill or

!e &uZngton Post “$ore HS "il >rilling Wont oer Jas Prices, E+erts Say*0/0N/11 !tt+%//!uZngton+ostco./2011/0/0N/.ore-us-oil-drilling-ont-!el+-gas-+ricesRnRCC47!t.lWAS&(J"( -- Oe+u)licans used t!e +olitically +otent argu.ent a)out t!e cost ogas !ursday to +ass a )ill e+anding o=s!ore oil and gas e+loration 'ut analystssay t!eres a .aor Ma in t!eir case% ore #rilling will barely bu#ge prices

!e Oestarting A.erican "=s!ore easing (o Act, !ic! +assed 2NN to 144 it! >e.ocrats )uying into t!e sc!e.e, orders t!e >e+art.ent o t!e nterior to

.o5e Guickly to o=er t!ree leases to drill in t!e Jul o $eico and one o= t!e coasto Dirginia !e )ill de.ands t!at t!e leases )e eecuted )y net year 'ut t!elegislation ont reduce t!e +rice at t!e +u.+, e+erts said (or ould a 5astly.ore a.)itious e=ort !a5e .uc! i.+act D>tBs not going to change the price o&oil overnight3 an# itBs probably not going to have a huge impact on the

price o& oil ever3Q said $ike ync! o Strategic Energy and Econo.ic Oesearc!, ncre&erring not ust to t!ose our leases, )ut to e%pan#ing all U)$) #rilling ;et&ouse Oe+u)licans -- )acked )y nearly t!ree doKen >e.ocrats -- !eld out t!eir +us!or e+loitation o t!e our tracts as a +anacea or t!e eak econo.y and !ig! gas+rices QOe+u)licans are standing it! t!e A.erican +eo+le, !o ant us toincrease t!e su++ly o A.erican energy t!at ill loer costs, reduce our

de+endence on oreign oil, and create o)s !ere in A.erica,Q &ouse S+eaker Yo!n'oe!ner O-"!io3 +roudly declared QAnd L. certain - it! 64 +er gallon gas - t!eA.erican +eo+le ill re.e.)er !o listened to t!e., and !o didnLtQ Q t!ink !ig!gas +rices and !ig! energy costs are crus!ing o)s and are ust unnecessary,Q Oe+Jlenn !o.+son O-Pa3 told !e &uZngton Post QW!en e !a5e access todo.estic resources, gas +rices go don !atLs !at !a++ened in 200C !en 'us!o+ened u+ t!e outer-continental s!elQ Oe+ >oc &astings O-Was!3, t!e )ills leads+onsor, .ade t!e sa.e argu.ent Wednesday Q e send a signal to t!e .arketst!at eLre going to go ater t!e resources t!at e !a5e in t!is country,Q !e told)loggers on a conerence call, Q t!ink t!at ill !a5e a +ositi5e i.+act on dri5ing t!e+rice o gasoline don As a .atter o act, t!at !a++ened in 200CQ 'ut people

who stu#y oil markets &or a living say they are wrong) Q> woul# really#oubt that that V277L price #ropW woul# have been because we committe#to more #rilling3Q said P!yllis $artin, an analyst it! t!e HS Energy nor.ationAd.inistration EA3, !ic! ust released its detailed, annual outlook on energysu++ly and +rices Q>t was most likely the recession,Q $artin e+lained QChen#eman# cuts back3 the pro#uction cuts back an# the prices &all)D As &or

opening &our new #rilling leases3 thatBs not even a #rop in the bucket)

Analyst ync! said t!at, i& the nation took an e%tremely vigorous stance on

http://www.huffingtonpost.com/2011/05/06/more-us-oil-drilling-wont-help-gas-prices_n_858473.html






High Prices Goo#ow Prices

<a#



High Prices Goo#ow Prices <a# —

conomy



when inevitable price shocks occur) Chat the global economy nee#s arestable3 sustainable prices that can provi#e the basis &or eective planning)

High Oil Prices goo# &or stock market

Our nergy Policy !2 — Ad.inistrator at "ur Energy Policy, /N/12,“Econo.ist% &ig! "il Prices (ot (ecessarily3 'ad or t!e Econo.y*, "ur EnergyPolicy, !tt+%//ourenergy+olicyorg/econo.ist-!ig!-oil-+rices-not-necessarily-)ad-or-econo.y/n a ;ardeni Oesearc! )log +ost !ig!lig!ted )y an article in t!e (e ;ork i.es,economist # ar#eni argue# that rising oil prices :may actually be goo#

&or the stock market3 up to a point); .his is #ue3 in part3 to energy sector

companies like 4hevron an# %%on making up more than !2Q o& the $P=778s market capitali/ation) ar#eni notes that since late 277L there has

been :a strong positive correlation between energy prices an# the stock

market);

ow oil prices kill investor con5#ence

,earban !+ — Ale >e$ar)an, re+orter at Alaska>is+atc!, 1/20/201, “Will

Arctic o=s!ore oil drilling +ro5e unecono.ic in ake o HS s!ale oil )oo.I*Alaska>is+atc! !tt+%//alaskadis+atc!co./article/ill-arctic-o=s!ore-oil-drilling-+ro5e-unecono.ic-ake-us-s!ale-oil-)oo.#i5e years ago, oil prices settle# aroun# '!77 a barrel an# heavily reignite#

$hellBs interest in the Arctic Ocean% !e co.+any +lunked don .ore t!an 62)illion or a c!ance to drill into t!e relati5ely s!allo Moor o t!e :!ukc!i Sea n t!eearly 1BB0s, low oil prices le# $hell to aban#on its original &oray into the

oshore Arctic, des+ite !a5ing +unc!ed .ore t!an 20 !oles, inclu#ing somethat &oun# oil #ast-orard to 201 and its !ard not to onder i !istory illre+eat itsel n total, S!ell !as s+ent 6 )illion on leases, o+erational costs andot!er e+enses3 )ut t!e current e+loration +!ase o t!at e=ort .ig!t ust )e t!eeasy +art o get any disco5ery to .arket in t!e years to co.e, $hell will have toclear more regulatory hur#les3 &en# o a##itional legal battles3 an# spen#

billions more to create concrete or steel pro#uction plat&orms3 essentially

remote islan#s to process cru#e !e co.+any also ill need !undreds o .ileso +i+eline to s!i+ oil across one o t!e +lanets .ost in!os+ita)le anden5iron.entally +rotected regions S!ell s+okes.an :urtis S.it! said its too earlyto s+eculate on !o t!e Fulluk grounding ill i.+act S!ells ongoing e+loration

+rogra. o= Alaska QWe ill 9rst co.+lete an assess.ent o t!e Fulluk, )ut ourcon9dence in t!e strengt! o t!is +rogra. re.ains,Q !e said At !at oil +rice -- orat !at +oint in ti.e -- does t!e +roect )eco.e unecono.icI S.it! said !ecouldnLt anser An# what will happen to oil prices in the coming years isanyoneBs guess



%traction

ow Oil prices prevent investment in e%traction

.ravberg !+ — Jail ra5)erg, editor o !e "il >ru., 12/1C/1, "ilPriceco.,

“&o o "il Prices could :ause t!e >eat! o "il*, !tt+%//oil+riceco./Energy/"il-Prices/&o-o-"il-Prices-could-:ause-t!e->eat!-o-"il!t.l'ecause o di.inis!ing returns, the cost o& oil e%traction keeps rising t is !ardor oil +rices to increase enoug! to +ro5ide an adeGuate +ro9t or +roducers n act,oil prices alrea#y seem to be too low Oil companies have begun returningmoney to stockhol#ers in increase# #ivi#en#s3 rather than investing in

proects which are likely to be unpro5table at current oil prices) See "ilco.+anies rein in s+ending to sa5e cas! or di5idends our need or in5est.entdollars is escalating )ecause o di.inis!ing returns in oil etraction, )ut oilcompanies are reining in spen#ing &or investments because they #on8t

think they can make an a#equate return at current oil prices3 this #oes not

bo#e well &or &uture oil e%traction)



High Prices Goo# — Pro#ucing conomies

High prices bene5t pro#ucing economies — resulting increase#

pro#uction mo#erates spikes

Ieuhauser *2- — Alan (eu!auser, energy, en5iron.ent and SE$ re+orteror HS (es T World Oe+ort, N/24/2014, “>ata $ine% As ur.oil in raG 'oosts "ilPrices, W!o 'ene9ts t!e $ostI,* HS(es, !tt+%//usnesco./nes/)logs/data-.ine/2014/0N/24/data-.ine-as-tur.oil-in-iraG-)oosts-oil-+rices-!o-)ene9ts-t!e-.ostHigh prices .ean !ig! +ro9ts, rig!tIWell, not alaysAs 5iolence in raG orced crude oil +rices +ast a nine-.ont! !ig! o 611 late lasteek, it asnt necessarily t!e +roducers !o ere rea+ing !uge reards, )utinstead t!e traders t!e olks !o s+end eac! day selling !ig! and )uying lo(ely recruited raGi 5olunteers, earing +olice orces unior.s, take +art in a

training session on Yune 17, 2014, in t!e central S!iite $usli. city o Far)ala #acedit! a .ilitant o=ensi5e see+ing sout! toard 'ag!dad, Pri.e $inister (uri al-$aliki announced on Yune 1, 2014, t!at t!e raGi go5ern.ent ould ar. and eGui+ci5ilians !o 5olunteer to 9g!t, and t!ousands !a5e signed u+“!e real )ene9ciaries o !at e ould call t!is s!ort-ter. 5olatility is traders,*says Ya.ie We)ster, senior director o glo)al oil .arkets or &S, a consulting 9r.“Any)ody t!at )ene9ts ro. not !ig! +rices or lo +rices, )ut rat!er .o5ing +rices,t!eyLre t!e ones !o really )ene9t*

!ese traders can )e your )ankers on Wall Street or uncle on erade, )ut .ost otenitLs t!e inde+endent oil co.+anies, re9neries and ot!ers !o are constantly lookingto +icku+ oil at t!e loest +rices +ossi)le, and t!en sell it at t!e !ig!est

Pro#ucers can also bene5t at least as long as t!eir o+erations re.ainuntouc!ed )y tur.oil:For an e%isting pro#ucer who #oesn8t change anything about how they8re

pro#ucing3 they will make more money on an e%isting barrel than theywoul# have otherwise3; says Yulie :arey, #irector o& the consulting 5rm

Iavigant conomics “Other pro#ucers might also try to increase

pro#uction0 4an > now pro#uce something that was not economic at a pricethat was '!71per1barrel lower3 but now is more economic with prices that

are higherX As we see prices rising3 we see more pro#uction coming

online);



A.0 High Prices <a# &or conomy

High Oil Prices #on8t tank economy3 they ust show the

economy is ba# — current economy can withstan# oil spike

<urrows !2 — >an 'urros, contri)uting 9nancialist at :'S $oneyWatc!,2/2C/12, “W!y &ig!er "il and Jas Prices are good*, :'S(es,!tt+%//c)snesco./nes/!y-!ig!er-oil-and-gas-+rices-are-good-nes/

.rue3 oil price spikes prece#e# the !("+3 !(L73 !((!3 277! an# 277"

recessions3 but the spike in early 27!! #i# not lea# to one3 $on#ers notes

11 an# she #oesnBt believe the current spike will also be an e%ception) QU)$)

consumers are now much better positione# to weather higher energy

prices3 with well1improve# ob growth an# consumer con5#ence3 cre#it

growth picking up3 aggressive Fe# stimulus an# recor#1low natural gasprices3Q Sonders says Additionally, total HS s+ending on energy as a +ercentage

o dis+osa)le +ersonal inco.e currently stands at less t!an N +ercent, don ro.

t!e C +ercent o t!e early 1BC0s <ut most important is the &act that last

yearBs rise in energy prices was largely spurre# by the secon# roun# o&

quantitative easing by the Fe#eral Jeserve, Sonders says, whereas to#ayBs

#river o& higher oil an# gas prices is global growth)

High prices &ollow economic growth — they #on8t prevent itHyman !+ — Sean &y.an, 9nancial insider at $oney (es, 7/1B/201, “Oising

"il and Jasoline Prices% A 'lessing and a :urse*, $oney (es,!tt+%//.oneynesco./Sean&y.an/oil-gas-+rice-econo.y/201/07/1B/id/1BN1/

;ou see, when economic growth is waning, there is less #eman# place#

upon the supplies o& oil An# when the global economy is e%pan#ing, yese5en .ore so t!an t!e increased su++lies, t!e de.and increases u+on t!e su++lieso oil and oils +rice rises > watch oil a lot because itBs a great barometer o&

how the global economy is &aring And !at like )est a)out it is t!at its .oreo a real-ti.e indicator t!an atc!ing delayed gross do.estic +roduct re+orts, etc

$o oilBs rise proves to us that the global economy still has its &ooting an#is strengthening overall An# thatBs a goo# thing Chen economies are

e%pan#ing, o)s ill )e created



ow prices #on8t help the economy K the #ierence is marginal

at best

Cashington Post !2 — 'yline 'rad Plu.er, “:!ea+ oil onLt sa5e t!e orldLs

econo.y,* Was!ington Post, N/2/12, !tt+%//as!ington+ostco./)logs/eKra-klein/+/2012/0N/2/c!ea+-oil-ont-sa5e-t!e-orlds-econo.y/3

Earlier t!is year, oil +rices s+iked u+ard, and o)ser5ers orried t!at !ig! +rices could +inc! t!e glo)al econo.y !en t!e glo)al econo.y stu.)led on its on — it! slodons in t!e Hnited States, :!ina, Euro+e, andelse!ere — and oil +rices slu.+ed again :rude traded in t!e Hnited States sunk ro. 610C +er )arrel )ack in

#e)ruary don to 67C +er )arrel today So ill t!e re5erse )e trueI 4an low oil prices provi#e a

stimulusI8 A little3 but not much According to Andre Fenning!a., a senior econo.ist it!

:a+ital Econo.ics3 a '27 &all in oil prices basically trans&ers about ! percent o&

global G,P &rom countries that mainly pro#uce oil suc! as Oussia and Saudi Ara)ia@to countries that mainly use oil lots o +laces3 $ince oil1consuming countries

ten# to spen# a bit more money on goo#s an# services3 this wealth

trans&er will likely boost the global economy by about 7)= percentage

points !at !el+s 'ut it8s not nearly enough to solve the worl#8s problems)E

“4heaper oil .ay cus!ion t!e all in de.and, +articularly in t!e HS, !ere t!e +ass-t!roug! ro. crude oil togasoline +rices is !ig!,* Fenning!a. told &ousing Wire “'ut it cannot reverse the slow#own*8

Ya.es &a.ilton, an econo.ist and oil e+ert at t!e Hni5ersity o :aliornia San >iego, concurs &e notes t!atgasoline +rices !a5e alays tig!tly olloed oil +rices, so +rices at t!e +u.+ in t!e Hnited States are likely to dro+

)y Guite a )it in t!e .ont!s a!ead !at ill +ut a little .ore .oney in t!e +ockets o dri5ers 'ut that8s not

enough o& a boost to overcome all the other problems in the worl#%8 gasoline

+rices do all ro. t!eir 5alue in A+ril near 6B2 to 612, t!at ould )e an C0 cents/gallon sing Wit! A.ericans)uying a)out 140 )illion gallons o gasoline eac! year, t!at translates into an etra 6112 )illion o5er t!e course o ayear t!at consu.ers ould !a5e a5aila)le to s+end on ot!er t!ings )esides gasoline 8 So s!ould e )e cele)ratingIL. araid not !e +ri.ary reason t!at oil +rices !a5e co.e don is )ecause o groing signs o eakness in t!eorld econo.y a. 5ery concerned a)out !ere e5ents in Euro+e are going to lead, and recent HS data indicate

so.e eakening 4heap gas helps3 but not so much i& you #on8t have a ob)E !e

orld ust canLt in it! oil lately Chen times are goo# an# the global economy is

e%pan#ing3 the worl# bumps against what appears to be a ceiling in thepro#uction o& :easy; oil) At that point3 prices tick up3 threatening to

squelch the recovery) 4onversely3 when times are ba#3 &alling oil prices

#on8t appear to be enough to prop up the economy again)



.urns 4ase

ow Oil Prices .urn the 4ase K only sustaine# high prices lea#

to long term investment in renewable energy

Akst * — >aniel Akst, contri)uting editor at t!e (; and 5arious ot!er+u)lications, B/17/0N, “!e Jood !ing a)out "il Prices s t!e 'ad (es*, (;,!tt+%//nyti.esco./200N/0B/17/)usiness/your.oney/17cont!t.lIre]your.oney3>onLt kid yoursel Anyt!ing t!at reinorces t!e role o ossil uels — +articularly oil— as t!e industrial orldLs +ri.ary energy source is )ad, not good Anyt!ing t!at+rolongs t!e lie o t!e internal co.)ustion engine is a negati5e, not a +ositi5eAnyt!ing t!at .akes it c!ea+er to +u.+ green!ouse gases into t!e at.os+!ere iscause or .ourning rat!er t!an cele)ration Chat we nee# is not lower oilprices but higher ones — signi9cantly !ig!er, enough to #eter consumption

an# make us look seriously at alternatives " course, it ould )e nice not to

!a5e to rely on cartels and circu.stances to .ake us .oderate our consu.+tionHe&ty ta%es on carbon1base# energy, the procee#s o& which coul# &uelresearch into non&ossil alternatives, ould )e a .uc! )etter a++roac!, since

then at least we8# be paying ourselves instea# o& our &rien#s at the

Organi/ation o& the Petroleum %porting 4ountries As a )onus or sa5ing t!e+lanet, e .ig!t e5en under.ine t!e intolerance and autocracy t!at are a)etted in.any +laces )y oil .oney !e sad act is t!at ust as oil is t!e lie)lood o Westernecono.ies, oil re5enue oten is t!e lie)lood o tyranny "il-ric! regi.es t!attra.+le t!e rig!ts o o.en, 9nance terroris. and +reac! intolerance are sustained)y !at e s+end on gasoline and !eating oil !e unortunate +arado is t!at.oderating oil +rices, !ile t!ey .ay reduce t!e earnings o des+ots in t!e s!ort

run, ill only su++ort our !ar.ul addiction — and t!e +oer o t!ose sa.e des+ots— in t!e long run t!at ere t!e only )ad t!ing resulting ro. loer oil +rices, itould )e suZcient A!, )ut t!ereLs so .uc! .ore ower oil prices woul#

promote more #riving, &or instance, a dis.al outco.e t!at ould increase air+ollution and, in all likeli!ood, !ig!ay atalities $ore t!an 4,000 +eo+le erekilled on Hnited States roads last year, and 27 .illion ere inured $anyt!ousands die annually ro. air)orne +ollutants as ell !en t!ereLs s+ral:!ea+er gas ill .ean .ore ar-Mung, auto.o)ile-de+endent co..unities !atill )ring .ore dri5ing still, !ic! ill result in e5en .ore +ollution and accidents

!is is to say not!ing o t!e !ealt! e=ects associated it! dri5ing e5ery!ereinstead o alking All that #riving brings us back to global warming Fossil

&uels are implicate# in what appears to be signi5cant human1in#uce#climate change E5eryone kno +roesses to orry a)out t!is, )ut letLs ace it%nothing but #rastically higher prices will #eter most o& us &rom consumingmore carbon1base# energy $ean!ile, oil prices remain #istressingly lowAdusted or inMation, re.e.)er, prices peake# some 2= years ago H>GHJ

prices have worke# won#ers be&ore oday, Americans can generate a#ollar o& gross #omestic pro#uct using ust hal& the energy require# in

!("+, that watershe# year o& the oil embargo an# lines at gas stations >n



countries where energy is more e%pensive, a dollar o J>P requiresconsi#erably less energy still Hnlike a ta, .oreo5er, higher prices have the

a#vantage o& applying all over the worl#, to e5eryone !e )urden o !ig!er oil+rices, unortunately, ill all .ost !ea5ily on t!e orldLs +oor — )ut t!en again, soould t!e )urden o cli.ate c!ange And surely t!e +oor ould )ene9t ro.

tec!nologies t!at +ro5ide alternati5es to ossil uels

High Oil Prices help renewable energy

Frangoul !- — An.ar #rangoul, re+orter at :(':, /C/14, &ig! oil +rices ill)oost renea)les% Pro, :(':, !tt+%//cn)cco./id/101NBB0[Higher oil prices woul# help to incentivi/e research an# #evelopment into

renewable energy, according to $ark eis, senior analyst o sustaina)ilityresearc! at Fe+ler :!eu5reu 'rent crude utures traded ust )elo 610C a )arrelaround .idday on !ursday, u+ so.e 6C a )arrel ro. t!is ti.e last year Q;ou5egot security o su++ly concerns, raised .ost recentlyUit! t!e tensions in t!e east

o Euro+e it! Hkraine t!at !as )roug!t to t!e ore Euro+es de+endence oni.+orted ossil uels, an# youBve got continuing high oil prices3D ewis sai#"nly recently Elon $usk, :E" o esla $otors, announced a.)itious +lans to )uild a6 )illion giga actory t!at ill +roduce u+ to 00,000 lit!iu. )atteries annually )y2020 And it! ongoing tensions )eteen Hkraine and Oussia !ig!lig!ting Euro+esde+endency on i.+orted ossil uels, eis told :(': t!at suc! a cli.ate could.ake t!e de5elo+.ent o renea)les, suc! as lit!iu. ion )atteries, a .oreattracti5e +ro+osition Q t!ink oil i.+orting countriesUreally s!ould )e looking at)attery tec!nology, storage o& energy, as t!e !oly grail,Q eis added Q!isreally is it, )ecause i you can .ake t!e )ig )reakt!roug! t!ere, we really #o startto see a change)D Cith oil prices high an# maor oil companies cutting

back on capital e%pen#iture levels, ewis pre#icte# that the appetite &orrenewables will gain momentum Q t!ink t!is is a real issue,Q eis said Q.he

oil companies are &ailing to make enough money even at current recor#high price levels, e5e seen t!e oil co.+anies start to cut )ack on t!eir ca+ eca+ital e+enditure3 levels &rom the beginning o& this yearZ which kin# o&

tells you oil prices have to go higher, and t!ats !ere t!e incenti5e orde5elo+ing t!is tec!nology ill co.e t!roug!,Q !e added

High Oil Prices Force Use o& Alternative nergy

.ravberg !+ — Jail ra5)erg, editor o !e "il >ru., 12/1C/1, "ilPriceco.,

“&o o "il Prices could :ause t!e >eat! o "il*, !tt+%//oil+riceco./Energy/"il-Prices/&o-o-"il-Prices-could-:ause-t!e->eat!-o-"il!t.l:li.ate :!ange !ere is no li.it on oil +roduction it!in t!e oreseea)le uture Oil

prices can be e%pecte# to keep rising) Cith higher prices3 alternative &uelsan# higher cost e%traction techniques will become available) !e .ainconcern is cli.ate c!ange !e only reason t!at oil +roduction ould dro+ is)ecause e !a5e ound a ay to use less oil )ecause o cli.ate c!ange concerns,and c!oose not to etract oil t!at see.s to )e a5aila)le



High Prices Goo# — $peci5c

4ountry o#ules



Jussia



!I4 — Jussian Oil ,A

First3 oil prices are high an# stable

$econ#3 the plan causes a sustaine# re#uction in oil prices)?nsert ink@

.hir#3 high oil prices are key to the Jussian economy —

#iversi5cation is #estructive

Fei&er !! Jregory, Editor and Senior :orres+ondent or Oadio #ree Euro+e/Oadio

i)erty, Russia's Image as Energy Superpower Beneftting rom Middle East Crisis,

!tt+%//oil+riceco./Energy/Energy-Jeneral/Oussia-s-.age-as-Energy-Su+er+oer-'ene9tting-ro.-$iddle-East-:risis!t.l3Wit! HS-led 9g!ter ets +ounding .ilitary assets in oil-ric! i)ya, and Ya+an still struggling to contain radiation atits stricken #ukus!i.a nuclear +lant, concerns are rising around t!e orld a)out t!e uture o energy su++lies 'ut

not in Oussia As the unrest in the i##le ast bites into supplies, prices &or

cru#e approache# '!7= a barrel t!is eek .hatBs helping #rive win#&all

pro5ts that are enabling the worl#Bs biggest energy e%porter to 5nally

emerge &rom recession triggered )y t!e glo)al 9nancial crisis in 200C 'ut while thatBs goo#

news &or JussiaBs economy, 6remlin critics say rising energy prices are

again shoring up the countryBs aut!oritarian government -- and t!ats )ad or +olitics

Energy Sa5ior Jussia is using the crises in the i##le ast and Ya+an to burnish its

image as the worl#Bs energy superpower Pri.e $inister Dladi.ir Putin -- !o !as +redictedt!at Oussias J>P ill eGual its +recrisis le5el )y net year -- ec!anged !is usually stern de.eanor or anunc!aracteristically riendly .anner last eek and +ro.ised to !el+ Ya+an, !ere t!e nuclear crisis !as orcedelectricity )lackouts &e +redicted t!e e=ects o t!e eart!Guake and tsuna.i to energy su++lies t!ere ill )e long-ter. Qn t!at regard, e !a5e to t!ink o accelerating our +lans to de5elo+ !ydrocar)on-etraction +roects --

+articularly gas etraction -- in t!e #ar East,Q !e said Putin oere# to pump more gas to

urope by pipeline, reeing s!i+.ents o liGue9ed natural gas or Ya+an &e also +ro+osed laying an

electricity ca)le to Ya+an and o=ered Ya+anese co.+anies stakes in Si)erian gas 9elds $osco !as issued .oreo=ers since, including encourage.ent or Ya+anese co.+anies to in5est in Oussias coal industry 'ut so.e analystsare arning Oussias !eig!tened ocus on its glo)al energy role is eroding any -- already distant -- !o+es t!ego5ern.ent ould enact econo.ic reor. !e Fre.lin 5oed to di5ersiy t!e countrys econo.y ater +lu..etingoil +rices dealt t!e econo.y a )ody )lo during t!e glo)al 9nancial crisis Anti-Westernis. Oising Political analyst

Andrei Piontko5sky says the latest events in the i##le ast are instea# helping

spee# a return to JussiaBs precrisis situation, when peak oil prices oo#e#

the country with cash QCeBre returning to the gol#en era o 200N and 2007, witho9cial propagan#a slogans e%tolling a Bgreat energy power,Q Piontko5sky says

Q>tBs very goo# &or a 5ery li.ited group o& people or a 5ery s!ort ti.e +eriod, )ut certainly its

5ery )ad or t!e countryQ Piontko5sky says t!e #evelopments are rein&orcing the QgeneralmentalityQ o& JussiaBs lea#ers, reMected in a return to t!e kind o strident anti-Western r!etoric t!at

as es+ecially loud during t!e +recrisis oil )oo. &e +oints to President >.itry $ed5ede5s co..ents t!is .ont!in !ic! !e )la.ed Western countries or +ro.+ting t!e $iddle East unrest, adding t!at Qt!ey !a5e +re+ared suc!

a scenario or usQ 'ut itBs Putin whoBs seen as JussiaBs supreme lea#er &e las!ed out



on $arc! 22 in !is strongest anti-Western co..ents in years, conde.ning t!e H( Security :ouncil or aut!oriKingorce against i)ya &e said last eeks resolution ena)led Western countries to take action against a so5ereignstate Qunder t!e guise o +rotecting t!e ci5ilian +o+ulationQ Qt actually rese.)les .edie5al calls or crusades !en

so.eone called on ot!ers to go to a certain +lace and li)erate it,Q Putin said Oede9ning #oreign Policy <ut the

atmosphere in oscow is more nuance# then the rhetoric suggests $ed5ede5

reected Putins co..ents, calling t!e. Qunacce+ta)leQ And des+ite Putins dis+leasure, Oussia declined to 5etot!e resolution !en it ca.e to a 5ote last eek, instead c!oosing to a)stain #yodr ukyano5, editor o t!e ournal

QOussia in Jlo)al A=airs,Q sees t!at decision as .ore signi9cant t!an t!e toug! talk Qts not ty+ical,Q !e saysQOussia used to take stands or or against, +articularly !en it co.es to issues suc! as inter5ention in ot!ercountriesQ &e says oreign +olicy isnt )eing dri5en )y rising oil +rices Qts a)out t!e gradual reocusing o Oussianinterests and rede9ning o Oussian oreign-+olicy identity ro. a glo)al one to a .ore regional oneQ !at c!ange,!e says, reMects a Q.uc! .ore rational calculation o +rioritiesQ Qt doesnt .ean Oussia is .ore +ro-Western,Q

ukyano5 says QJussia is becoming less global, which means that, or ea.+le, thei#ea to challenge Cashington everywhere an# over everything isnBt

relevant anymoreQ Oussias Oesources :ard 'oosting energy e+orts is a.ong t!e +riorities, as Putins

latest sales.ans!i+ reMects 'ut .aintaining current le5els ont )e as easy as it .ay a++ear Econo.ist :li=ord

Jaddy o t!e 'rookings nstitution says the key question &or JussiaBs &uture economic

success will be how it respon#s to #eman# in resource-!ungry :!ina Chatever the

rhetoric coming out o& the 6remlin, !e says, Jussia has little chance o&

competing in any other sector Q ou can #ream all you want about#iversi5cation an# blame Putin or whoever &or not #iversi&ying or praise

them because they want to #iversi&y,Q Jaddy says, Qbut it #oesn8t make very

much sense JussiaBs comparative, competitive a#vantage is not in

anything e%cept resources, so the smart thing to #o is play that car#Q #or

no, Jaddy sees e long-ter. e=ects or Oussia ro. t!e $iddle East unrest, saying oil +rices ere +redicted torise to 610 to 610C t!is year e5en )eore it )egan, !ile co..odity +rices are e+ected to continue rising or t!e

oreseea)le uture .hatBs #epressing news &or PutinBs critics any believe the

prime minister plans to return to the presi#ency in an election ne%t year,an# -- i& electe# again -- he coul# remain in o9ce &or the ne%t !2 years

Fourth3 Jussian economic #ecline risks global nuclear conictFilger ( S!eldon, :olu.nist and #ounder Jlo)al Econo.ic:risisco., “Oussian

Econo.y #aces >isasterous #ree #all :ontraction*, !tt+%//!uZngton+ostco./s!eldon-

9lger/russian-econo.y-aces-disR)R201147!t.l3>n Jussia3 historically3 economic health an# political stability are

intertwine# to a degree t!at is rarely encountered in ot!er .aor industrialiKed econo.ies t as t!e

econo.ic stagnation o t!e or.er So5iet Hnion t!at led to its +olitical donall Si.ilarly, $ed5ede5 and Putin,)ot! inti.ately acGuainted it! t!eir nations !istory, are unGuestiona)ly alar.ed at t!e +ros+ect t!at Oussias

economic crisis will en#anger the nationBs political stability, ac!ie5ed at great cost

ater years o c!aos olloing t!e de.ise o t!e So5iet Hnion Already, strikes and +rotests are occurring a.ongrank and 9le orkers acing une.+loy.ent or non-+ay.ent o t!eir salaries Oecent +olling de.onstrates t!at t!eonce su+re.e +o+ularity ratings o Putin and $ed5ede5 are eroding ra+idly 'eyond t!e +olitical elites are t!e9nancial oligarc!s, !o !a5e )een orced to dele5erage, e5en unloading t!eir yac!ts and eecuti5e ets in a

des+erate atte.+t to raise cas! $houl# the Jussian economy #eteriorate to the point

where economic collapse is not out o& the question3 the impact will go &arbeyon# t!e o)5ious accelerant suc! an outco.e ould )e or t!e Jlo)al Econo.ic :risis !ere is a geo+olitical

di.ension t!at is e5en .ore rele5ant t!en t!e econo.ic contet >es+ite its econo.ic 5ulnera)ilities and +ercei5ed

decline ro. su+er+oer status, Jussia remains one o& only two nations on earth with

a nuclear arsenal o& su9cient scope an# capability to #estroy the worl# as

we know it) For that reason3 it is not only President e#ve#ev an# Pri.e $inister

Putin who will be lying awake at nights over the prospect that a national

http://www.huffingtonpost.com/sheldon-filger/russian-economy-faces-dis_b_201147.html






economic crisis can trans&orm itsel& into a virulent an# #estabili/ing socialan# political upheaval t ust .ay )e +ossi)le t!at HS President 'arack ")a.as national security

tea. !as already )rieed !i. a)out t!e conseGuences o a .aor econo.ic .eltdon in Oussia or t!e +eace o t!eorld Ater all, t!e .ost recent national intelligence esti.ates +ut out )y t!e HS intelligence co..unity !a5ealready concluded t!at t!e Jlo)al Econo.ic :risis re+resents t!e greatest national security t!reat to t!e HnitedStates, due to its acilitating +olitical insta)ility in t!e orld >uring t!e years 'oris ;eltsin ruled Oussia, securityorces res+onsi)le or guarding t!e nations nuclear arsenal ent it!out +ay or .ont!s at a ti.e, leading to ears

t!at #esperate personnel woul# illicitly sell nuclear weapons to terroristorgani/ations >& the current economic crisis in Jussia were to #eteriorate

much &urther3 how secure woul# the Jussian nuclear arsenal remainX >t

may be that the 5nancial impact o& the Global conomic 4risis is its least#angerous consequence



A.0 Jussian conomy ow Iow



A.0 ,iversi5cation .urn

High oil prices are key to #iversi5cation K

!) >nvestment &un#s an# con5#ence,ashevsky !! — Ste5en, $anaging >irector o >as!e5sky T Partners, “!e

Oussian econo.y and its oil,* -24, !tt+%//rtco./)usiness/nes/russia-econo.y-oil-r+ice/O% &ig! oil +rices !a5e !el+ed OussiaLs )udget )ut is t!e country too de+endent onenergy e+ortsI S>% “Well t!e de+endence !as declined greatly in recent years, )ut t!ink t!e sad trut! re.ains t!at, to a very signi5cant #egree3 Jussia8s

bu#get revenues an# overall 5scal health is still very #epen#ent on the

level o& oil prices* O% &o does t!e energy sector s!a+e t!e Oussian in5est.entcli.ateI S>% “Well, t!ere are .any ays !o the events happening in the oil

an# gas sector inuence what is happening in the broa#er economy "n

t!e one !and this is the biggest source o& cash ow generation in the

country, so in a sense itLs t!e )iggest source o in5est.ent unds, )ot! or t!eco.+anies, and or t!e go5ern.ent and also )ecause oil co.+anies in5est 5erysigni9cant a.ounts o .oney e5ery year, so the ability o& Jussian oil

companies to spen# money aects really the entire Jussian economy ro. trans+ort co.+anies to oil ser5ice co.+anies to catering co.+anies to localairlines so it is still, des+ite t!e signi9cant e=orts to di5ersiy t!e econo.y, it8s a

very important source o& investment &un#s !atLs kind o one angle, andanot!er angle is what is happening in the Jussian oil an# gas sector3 since it

is the biggest sector in the economy3 aects the general investmentclimate3 &rom the kin# o& sentiment perspective So, when something goo#

happens like +otentially as going to !a++en, 'P-Oosnet deal, or i t!ere are goode5ents !a++ening, new 5el#s are being #evelope#3 new pipelines are beingbrought on1stream3 that gives investor a##itional con5#ence that the

economy is progressing very well3 and +eo+le are in5esting .oney in it, an#

the whole country is open &or business Dice 5ersa, i& things are not going

well, i deals are )reaking u+, i instead o going to ork +eo+le going to courtsagainst eac! ot!er, that clearly creates a big #rag on the investors

sentiment &or all o& the Jussian economy3 not ust oil an# gas);

2) >n&rastructure spen#ing<ennallack !! — "ain, eecuti5e editor o >e5elo+, “!e one .arket you can)uy on !ig!er oil +rices* -, !tt+%//oolcouk/nes/in5esting/2011/0/0/t!e-one-.arket-you-can-)uy-on-!ig!er-oil-+ricesas+ ;es, ere talking a)out Oussia As $att!ias Siller, n5est.ent $anager at 'aring Asset $anager e+lains%

D.here is generally a close relationship between the per&ormance o& the

Jussian equity market an# the oil price, it! Oussia lagging slig!tly >n a stronger oilprice environment3 it is our belie& that the Jussian market will gain



upwar# momentum)D !e olloing gra+! s!os t!e relations!i+ )eteen t!e oil +rice and t!e Oussian

.arket 5ery clearly% ;ou can clearly see t!at going on t!is +rior trend, t!e Oussian .arket could )e a)out to s!ootu+ards ts already started 2011 it! a )ang in co.+arison it! .ost ot!er e.erging .arkets, !ic! !a5e ilted

$ore reasons to )uy Oussia Were not !a)itual gra+! olloers at t!e #ool 'ut there are very strong

reasons why Jussia rises when the oil price #oes -- +rinci+ally, t!at the country

is a huge e%porter o& oil3 an# its markets are stue# to overowing with

oil pro#ucers n t!e s!ort ter. at least, higher oil prices will massively boost theirpro5tability ts esti.ated t!at a '!=7 barrel o& oil woul# increase Jussian

oil 5rmBs operating pro5tability by an a5erage o N0-L7Q 'ut 'arings $att!ias Siller +oints

to to ot!er reasons to )e o+ti.istic a)out Oussian eGuities in t!is cli.ate% $ore taes or t!e go5ern.ent% >tBs an election year in Jussia3 an# incumbents ush with oil1&uelle# ta%

receipts coul# well increase in&rastructural an# social security spen#ing3to the bene5t o& banks3 construction 5rms3 property companies3 an#

retailers) A )oost to oil +roduction% Oussian oil co.+anies )adly need to u+grade t!eir acilities to get

.ore o t!eir reser5es to .arket A !ig!er oil +rice ould gi5e t!e Oussian aut!orities leeay to introduce )etterta incenti5es to encourage t!is, !ic! could ena)le Oussias +roducers to increase t!eir out+ut and +ro9ts !eOussian .arket is on a P/E o ust 10 and orecast to all to around 7, so on t!e ace o it t!is is +retty co.+ellingo++ortunity

+) 4onstruction3 real estate3 5nancial services3 an# telecomm

$chnei#er - — Andre, Fi+linger 'usiness #orecasts, N-C-2004, leis

nergy will remain the key &actor un#erpinning JussiaBs economy, with oil

an# natural gas e%ports bringing in billions o& #ollars annually in &oreignincome) .his is provi#ing the &uel &or booms in construction an# real

estate as well as in several service1sector in#ustries ranging &rom 5nancial

services an# telecommunications to retail)DOil revenues are &ueling growth in all these sectors,Q says :arenJa)outc!ian, a on#on1base# economist it! (J #inancial $arkets &e notes

t!at the link is particularly visible with regar# to the construction boom)DOil companies pay their employees) .he employees want to invest their

cash3 an# one o& the best investments is the real estate sector in oscow,eit!er residential or co..ercial,Q !e +oints out



A.0 ,utch ,isease .urn

Oil revenue will not cause Jussian imperial aggression K risk is

low

anning an# Sae ! OA(> Energy Analysts,!tt+%//crorg/+u)lication/BN0/russiaRenergyRandRt!eRest!t.l3 !e long ter. t!reat o a re5i5ed, neo-i.+erial Oussian !ege.on can not )e dis.issed out o !and&oe5er, HS +olicy )ased on suc! a orst-case scenario carries t!e danger o )eco.ing a sel ul9lling

+ro+!ecy >n reality3 the material nee#s o& the Jussian people are so huge3an# the #eterioration o& the Jussian military so #eep3 that the potential o&

improve# oil revenues to bring Jussia back to a position where it coul#

#ominate its neighbours3 much less threaten the United $tates, is remote)

Oil #epen#ence is overwhelmingly goo# &or Jussia K no viable

alternatives,ashevsky !! Ste5en, $anaging >irector o >as!e5sky T Partners, The

Russian economy and its oil, $ay 24t!, !tt+%//rtco./)usiness/nes/russia-econo.y-oil-

r+ice/+rint/3Wit! !ig!er crude +rice )ringing t!e )udget )ack into )alance )ut also stoking inMation 'usiness O s+oke it!Ste5en >as!e5sky, $anaging >irector o >as!e5sky T Partners a)out oil and its relations!i+ to t!e Oussian

econo.y O% High oil prices have helpe# Jussia8s bu#get )ut is t!e country too de+endent

on energy e+ortsI S>% “Well t!e de+endence !as declined greatly in recent years, )ut t!ink t!e sad trut! re.ains

t!at, to a very signi5cant #egree, Jussia8s bu#get revenues an# overall

5scal health is still very #epen#ent on the level o& oil prices* O% &o does t!e

energy sector s!a+e t!e Oussian in5est.ent cli.ateI S>% “Well, t!ere are .any ays !o t!e e5ents !a++ening in

t!e oil and gas sector inMuence !at is !a++ening in t!e )roader econo.y "n t!e one !and this is the

biggest source o& cash ow generation in the country, so in a sense it8s the

biggest source o& investment &un#s, both &or the companies, an# &or thegovernment an# also because oil companies invest very signi5cant

amounts o& money every year, so the ability o& Jussian oil companies to

spen# money aects really the entire Jussian economy &rom transport

companies to oil service companies to catering companies to local airlines so it is still, des+ite t!e signi9cant e=orts to di5ersiy t!e econo.y, itLs a very importantsource o& investment &un#s !atLs kind o one angle, and anot!er angle is !at is !a++ening in t!e

Oussian oil and gas sector, since it is t!e )iggest sector in t!e econo.y, a=ects t!e general in5est.ent cli.ate,ro. t!e kind o senti.ent +ers+ecti5eSo, !en so.et!ing good !a++ens like +otentially as going to !a++en, 'P-Oosnet deal, or i t!ere are good e5ents !a++ening, ne 9elds are )eing de5elo+ed, ne +i+elines are )eing)roug!t on-strea., t!at gi5es in5estor additional con9dence t!at t!e econo.y is +rogressing 5ery ell, and +eo+le

are in5esting .oney in it, and t!e !ole country is o+en or )usinessDice 5ersa, i t!ings are not going ell, i dealsare )reaking u+, i instead o going to ork +eo+le going to courts against eac! ot!er, t!at clearly creates a )igdrag on t!e in5estors senti.ent or all o t!e Oussian econo.y, not ust oil and gas* O% Are go5ern.ent .o5es todi5ersiy t!e econo.y aay ro. energy likely to succeed in t!e s!ort ter.I And in t!e long ter.I S>% “tLs a trickGuestionSo.eone told .e t!at t!e 9rst ti.e t!e Oussian go5ern.ent !as )eco.e concerned a)out its reliance onoil and gas re5enue, as, in act, al.ost i..ediately ater oil and gas as ound in Si)eria, in 1B7, 1B74"ne ot!e central co..unist +arty co..ittees !as discussed t!e su)ect So t!at as 1B74Al.ost 40 years later t!ink

we still 5n# ourselves in the current situation where the economy an# the

bu#get are very, very, #epen#ent on oil and gas > +ersonally #on8t see how it is

http://rt.com/business/news/russia-economy-oil-rpice/print/






going to change >n the near term, an# even in the long term, because

even i& the Jussian oil pro#uction begins to #ecline, or t!e glo)al oil +roduction )egins

to decline, what will happen at that time woul# also mean high oil prices, so i&global pro#uction will be getting lower3 the oil price will be getting higher

because o& that So, as a result, t!e Oussian intake ro. co..odity e+orts ould .ore or less stay t!e

sa.e it ould )e a )ig a.ount o .oney co.ing into t!e country And t!ere is 5ery e ot!er sources o !ard

currency t!e econo.y could generate So it woul# take a miracle to materially change

the structure o& the Jussian economy an# o& the Jussian bu#get ven the

long term, so > think the only thing you can #o is really simply take this

natural wealth that has been given to you by go#, an# si.+ly use it eZciently >#on8t think you can really say [let8s become a hi1tech nation, or lets

become a tourist mecca, or lets )eco.e t!e +ro5ider o sa5oir 5i5re +roducts like #rance .hey are

ust not going to happen ou ust take your natural resource wealth but

you try to use that e9ciently, an# try not to waste it* O% W!at is t!e )est ay t!e

go5ern.ent can di5ersiy t!e econo.y and at t!e sa.e ti.e take ad5antage o t!e energy resources t!at it !asIS>% “Well t!atLs a slig!tly di=erent Guestion!e anser to t!at is 5ery si.+le you are endoed it! signi9cantnatural resources, one ay !o you di5ersiy your econo.y, i t!is is still t!e core o your econo.y, t!e core o

your ealt!, t!e ay you di5ersiy and t!e ay you .ake t!e econo.y .ore di5ersi9ed is )y creating .ore 5alueaddedSo t!ink t!e clear sort o strategic goal t!at t!e Oussian go5ern.ent s!ould +ursue is increasing t!e degreeo re9ning o, or ea.+le, or oilSo instead o selling si.+le 5acuu. gas oil, .ay)e uel oil, !ic! is su)seGuently)eing re9ned into !ig! 5alue added +roducts in t!e est, you )uild t!ese re9ning co.+lees !erenstead o)urning associated gas, or ea.+le, you create +etroc!e.ical re9ning co.+lees !ic! +rocess it into 5arious

liGue9ed gas, and 5arious associated +etroc!e.ical +roducts, and you e+ort t!atSo, > #on8t think it is

&air to say that, ok i& you have a natural resource #riven economy, you arein a ba# situation .ean Australia has a natural resource #riven economy,an# so #oes 4ana#a, an# so #oes Iorway, )ut t!ere are alays ays, i you t!ink a)out

t!ings to create 5alue to .ake it .ore di5ersi9ed, and t!e .ore you add 5alue, t!e .ore added 5alue is in t!e+roduct you sell t!e less 5ulnera)le you are to co..odity +rice sings'ecause co..odity +rice sings a=ect,9r4st and ore.ost, t!e ra natural resources, and to a .uc! lesser degree t!ey a=ect t!e 9nal +roductSo e allkno !o .uc! t!e oil +rice c!anges e5ery day, )ut t!e +rice +er tonne o ru))er or +lastic or certain+etroc!e.ical s+ecialiKed +roducts doesnLt c!ange t!at otentLs su)ect to .uc! .ore longer ter. contractsAnd i

you go ro. +roducing gas to also +roducing electricity, t!at doesnLt c!ange daily, itLs not as 5olatileSo thereare #ierent ways, t!ink, how you can #iversi&y the economy, an# simply

make Jussia, instea# o& raw material e%porter3 into a high quality, high

value a##e# energy e%porter n di=erent ty+es o energy, and di=erent ty+es o resources, as your

9nal +roduct And that t!ink is the only kin# o& reasonable #iversi5cation

strategy* O >o you t!ink Oussia !as >utc! disease and !o does energy reliance ork in Oussia it! t!e

i.+ort co.+eting sectorI S>% “!ere are ele.ents o >utc! disease, so t!ink not all t!e sy.+to.s are !ere

)ecause t!e oil industry is not, ,utch #isease happens when one in#ustry, in t!is case oil

and gas industry, really begins to crow# out investment an# obs an# becomes

the centre o& everything, so the rest o& the economy kind o dies >n theJussian case, it8s a little )it #ierent because a lot o& the money that ows

into the country, via the oil and gas sector, subsequently ows &urther intothe economy So the impact &rom the oil and gas sector or ea.+le, on the

currency is not what it use# to be So, yea!, i t!e oil +rices are !ig! it gets stronger, )ut itLs not

dra.atically stronger, and t!ink t!e econo.y is )eco.ing, in relati5e ter.s, it is getting better i& oilprices are high, instead o getting orse>utc! disease really !a++ens i t!ere is one sector t!at is doing

ell and it drains resources ro. all t!e ot!er sectors>n Jussia8s case when oil prices are

high, all sectors are enoying it because it trickles #own to the entire

economy So t!ink t!ere are certain ele.ents o it, )ut > #on8t think Jussia has ,utch



#isease, an# whatever people say , ortunately i& oil prices are high it is goo#

&or Jussia, an# it is goo# &or Jussia as a whole, not ust &or Jussian oil

companies* O% &o o+en is t!e Oussian energy sector to oreign in5est.entI

Io ,utch ,isease &or JussiaJ.3 interviewing ,ashevsky !! — Ste5en >as!e5sky, $anaging >irector o

>as!e5sky T Partners, a)out t!e i.+lications o oil de+endence or t!e Oussianecono.y “!e Oussian econo.y and its oil,* /24,!tt+%//rtco./)usiness/nes/russia-econo.y-oil-r+ice3O% W!at is t!e )est ay t!e go5ern.ent can di5ersiy t!e econo.y and at t!e sa.e ti.e take ad5antage o t!eenergy resources t!at it !asI S>% “Well t!atLs a slig!tly di=erent Guestion !e anser to t!at is 5ery si.+le youare endoed it! signi9cant natural resources, one ay !o you di5ersiy your econo.y, i t!is is still t!e core oyour econo.y, t!e core o your ealt!, t!e ay you di5ersiy and t!e ay you .ake t!e econo.y .ore di5ersi9edis )y creating .ore 5alue added So t!ink t!e clear sort o strategic goal t!at t!e Oussian go5ern.ent s!ould+ursue is increasing t!e degree o re9ning o, or ea.+le, or oil So instead o selling si.+le 5acuu. gas oil,.ay)e uel oil, !ic! is su)seGuently )eing re9ned into !ig! 5alue added +roducts in t!e est, you )uild t!esere9ning co.+lees !ere nstead o )urning associated gas, or ea.+le, you create +etroc!e.ical re9ning

co.+lees !ic! +rocess it into 5arious liGue9ed gas, and 5arious associated +etroc!e.ical +roducts, and youe+ort t!at So, donLt t!ink it is air to say t!at, ok i you !a5e a natural resource dri5en econo.y, you are in a )adsituation .ean Australia !as a natural resource dri5en econo.y, and so does :anada, and so does (oray, )utt!ere are alays ays, i you t!ink a)out t!ings to create 5alue to .ake it .ore di5ersi9ed, and t!e .ore you add5alue, t!e .ore added 5alue is in t!e +roduct you sell t!e less 5ulnera)le you are to co..odity +rice sings'ecause co..odity +rice sings a=ect, 9r4st and ore.ost, t!e ra natural resources, and to a .uc! lesserdegree t!ey a=ect t!e 9nal +roduct So e all kno !o .uc! t!e oil +rice c!anges e5ery day, )ut t!e +rice +ertonne o ru))er or +lastic or certain +etroc!e.ical s+ecialiKed +roducts doesnLt c!ange t!at oten tLs su)ect to.uc! .ore longer ter. contracts And i you go ro. +roducing gas to also +roducing electricity, t!at doesnLtc!ange daily, itLs not as 5olatile So t!ere are di=erent ays, t!ink, !o you can di5ersiy t!e econo.y, and si.+ly.ake Oussia, instead o ra .aterial e+orter, into a !ig! Guality, !ig! 5alue added energy e+orter n di=erentty+es o energy, and di=erent ty+es o resources, as your 9nal +roduct And t!at t!ink is t!e only kind o

reasona)le di5ersi9cation strategy* O ,o you think Jussia has ,utch #isease and !o does

energy reliance ork in Oussia it! t!e i.+ort co.+eting sectorI S>% “!ere are ele.ents o >utc! disease, so

think not all the symptoms are here because the oil in#ustry is not3 >utc!

disease !a++ens !en one industry, in t!is case oil and gas industry, really )egins to crod out in5est.ent and

o)s and )eco.es t!e centre o e5eryt!ing, so t!e rest o t!e econo.y kind o dies >n the Jussian case3

it8s a little bit #ierent because a lot o& the money that ows into the

country, 5ia t!e oil and gas sector, subsequently ows &urther into the economy) $othe impact &rom the oil an# gas sector &or e%ample3 on the currency is not

what it use# to be) So, yea!3 i& the oil prices are high it gets stronger3 but it8s

not #ramatically stronger3 an# > think the economy is )eco.ing, in relati5e ter.s, it isgetting better i oil +rices are !ig!, instead o getting orse >utc! disease really !a++ens i t!ere is one

sector t!at is doing ell and it drains resources ro. all t!e ot!er sectors >n Jussia8s case when oil

prices are high3 all sectors are enoying it because it trickles #own to theentire economy) So t!ink t!ere are certain ele.ents o it, )ut > #on8t think Jussia has

,utch #isease3 and !ate5er +eo+le say, ortunately i oil +rices are !ig! it is good or Oussia, and it is goodor Oussia as a !ole, not ust or Oussian oil co.+anies* O% &o o+en is t!e Oussian energy sector to oreignin5est.entI S>% “tLs )ot! o+en and closed t!ink it is airly o+en to larger strategic dealsWe !a5e seen 'P-Oosnetdeal, !ic! alt!oug! it !as )een declined, or t!e ti.e )eing, on tec!nical grounds, and it didnLt !a++en, t!e actt!at )ot! sides anted to do it, t!at t!e Oussian go5ern.ent as illing to recei5e t!at in5est.ent, and 'P asilling to .ake it, t!ink it is a )ig testa.ent to !o o+en t!e industry is or )usinessotal )oug!t a )ig stake in(o5atek, t!ere are certain PSAs !ic! continue to o+erate t!ey ent t!roug! diZcult ti.es, )ut )ot! Sak!alin 1and Sak!alin 2 are +roducing energy and .aking .oney o= itSo on t!e one !and it is o+en, on t!e ot!er !and itclearly !as )eco.e .uc! .ore concentrated a.ong t!e to+ +layers, so i you look )eyond t!at, t!ere are 5ariouslas on +artici+ation in t!e Oussian oil and gas sector, and, in general, i you are an u+ and co.ing esternco.+any t!at ants to co.e in and de5elo+ t!e Oussian reser5es, t!ink you ould !a5e a +ro)le. unless you are



negati5e or t!e 200N-2007 +eriod Oosstat &P as o Se+te.)er C, 20103 !e oil and gas sector ill need tre.endous ca+italre+lace.ent in5est.ents to raise its #P !e .arked oil +rice alls induced OussiaLs great contraction o t!e J>P in 200B, !ile t!eoil and gas J>P did not s!o suc! a decline !is stagnant sector only )u=ered t!e o5erall grot! contraction in 200B ronically,Oussia, it! .ore t!an 10-.illion-)arrel daily +roduction, as t!e orldLs largest +roducer o crude oil in 200B t!anks to are.arka)le out+ut adust.ent an 11 +ercent reduction3 )y Saudi Ara)ia 'P, 20103 Oussia, ree ro. t!e "PE: out+ut adust.ents,!as alays esca+ed t!e restraints o oil +rice increases, !ile it !as )een orced to ace reductions in oil +rices !ead-on #ourt!,

the continuous appreciation o& the real eective e%change rate o& theruble #ue to oil price rises in#uce# the boost o& imports in Jussia3 which3

in turn3 #i# not necessarily in#uce a#verse eects on Jussia8s economic

growth an# competitiveness Oussia e+erienced ser5iciKation, as in ad5anced countries as ell as or.er

So5iet re+u)lics t !as +articularly Oussian eatures deri5ing ro. its s+eci9c +at! de+endency, !ic! includes econo.ic +layersLstrong +reerences or i.+orted goods and #"OE< as ell !e do.estic distri)ution acti5ities o i.+orted goods are accounted or

as a +art o sources o t!e J>P) .he boost o& imports largely contribute# to the high

growth o& the tra#e sector8s value a##e#3 which was3 in turn3 one o& themaor sources o& the overall high growth n t!e Oussian oZcial statistics, t!e re5enues ro. oreign

trade o oil and gas are included not in t!e .ining sector )ut in t!e trade sector &oe5er, t!ese s+ecial oreign trade re5enuescould not )e t!e source o t!e ra+id J>P grot! )ecause OussiaLs e+orts o oil and gas ere also stagnant in real ter.s

Sur+risingly, import substitution3 inclu#ing #omestic assembling o& &oreign1

make #urable goo#s3 appeare# along with the boost o& imports in Jussia).he real appreciation o& the e%change rate o& the ruble booste# the

imports o& consumer goo#s an# ease# the imports o& equipment an#interme#iate goo#s3 which is consi#ere# to have contribute# toimprovements in the manu&acturing .FP 'ased on t!e un+u)lis!ed Oosstat data on i.+ort .atri,

t!e s!are o i.+orts o .anuacturing in5est.ent goods in t!e total gross de.and or t!e. a.ounted to 40 +ercent in 200N n t!is+a+er, e ea.ine statistically so.e o t!ese acts to diagnose t!e Oussian >isease and ocus on t!e ter.s-o-trade e=ects on t!eo5erall grot! as ell as t!e .anuacturing de5elo+.ent #irst, s!oing t!e key di=erences )eteen t!e >utc! and Oussian

>iseases, e +ro5e t!at a key symptom o& the Jussian ,isease is a strong positiverelation between the country8s real growth an# terms1o&1tra#e1eects We

also +resent t!ree 5ariants oil +rices, ter.s-o-trade, and trading gains3 o t!e conce+t o ter.s-o-trade e=ects using t!e S(A

ra.eork Second, it shows a strong positive impact o& terms1o&1tra#e eects onthe Jussian manu&acturing3 which marke#ly #iers &rom one o& the maor

symptoms o& the ,utch ,isease sloer grot! o .anuacturing t!roug! t!e )oo.ing .ining sector and

real a++reciation o ec!ange rates3 We also suggests t!e signi9cance o t!e .anuacturing industry or t!e Oussian econo.y

!ird, e s!o t!at the appreciation ?#epreciation@ o& real e%change rates o&Jussia8s rubles in#uce# the boost ?#ecline@ o& its imports) #ourt!, e +ro5e t!at the

boost o& imports3 in turn3 in#uce# the G,P growth o& the tra#e sector as

one o& the maor sources o& the Jussian overall growth We also +resent t!e i.+act o oil

+rices on to kinds o real ec!ange rates :P-)ased and J>P-)ased real ec!ange rates3

conomic #ecline causes Jussian aggression — bigger internal

link

Peters L Oal+!, Oetired Hnited States Ar.y ieutenant :olonel and >egree in

nternational Oelations ro. St $aryLs Hni5ersity, Bankrupt Rogues Beware !ailing!oes, (; Post, (o5e.)er 2Bt!,!tt+%//ny+ostco./+/nes/o+inion/o+edcolu.nists/ite.RSGNruaX2dDN.d!B$3#EE(J gleeul at t!e .isortunes o ot!ers is an ugly-)ut-co..on !u.an c!aracteristic !e orld delig!ted inour cras!ing econo.y, t!en e got our on )ack as Euro-)ankers and Oussian )illionaires +ro5ed at least as greedyas our on .oney-t!ugs " all t!e +leasures to )e ound in t!e +ain o ot!ers, t!oug!, none see.s .ore usti9edt!an s.ugness o5er t!e +anic in $osco, :aracas and e!ran as oil +rices +lu..et We .ay need to )e careul

!at e is! or $uccess&ul states may generate trouble, but &ailures pro#uce



catastrophes% Ia/i Germany erupte# &rom the bankrupt Ceimar Jepublic\$oviet 4ommunismBs economic #isasters swelle# the Gulag\ a &eckless

state with unpai# armies enable# aoBs rise Econo.ic co.+etition killed a .illion utsis in

Oanda !e deadliest conMict o our ti.e, t!e .ulti-sided ci5il ar in :ongo, e+loded into t!e +oer 5acuu. let

)y a )ankru+t go5ern.ent A resource-star5ed Ya+an attacked Pearl &ar)or .he crucial point% .he

more a state has to lose, the less likely it is to risk losing it Q,i//y with

success,Q Oussias Dladi.ir Putin may have #ismembere# Georgia, but Jussiantanks stoppe# short o& .bilisi as he calculate# e%actly how much he coul#

get away with 'ut no, !ile our retire.ent +lans !a5e su=ered a set)ack, Oussias stock .arket !as

cras!ed to a 9t! o its 5alue last $ay #oreign in5est.ent !as )egun to s!un Oussia as t!oug! t!e s!i+ o state !as+lague a)oard !e .urk o Oussias econo.y is ulti.ately i.+enetra)le, )ut analysts take $oscos ord t!at itentered t!is crisis it! o5er 600 )illion in oreign-ec!ange reser5es At least 6200 )illion o t!at is no gone,

!ile Oussian .arkets still !e.orr!age And the price o& oil - Oussias lie)lood - has &allen by

nearly two1thir#s oil cli.)s to 670 a )arrel, t!e Oussian econo.y .ay eke )y 'ut t!e Fre.lin can kiss

o= its .ilitary-.oderniKation +lans Hrgent inrastructure u+grades ont !a++en, eit!er And t!e +o+ulationtra++ed outside t!e e garis! city centers ill continue to li5e li5es t!at are nasty, )rutis! and s!ort - on a good

day $houl# oil prices an# shares keep tumbling, Jussia will slip into +olni

)ardak mo#e - politely translate# as Qresembling a #ocksi#e brothel on the

ski#sQ And t!at assu.es t!at ot!er as+ects o t!e econo.y !old u+ - a ragile !o+e, gi5en Oussiaso5erle5eraged concentration o ealt!, udged nu.)ers and state lalessness S!ould e reoice i& the ruble

continues to #ropI Per!a+s 'ut what incentive woul# :Kar Mla#imir have to halthis tanks short o& 6iev, i !is econo.y ere a )asket case s!unned )y t!e rest o t!e orldI ea#ers with &ailures in their laps like the #istraction wars provi#e religion

is t!e o+iu. o t!e +eo+le, nationalis. is t!eir .et!a.+!eta.ine3 .he least we might e%pectwoul# be an increase# willingness on oscowBs part to sell a#vance#

weapons to &ellow rogue regimes " course, t!ose rogues ould need .oney to +ay or t!e

ea+ons or or nuclear secrets sold )y gras+ing oZcials3 A +ositi5e side o t!e glo)al donturn is t!at .isc!ie-.akers suc! as ran and DeneKuela are going to !a5e a great deal less .oney it! !ic! to annoy ci5iliKation



High Oil Prices 6ey to Jussian conomy

ow oil prices cause investor ight an# collapse the Jussian

economy K Jussia can8t #iversi&y in time)

Mestrgaar# !- — Yako) Destrgaard, $arc! 2, 2014, P!>, nternational PoliticalEcono.y\ $Sc, Econo.ics8 Senior Oesearc!er, Oesearc! Area on Jlo)altransor.ations in 9nance, .igration and aid, “Oussia Oeeling% Pus!ing a #ragileEcono.y "= t!e :li=I* JEJ Watc!, !tt+%//gegatc!co./2014/0/2/russia-reeling-is-+utin-+us!ing-a-ragile-econo.y-o=-t!e-cli=/

!ird, the Jussian economy is highly #epen#ent on oil an# gas) !e $#stresses t!at both the Jussian economy an# its public 5nances remain

:highly sensitive to oil prices;) sanctions are ste++ed u+ to include a )lock oni.+orts o Oussian oil and gas, t!e e=ects on Oussia ould )e !uge !e re5enueloss is esti.ated to )e in t!e order o 6100 )n +er day, !ic! ould !a5e .assi5e

re+ercussions, not least 9scally hal& o& Jussian state revenues come &rom

energy receipts3 n "cto)er last year, t!e $# noted t!at “going orard t!eOussian econo.y ill !a5e to rely on a .ore eZcient use o resources and !ig!erin5est.ent, rat!er t!an increasing oil +rices* sanctions are ste++ed u+, t!isada+tation c!allenge ill co.e sooner and !arder t!an anyone !ad e+ected 8 #ourt!, Oussia su=ers ro. a resource curse “Jussia8s energy resourcesZ are

&ast shi&ting &rom an opportunity to a &amiliar curse as the country &ails tomake the structural a#ustments nee#e# to #iversi&y its brittle economy;,notes :!risto+!er &ill, or.er HS Assistant Secretary o State to East Asia A strong

entrepreneurial response to quickly enhance the #iversi5cation o& the

economy is har#ly to be e%pecte#, given Jussia8s low competitiveness an#

innovation capacity Oussia is ranked N2nd in t!e Jlo)al nno5ation nde andN4t! in t!e WE# co.+eti5eness inde3 >e+endency on natural resources and loentre+reneurialis. ill .ake t!e )leeding caused )y stricter sanctions all t!e .ores!attering

Jussia is heavily reliant on high oil prices K the threshol# &or

economic collapse is '!27)

$chuman !2 — $ic!ael Sc!u.an, 7//2012, or.er corres+ondent or t!e Wall

Street Yournal and a sta= riter or #or)es, “W!y Dladi.ir Putin (eeds &ig!er "ilPrices,* i.e, !tt+%//)usinessti.eco./2012/07/0/!y-5ladi.ir-+utin-needs-

!ig!er-oil-+rices/E 'ut Dladi.ir Putin is not one o t!e. .he economy that the Jussian

Presi#ent has built not only runs on oil3 but runs on oil price# e%tremely

high Falling oil prices means rising problems or Oussia )ot! or t!e strengt!o its econo.ic +eror.ance, and +ossi)ly, t!e strengt! o Putin !i.selE E ,espite

the &act that Jussia has been labele# one o& the worl#8s most promising

emerging markets, oten .entioned in t!e sa.e )reat! as :!ina and ndia, theJussian economy is actually quite #ierent &rom the others) W!ile ndia



gains grot! )ene9ts ro. an e+anding +o+ulation, Jussia, like .uc! o Euro+e,is aging\ while economists &ret over 4hina8s e%cessive #epen#ence on

investment3 Jussia ba#ly nee#s more o& it $ost o all, Jussia is little more

than an oil state in #isguise) !e country is the largest pro#ucer o& oil in theworl# yes, )igger e5en t!an Saudi Ara)ia3, an# OussiaLs #epen#ence on crude has

been increasing) A)out a decade ago, oil and gas accounted or less t!an !al oOussiaLs e+orts\ in recent years3 that share has risen to two1thir#s $ost oall, oil provi#es more than hal& o& the &e#eral government8s revenues) E E $"OE% &o Joogle s $aking Science #iction Oeal3E E W!atLs .ore, the economic

mo#el Putin has #esigne# in Jussia relies heavily not ust on oil3 but highoil prices) Oil lubricates the Jussian economy by making possible the

increases in government largesse that have &uele# Jussian consumption<u#get spen#ing reache# 2+)*Q o& G,P in the 5rst quarter o& 27!2, u+ ro.12 our years earlier W!at t!at .eans is Putin requires a higher oil price tomeet his spen#ing requirements to#ay than he #i# ust a &ew years ago)E E Oesearc! 9r. :a+ital Econo.ics 9gures t!at t!e go5ern.ent )udget )alanced at anoil +rice o 6 a )arrel in 200C, )ut t!at no it )alances at close to 6120 "il +ricestoday !a5e allen ar )elo t!at, it! 'rent near 6100 and HS crude less t!an 6B0.he &arther oil prices &all3 the more pressure is place# on Putin8s bu#get3 and t!e har#er it is &or him to keep sprea#ing oil wealth to the greaterpopulation through the government Wit! a large sat! o t!e +o+ulaceangered )y !is re-election to t!e nationLs +residency in $arc!, and +rotests eru+tingon t!e streets o $osco, Putin can ill1aor# a signi5cant blow to the

economy, or !is a)ility to use go5ern.ent resources to 9r. u+ !is +o+ularityE E .hat8s why Putin hasn8t been scaling back even as oil prices &all) &isgo5ern.ent is ear.arking 640 )illion to su++ort t!e econo.y, i necessary, o5ert!e net to years &e does !a5e 9nancial iggle roo., e5en it! oil +rices allingoscow has wisely stashe# away petro#ollars into a rainy #ay &un# it can

tap to 5ll its bu#get nee#s 'ut Putin doesnLt !a5e t!e Mei)ility !e used to!a5e .he &un# has shrunk3 &rom almost LQ o& G,P in 277L to a touch more

than +Q to#ay !e package, says :a+ital Econo.ics, si.+ly highlights the

weaknesses o& Jussia8s economy0 E E !is cuts to t!e !eart o a +ro)le. e !a5e!ig!lig!ted )eore na.ely t!at Jussia is now much more #epen#ent on high

an# rising oil prices than in the pastU !e act t!at t!e s!are o permanent8spen#ing eg on salaries and +ensions3 has increase#Ucreates additional+ro)le.s shoul# oil prices #rop back and is also a concern ro. t!e +ers+ecti5eo .ediu.-ter. grot!3U.he present growth mo#el looks unsustainable

unless oil prices remain at or above ' !27pb E $"OE% &o to .+ro5e

")a.acare3E E !e only ay out o t!e tra+ is to decrease OussiaLs de+endence onoil !at ill reGuire a .uc! !ig!er rate o in5est.ent, and es+ecially +ri5ate sectorin5est.ent, to de5elo+ ne industries and create )etter o)s .+ro5ing t!e +oorin5est.ent cli.ate, !oe5er, ill take a long list o reor.s, !ic! include 9ingineZcient state enter+rises, alloing greater co.+etition, sto++ing t!e state ro.croding out t!e +ri5ate sector, and 9g!ting ides+read corru+tion Putin !i.sel!as re+eatedly ad5ocated or ust suc! reor.s, as !e did in a s+eec! at t!e StPeters)urg nternational Econo.ic #oru. in Yune%E E “Ce are well aware o&



&ell so +reci+itously, in 277(, JussiaBs economy slumpe# by a #ramatic Lpercent 4ollapsing oil was also a catalyst &or JussiaBs !((L economic

crisis that en#e# in #evaluation an# #e&ault Putin, in !is annual state.ent ont!e )udget on !ursday, acknowle#ge# that JussiaBs reliance on energyprices was one o& its biggest policy hea#aches D.he Jussian bu#getary

system is highly #epen#ent on the situation on worl# commo#ity markets,Qhe sai# Q!is li.its t!e o++ortunities or )udget .aneu5erQ #or no, #inance$inister Anton Siluano5 !as ear.arked 6N )illion t!at could )e s+ent in 2012 ro. a)udget rainy-day und s!ould a deteriorating glo)al econo.y drag on grot! inOussia QWe !o+e e dont !a5e to .ake use o t!ese .easures, )ecause t!e ste+s)eing taken )y t!e go5ern.ent and central )ank are suZcient,Q Siluano5 said &etri..ed !is 201 )udget de9cit orecast to 1 +ercent o gross do.estic +roduct,assu.ing an a5erage oil +rice o 6B7 +er )arrel !e 9scal +lan ill !el+ kee+ t!enational de)t, no around 10 +ercent o J>P, .anagea)ly lo 'H##EO Analystssay t!e i.+act on Oussia o loer oil +rices .ay )e .ilder t!an during +re5iousalls Qn t!e s!ort ter., in t!e net one to t!ree years, e are 9ne,Q said c!akaro5&e noted t!at accor#ing to Finance inistry calculations3 every one #ollar&all in the oil price means that the government loses aroun# == billion

roubles ?'!)" billion@ in oil-related taes over the course o& a year) Wit! t!e)udget +resently )alancing at around 611 +er )arrel, an oil +rice o 6B0 +er )arrel,i sustained o5er a ull year, ould lea5e t!e go5ern.ent s!ort to t!e tune oaround 640 )illion a year 'ut t!at is still ust a raction o t!e 61C )illion t!atOussia !as stas!ed aay in to 9scal reser5e unds, designed to sta)iliKe t!e)udget in ust suc! an e.ergency E5en at 6N0 +er )arrel - t!e a5erage oil +riceduring t!e crisis year o 200B - t!e reser5e unds could co5er t!e s!ortall or a)outto years Q 9nd t!is orrying a)out t!e )udget at t!is .o.ent a little )eside t!e+oint,Q said :le.ens Jrae, c!ie Oussia econo.ist at Jold.an Sac!s Q!e 9scal)u=ers t!ey !a5e to a)sor) t!is are going to )e suZcient it!out cuttinge+enditureQ Analysts also +oint out t!at since t!e +re5ious 9nancial crisis in 200C-200B, t!e central )ank !as radically c!anged t!e ec!ange rate regi.e, alloingt!e rou)le to all in line it! t!e c!ea+er oil +rice Since oil )egan its latest slide in.id-$arc!, t!e rou)le !as lost around 1 +ercent o its 5alue against t!e dollarQ!e rou)le eakened eactly in line it! t!e oil +rice And a eaker rou)le is 5erygood )ecause it ill secure t!e rou)le eGui5alent o oil taes or t!e )udget,Q saidE5geny Ja5rilenko5, c!ie econo.ist at roika >ialog SJ(#:A( S"W>"W(>es+ite t!ese )u=ers, most economists e%pect that a sustaine# &all in the oil

price woul# cause a signi5cant slow#own in JussiaBs economic growth - stilla sur+risingly resilient 42 +ercent in $ay Q<etween '"7 an# 'L7 per barrel you

will have a recession3D sai# Cestin &rom Aton) JussiaBs ability to maintain

government spen#ing is limite# by the so calle# non1oil #e5cit 1 a measureo& the un#erlying state o& the bu#get once oil ta%es are remove# 1 that has

balloone# &rom = percent o& gross #o.estic product in 277L to over !7

percent this year E5en )eore t!e latest decline in t!e oil +rice, t!e nternational$onetary #und and World 'ank ere urging Oussia to scale )ack t!is underlyingde9cit )y cutting don on )loated go5ern.ent s+ending n a recent inter5ie it!Oeuters, Oussias de+uty +ri.e .inister gor S!u5alo5 5oed t!at !ile t!ego5ern.ent intended to use its reser5es to .aintain e+enditures t!is year, net



+o+ulation )ulge a.ong t!e elderly rat!er t!an t!e young, is seen as less vulnerable to anoutbreak o& social unrest Oussia !as long ockeyed against Saudi Ara)ia, a .e.)er o "PE:, to )e

t!e orldLs to+ oil-+roducing nation Alt!oug! t!e Saudis !a5e .ore +roduction ca+acity and 5astly .ore reser5es,Oussia is +u.+ing .ore oil And i oil and natural gas are considered toget!er, Oussia is t!e largest energy-e+orting nation W!ic! country is in 9rst +lace or oil at any gi5en .o.ent de+ends on !o t!e Saudis ield t!eirsing +roduction ca+acity, t!e cus!ion o unused ells and +i+elines t!e Saudis can turn on to ta.+ don glo)al+rices As t!e )iggest "PE: .e.)er, Saudi Ara)ia is t!e cartelLs enorcer and ena)ler, it! t!e +oer to inMuence

glo)al +rices or to .oderate glo)al disru+tions )y !o .uc! o its +roduction ca+acity it c!ooses to +ut to ork t!e Saudis o+en t!e 5al5es during +eriods o insta)ility, Oussia alls into second +lace as a +roducer — )ut still.akes a !ealt!y +ro9t o= !ig!er +rices Oussia !as little incenti5e to in5est in s+are ca+acity — in +art )ecause)eing outside t!e "PE: cartel gi5es it less direct a)ility to inMuence +rices t!roug! t!e e)) and Mo o +roduction anyt!ing, a large idle ca+acity )y Oussia ould ork against its 9nancial interests — )y acting as .arketinsurance, and t!us !olding +rices don — during +eriods o insta)ility in t!e $iddle East Oussian oZcials also sayt!at s+are ca+acity is too !ard to .aintain in t!eir ar nort!ern country $ost o its current +roduction co.es ro.ells in Si)eria t!at ould reeKe solid in t!e +er.arost i not ke+t running And t!e Oussians ill +ro)a)ly arguet!e ne 9elds t!ey +lan to o+en in Arctic aters ill )e so e+ensi5e to drill t!at it ould )e unise to later s!utt!e. don “!ey are +roducing Mat-out on a +er.anent )asis,* >idier &oussin, t!e director o energy .arkets

and security at t!e nternational Energy Agency in Paris, said 5ia tele+!one >n the longer term &or

Jussia, policies that encourage or #iscourage oil 5el# investment are the

bigger #eterminant o& how much oil the country can provi#e to globalmarkets !e energy agency orecasts t!at Jussian energy output will remain about

stable &or 5ve years, but will require increasing investments as the main

oil provinces in western $iberia, having peake# years ago, continue to

#ecline >n this respect, i##le ast instability coul# bring longer1term

bene5ts to oscow than the current oil price spike, i it re#irects even

more o& the Cestern oil in#ustry8s investment to $iberia an# the Jussian

Arctic shel& !e 'ritis! oil giant <P cite# Jussia8s relative stability compare# withOP4 regions, when <P in Sanuary announce# a '")L billion #eal to invest

in the state1owne# Jussian oil company Oosnet an# ointly search &or oil in

the Arctic ater t!at .ont!, Eon $o)il, t!e )iggest A.erican oil co.+any, signed a deal it! Oosnet to

e+lore o=s!ore in t!e 'lack Sea Unrest in Iorth A&rica is also strengthening Jussia8s

bargaining position with urope on natural gas e+orts and +i+eline +olitics — alt!oug! OussianoZcials !a5e used delicate +!rasing to .ake t!is +oint Aleksei ' iller, t!e c!ie eecuti5e o JaK+ro., in a

5isit to Euro+ean ca+itals late last .ont!, suggeste# that uropeans reconsi#er theiropposition to new Jussian pipeline proposals, in light o& the “e%ternal

situation* in Iorth A&rica, a region that competes with Jussia to e+ort +i+eline

gas to Euro+e

Jussian economy is vitally #epen#ent on oil — prices key to

overall economic investment

,ashevsky !! — Ste5en >as!e5sky, $anaging >irector o >as!e5sky T

Partners, “!e Oussian econo.y and its oil,* -24,!tt+%//rtco./)usiness/nes/russia-econo.y-oil-r+ice/O% &ig! oil +rices !a5e !el+ed OussiaLs )udget )ut is t!e country too de+endent on energy e+ortsI S>% “Well t!e

de+endence !as declined greatly in recent years, )ut t!ink t!e sad trut! re.ains t!at, to a very

signi5cant #egree3 Jussia8s bu#get revenues an# overall 5scal health is

still very #epen#ent on the level o& oil prices* O% &o does t!e energy sector s!a+e t!e

Oussian in5est.ent cli.ateI S>% “Well, t!ere are .any ays !o the events happening in the oil

an# gas sector inuence what is happening in the broa#er economy "n t!e



one !and this is the biggest source o& cash ow generation in the country , so in

a sense itLs t!e )iggest source o in5est.ent unds, )ot! or t!e co.+anies, and or t!e go5ern.ent and also

)ecause oil co.+anies in5est 5ery signi9cant a.ounts o .oney e5ery year, so the ability o& Jussianoil companies to spen# money aects really the entire Jussian economy

ro. trans+ort co.+anies to oil ser5ice co.+anies to catering co.+anies to local airlines so it is still, des+ite t!e

signi9cant e=orts to di5ersiy t!e econo.y, it8s a very important source o& investment

&un#s !atLs kind o one angle, and anot!er angle is what is happening in the Jussian oilan# gas sector3 since it is the biggest sector in the economy3 aects the

general investment climate3 &rom the kin# o& sentiment perspective So,

when something goo# happens like +otentially as going to !a++en, 'P-Oosnet deal, or i t!ere

are good e5ents !a++ening, new 5el#s are being #evelope#3 new pipelines are being

brought on1stream3 that gives investor a##itional con5#ence that the

economy is progressing very well3 and +eo+le are in5esting .oney in it, an# the wholecountry is open &or business Dice 5ersa, i& things are not going well, i deals are

)reaking u+, i instead o going to ork +eo+le going to courts against eac! ot!er, that clearly creates a

big #rag on the investors sentiment &or all o& the Jussian economy3 not

ust oil an# gas);

High prices boost government revenue — results in social

spen#ing3 in&rastructure #evelopment3 an# #omestic liqui#ity)

Holmes et al) !! — #rank, Yo!n >errick, and i. Steinle, :o-.anagers o t!e

HS Jlo)al n5estors Eastern Euro+ean #und, &hat's ri%ing Russia's

$utperormance(, !tt+%//usundsco./in5estor-resources/rank-talk/Eastern-Euro+e/W!ats->ri5ing-Oussias-"ut+eror.ance-1C/I:#>]407CT:#"FE(]CN020.he Jussian $:E< >n#e%, !ic! increased 22 +ercent in 2010, !as u.+ed 1 +ercent so ar in 2011,

signi5cantly outper&orming .any other markets :!ina is t!e second-)est +eror.er o t!e

'O:s, rising .ore t!an +ercent, !ile ndia don o5er 10 +ercent3 and 'raKil don o5er 2 +ercent3 !a5elagged "5erall, t!e $S: E.erging $arkets nde !as dro++ed ust o5er 1 +ercent !is !as e=ecti5ely recou+edOussia it! t!e ot!er 'O: countries !e Oussian econo.y lagged out-o-t!e-gate once t!e glo)al reco5ery )egan,leading so.e to Guestion !et!er it )elonged in t!e sa.e category as 'raKil, :!ina and ndia !ose senti.ents

see.ed +re.ature and sy.+to.atic o an anti-Oussia .indset Jussian8s outper&ormance has

been #riven by se5eral actors #irst, t!e Oussian ru)le !as a++reciated 7 +ercent against t!e HS dollar,

)oosting stock .arket +eror.ance or HS in5estors !is de5elo+.ent also !as a long-ter. )ene9t as a strongru)le )ene9ts t!e countryLs do.estic sectors, so.et!ing eLll discuss later A second actor dri5ing Oussia !as

)een t!e geopolitical and natural disaster events that have transpire# #uring the

past &ew weeks Jussia is relati5ely sa&e &rom the type o& political uprisingsseen in the i##le ast an# Iorth A&rica ts go5ern.ent is decidedly +o+ular it! t!e +u)lic

and t!e one-to +unc! o President $ed5ede5 and Pri.e $inister Putin gi5e t!e go5ern.ent clout on )ot!

international and do.estic ronts .he price o& oil has risen roughly 2= percent since t!e unrest an# turmoil began in the i##le ast an# Iorth A&rica As an

energy e%porter o& cru#e oil and natural gas, Jussia is one o& the &ew large

economies in the worl# that #irectly bene5ts &rom higher energy prices

Jussia is the worl#8s largest oil pro#ucer and it8s estimate# that &or every

'!7 increase in the average annual price o& oil, Jussia8s revenues rise by

'27 billion, according to t!e #inancial i.es $ince Jussia is not a member o& OP4, it

is not boun# by pro#uction caps an# can increase pro#uction as it sees 5t



while prices are at elevate# levels Oussia is also t!e orldLs to+ e+orter o natural gas and

Strator ntelligence +oints out t!e situation in i)ya !as s!ut don 11 )illion cu)ic-.eters o natural gas Mo totaly As Euro+eLs t!ird-largest consu.er o natural gas, taly !as turned to Oussia or gas su++lies n addition, as!utdon o se5eral Ya+anese nuclear acilities could .ean as .uc! as a 14 +ercent increase in natural gasconsu.+tion to .eet t!e Ya+anLs energy de.ands n t!e energy sector, t!e Eastern Euro+ean #und EHO"<3+ortolio e.+!asiKes co.+anies t!at s!o strong grot! in +roduction, reser5es and cas! Mo, relati5e to t!eir

+eers S+eci9cally, (o5atek, Oosnet and (F-'P 9t t!is +ro9le Jussian energy equities, !ic! carry

t!e largest eig!ting in t!e $:E<, have gaine# 2= percent this year !is is !ig!er t!an non-oil

Oussian eGuities, !ic! !a5e risen only 77 +ercent &oe5er, as oil and gas ta%es swell the

government8s revenue, these &un#s are increasingly allocate# to social

an# public works programs which are likely to create an opportunity &or

non1energy relate# equities .hese sectors a++ear +oised to bene5t &rom the

current macroeconomic environment !is ta)le ro. $errill ync! s!os t!e +eror.ance o

t!e di=erent sectors o t!e Oussian .arket olloing a sustained rise in oil +rices $errill ync! co.+iled researc!on t!e se5en instances !ere oil +rices rose 20 +ercent in a to-.ont! s+an and .aintained at least !al t!osegains o5er t!e olloing si .ont! +eriod &istorically, t!e a5erage gain or Oussian eGuities is .ore t!an 4+ercent W!ile energy generally u.+s out a!ead !en oil +rices .o5e !ig!er, you can see t!at it lags ot!ersectors as t!e rally +rogresses We !a5e long )een +ositi5e on )ot! Oussian 9nancials and t!e consu.er sector andt!ese sectors a++ear ell +ositioned going orard :onsu.er-oriented eGuities suc! as retailers !a5e !istorically)een t!e )est +eror.ers, netting an C +ercent gain on a5erage and tri+le t!e gain o energy eGuities Oetailers <and $agnit s!ould )e a)le to ca+italiKe on t!ese trends Oussian 9nancials are net it! an a5erage C +ercent

gain S)er)ank, OussiaLs largest )ank, is t!e largest !olding in EHO"< Another area that coul#

#irectly bene5t &rom the 6remlin8s cash15lle# pockets is in&rastructure

Jussia is in #ire nee# o& a signi5cant revamping o& its in&rastructure Si.ilar

to t!e A.erican Society o :i5il Engineers re+ort t!at rates A.ericaLs inrastructure a “>,* t!e World Econo.ic#oru. says t!e Guality o OussiaLs inrastructure lags t!at o ot!er e.erging countries suc! as Sout! Arica, urkey,

:!ina and $eico .he areas most in nee# o u+grading are Jussia8s transportationan# electrical power gri# !e Guality o OussiaLs roads ranks in t!e )otto.-t!ird in t!e orld,

according to $errill ync!, and itLs esti.ated t!at Oussia loses N +ercent o J>P eac! year due to underde5elo+edroads n act, t!e co.)ined lengt! o OussiaLs roadays declined N +ercent )eteen 2002 and 2010 des+ite a N0

+ercent increase in car +enetration, $errill-ync! says >t8s a similar story &or Jussia8s airports

an# rail network Oussia currently !as roug!ly 00 o+erational air+orts )ut ust 40 +ercent o t!e. !a5e

+a5ed runays and 0 +ercent do not !a5e an air9eld lig!ting syste., $errill ync! says !e rail netork, al.ostentirely constructed during t!e So5iet era, is !ig!ly concentrated in t!e Western region o t!e country and isesti.ated to reGuire .ore t!an 670 )illion in in5est.ent or u+grades and re+airs )y 2020, according to $errill

ync! Jussia8s aging power gri# is unreliable an# acci#ent1prone $errill ync!

+roects t!at signi9cant in5est.ent )y 2020 is reGuired to u+date and .oderniKe t!e grid Wit! industrialconsu.ers accounting or C +ercent o electrical consu.+tion, kee+ing t!e +oer u+ and running is essential to.aintaining OussiaLs industrial +roduction le5els o 9nance t!e .uc! needed inrastructure i.+ro5e.ents, t!eOussian go5ern.ent created t!e 6420 )illion #ederal arget Progra. #P3 !e #P ocuses on key trans+ortationareas suc! as rails, autos, .arine and ci5il a5iation !e #P !as s+eci9c goals to .eet )y 201 suc! as increasingt!e +ercentage o roads t!at .eet ederal standards )y 2 +ercent !e +lan also calls or a 47 +ercent increase int!e s!i+.ent o goods and a 40 +ercent increase in airline +enetration t!roug! i.+ro5e.ents o a5iationinrastructure n addition to t!e #P, t!ree s+ecial e5ents ill !el+ dri5e OussiaLs inrastructure s+ending% !e 2012Asia-Paci9c Econo.ic :oo+eration APE:3 Su..it, 2014 Winter "ly.+ics in Soc!i and t!e 201C World :u+ $errillync! esti.ates t!at total s+ending or t!e World :u+ ill reac! 60 )illion :onstruction or t!e Ja.es in Soc!iincludes 1N1 .iles o roads and N .iles o rails, and t!e APE: calls or 4C ne o)ects to )e constructed or a total

o 6C .illion W!ile higher energy prices are in #anger o& slowing #ownconsumers in the U)$ , Western Euro+e and certain e.erging .arket countries, it has the

opposite eect &or the Jussian economy Cith increase# cash ow &rom its

natural gas and crude oil e%ports, the Jussian government has the much1nee#e#

capital to invest in t!e countryLs aging inrastructure an# to support #omestic

consumption .his shoul# #rive outper&ormance o& Jussian markets

t!roug!out 2011 an# stimulate #eman# &or in&rastructure1relate# commo#ities suc! as crude oil, co++er, ce.ent and iron ore



Jeverse causal evi#ence that #ecline causes economic crisis)

aul#in !! — Willia., Sta= Writer >o Yones (esire, Russian Budget

)nder Threat !rom $il rop "mid Election Spending, Yune t!,

!tt+%//.orningstarcouk/uk/.arkets/neseedite.as+Iid]1C01BC4N$"S:"W >o Yones3--JussiaBs ability to balance its 67 )illion bu#get has come

un#er threat a&ter a sharp #rop in cru#e prices, especially since the

6remlin plans on boosting spen#ing #uring a year o& +arlia.entary elections and

+re+arations or t!e 2012 +residential 5ote JussiaBs annual bu#get is e%pecte# to lose

'+* billion ro. 'rent crudes 61C dro+ ro. a !ig! o 612702 a )arrel, assuming prices #onBt

reboun# .he cru#e #rop threatens to put the bu#get into #e5cit territory,

since #inance $inister 6u#rin has sai# the bu#get nee#s an average 2011 oil price o& '!!= to balance, although many economists say the crucial oil price is

somewhat lower .he ruble weakene# signi5cantly against the #ollar on

#riday a&ter oil slumpe#, )ut Oussian Euro)ond +rices ere relati5ely steady, taking t!eir cues oninternational de)t .arkets and reasuries Q a. sur+rised t!e .arket reaction !as not )een .ore aggressi5e,Q said

i.ot!y As!, e.erging .arkets analyst at Ooyal 'ank o Scotland Q.he question is whether t!is

#rop in oil and co..odity prices is ust a correction o t!e start o a new eaker tren# >& it is

t!e latter, you #o not want to be long JussiaQ

Io oense — high prices are always better than low prices)

Jussian .imes !! — O "nline, Russia surfng the oil price surge, #e)ruary

2t!, !tt+%//rtco./)usiness/nes/russia-sur9ng-oil-surge/O% On balance #o you think high oil prices are goo# &or JussiaI Surely it

means more moneyI D"% Sure, absolutely One way or another high oil pricesgives much more resources &or Jussia to #eal with) .hat8s why, no matter

what way you look at it, it is always better &or Jussia to have high oil

prices than low oil prices guess t!e .ost i.+ortant t!ing is to realiKe t!at t!e sustaina)ility o t!ese

+rices is t!e )ig Guestion

Global oil prices are key to the Jussian economy K (Q swing in

bu#get surplus)

4ooper ( — Willia. & :oo+er Yune 2B, 200B, S+ecialist in nternational rade and

#inance, “OussiaLs Econo.ic Peror.ance and Policies and !eir .+lications or t!e

Hnited States,* :ongressional Oesearc! Ser5ice,!tt+%//asorg/sg+/crs/ro/O412+d .he levels o& Jussian oil pro#uction have varie# over the years an# have

roughly mirrore# overall con#itions o& the Jussian economy an# global

#eman#) !e gra+! in 9gure 2 a)o5e indicates t!at ro. 1BCB to 1BBN, t!e 5olu.eo oil +roduction decreased a++recia)ly, ro. 111 .illion )arrels/day .)d3 to N1.)d or a)out 4 .his perio# is contemporaneous with the #eep sli#e in

Jussian economic growth shortly be&ore an# imme#iately a&ter the



collapse o& the $oviet Union) .he #ecline was cause# by a #ramatic #rop inworl# #eman# &or oil, a decrease in orld oil +rices, t!e de+letion o e+loitedOussian oil 9elds, and t!e lack o in5est.ent in disco5ering ne ones Production)egan to gro in 1BB7, at 9rst gradually, t!en .ore ra+idly reac!ing BC .)d in200C, still )elo t!e 1BCB le5el2 "il +roduction !as continued to increase )ut at a

decelerating rate, it! +ossi)le i.+lications or t!e utureE

OussiaLs Econo.icPeror.ance and Policies and !eir .+lications or t!e Hnited StatesE A.ong t!eactors !ic! contri)uted to t!e deceleration o oil +roduction as t!e ;ukos case!ic! led Oussian oil co.+anies to reduce in5est.ent in u+strea. acti5ities Also,t!e !ea5y taation o oil re5enues is anot!er contri)uting actor $ost oil-sectorin5est.ent in Oussia is ai.ed at increasing current +roduction rat!er t!ande5elo+ing ne 9elds\ t!ereore, any slodon in t!e grot! o ca+ital s+ending issoon reMected in sloer grot! o +roduction and e+orts Oussia ill )e not )e a)leto sustain oil +roduction o5er t!e long ter. i t!e in5est.ent in t!e sector is notincreased4E Chile oil pro#uction activities represent a small #irect part o&

Jussian G,P3 the income #erive# &rom oil pro#uction has contribute#signi5cantly through the multiplier eect to overall G,P growth) Accordingto t!e $#, t!e Jussian ederal go5ern.ent )udget enoye# a 5scal surplus

equivalent to -)*Q o& G,P in 277"\ !oe5er3 i& oil1relate# revenues aree%clu#e#3 the bu#get woul# have been in a #e5cit equivalent to -)"Q o&

G,P " course, t!e $# calculation assu.es t!at t!e Oussian go5ern.ent ould!a5e .aintained t!e le5el o e+enditures !is analysis suggests t!at Jussia is

becoming more reliant on worl# oil prices increasing or at least remaininghigh) E .he signi5cance o& oil an# other natural resources to the Jussian

economy is perhaps no more evi#ent than in Jussian &oreign tra#e E5enduring t!e So5iet +eriod3 oil an# other natural resources were by &ar theprimary source o& har# currency revenues) .hey have maintaine# an#3 at

ti.es increase#, their importance in post1$oviet era Jussian &oreign tra#en 2007, energy resources oil, natural gas, and coal3 accounte# &or *=Q o&

total Jussian e%port revenues) $etals accounted or anot!er 14 o Oussiane+ortsN OussiaLs increasing reliance on e+orts oil and ot!er energy resourcesand ra .aterials !as .ade Oussian trade 5ulnera)le to t!e 5olatility ointernational co..odity +rices E+orts o .ac!inery and eGui+.ent accounted oronly o Oussian e+orts7



Jussia 6ey .o Global conomy

Jussian economic #ownturn will #isrupt the global economy

4ooper ( — Willia. & :oo+er Yune 2B, 200B, S+ecialist in nternational rade and

#inance, “OussiaLs Econo.ic Peror.ance and Policies and !eir .+lications or t!eHnited States,* :ongressional Oesearc! Ser5ice,!tt+%//asorg/sg+/crs/ro/O412+d .he greater importance o& Jussia8s economic policies an# prospects to the

Unite# $tates lie in their in#irect eect on the overall economic an#political environment in which the Unite# $tates an# Jussia operate #ro.t!is +ers+ecti5e, Jussia8s continuing economic stability an# growth can be

consi#ere# positive &or the Unite# $tates) <ecause 5nancial markets are

interrelate#3 chaos in even some o& the smaller economies can causeuncertainty throughout the rest o& the worl#) $uch was the case #uring

Jussia8s 5nancial melt#own in !((L) Pro.otion o econo.ic sta)ility in Oussia

!as )een a )asis or HS su++ort or OussiaLs .e.)ers!i+ in international econo.icorganiKations, including t!e nternational $onetary #und $#3, t!e World 'ank, andt!e World rade "rganiKation W"3 As a maor oil pro#ucer an# e%porter3

Jussia inuences worl# oil prices that aect U)$) consumers)



Jussian conomic 4ollapse 4auses Car

Jussian economic collapse causes increase# e%pansionism an#

U)$)1Jussia conict

Mestrgaar# !- — Yako) Destrgaard, $arc! 2, 2014, P!>, nternational PoliticalEcono.y\ $Sc, Econo.ics8 Senior Oesearc!er, Oesearc! Area on Jlo)altransor.ations in 9nance, .igration and aid, “Oussia Oeeling% Pus!ing a #ragileEcono.y "= t!e :li=I* JEJ Watc!, !tt+%//gegatc!co./2014/0/2/russia-reeling-is-+utin-+us!ing-a-ragile-econo.y-o=-t!e-cli=/Jecession in Jussia is a &rightening scenario3 not least in the currentpolitical climate o& surging nationalism an# [Great Jussia8 i#eology And e

dou)t t!at i t!e West does indeed ste+ u+ its sanctions on Oussia, Putin ould retaliate 'ut !oI !e o+tionEuro+ean in5estors s!ould ear t!e .ost, is orced nationaliKation Eurointelligence re+orts t!at t!e >u.a is already

+re+aring t!e legislation tLs in t!e )est interest o )ot! +arties to a5oid suc! escalation8 ;et, i Putincontinues into Eastern +arts o Hkraine or i.+oses t!e Oussian ar.y on s.aller

targets suc! as $oldo5a t!e West ill !a5e little c!oice )ut to ste+ u+ sanctionsalt!oug! t!is course o action could easily !urt t!e ragile econo.ic reco5ery, notleast in t!e EuroKone38 So ar, sanctions are relati5ely .ild, ai.ed at a s.all grou+o indi5iduals and to Oussian )anks sanctions are tig!tened in t!e co.ingeeks and .ont!s to include energy i.+ort restrictions, a reeKing o Oussianassets in t!e EH, and cutting Oussian )anks o= ro. t!e dollar and euro .arkets to Guestions are +articularly +ressing%8 #irst, can Putin a5oid t!at t!is ill causeOussiaLs already lo grot! to dro+ urt!er and )e re+laced )y recessionI Second, i not, !ere ill t!e Oussian +o+ulation turn its rustration and anger, and !o illPutin +lay it do.esticallyI8 n t!e o+ti.ist scenario, PutinLs do.estic +oer )aseill gradually erode, and t!e e5ents ill .ark a turning +oint in t!e !istory o

Oussian de.ocracy, it! a serious )lo taken )y aut!oritarian ruling >n a pessimist scenario3recession an# social unrest will be impetus &or &urther conquests by Putin

an# the beginning o& a new 4ol# Car perio#)8 Aleander Ou)tso5, ro. t!e Oussian

Acade.y o Sciences, asserts t!at i Putin is +ressed do.estically, t!ere will )e to ays !e can go%

“either tighten the screws3 an# so be rea#y to crush mass protests with

repression3 or arrange new conquests* 4omparisons with Ia/i Germany inthe !(+7s3 an# the anne%ation o& $u#etenlan#3 easily seem e%aggerate#

<ut i& Putin is in#ee# pushe# into a corner K with a suocating economy

an# increasing ination an# unemployment K his response3 an# itsgeopolitical repercussions3 certainly are not pleasant to imagine)E Alt!oug! it

is not at all clear that Putin is :prepare# to negotiate*, as (eil 'uckley notes3 one

can only oin !i.

in hoping

t!at a “.aor .ultilateral di+lo.atic +us!&or a

settle.ent* ill lead to a

“5nal peace over Ukraine between oscow3 Cashington an# <russels;3

be&ore the situation spins irreversibly out o& control)



Jussia Answers



2A4 — Jussian Oil ,A

Jussian economy low now — Ukraine tensions cause capital

outows

Mestrgaar# !- — Yako) Destrgaard, $arc! 2, 2014, P!>, nternational PoliticalEcono.y\ $Sc, Econo.ics8 Senior Oesearc!er, Oesearc! Area on Jlo)altransor.ations in 9nance, .igration and aid, “Oussia Oeeling% Pus!ing a #ragileEcono.y "= t!e :li=I* JEJ Watc!, !tt+%//gegatc!co./2014/0/2/russia-reeling-is-+utin-+us!ing-a-ragile-econo.y-o=-t!e-cli=/

Putin8s political ambitions may come at high cost to the Jussian economy:urrent tensions between Putin an# Cestern lea#ers3 and t!e ear o tig!tersanctions, are alrea#y causing trouble) !e Jussian government announce#yester#ay that it is e%pecting capital outows to soar to '"7bn in the 5rst

quarter o& the year3 a &our&ol# increase in comparison with a total outow

o& '*+bn last year)8 8 “.he outows seriously weaken the Jussian economy3at a time when &oreign #irect investment is collapsing*, notes Wolgang$Vnc!au $anctions are still mo#est3 so it is mainly the &ear o& tighter

sanctions in the near &uture K an# the potential Jussian retaliations K that

is currently #riving capital outows sanctions are tig!tened, to +ossi)lyinclude a )lock on i.+orts o Oussian gas and oil, t!e i.+act on t!e Oussianecono.y could )e de5astating8 8 o realiKe ust !o )ad t!ings could get, take intoaccount t!at )y end 201, t!e Oussian econo.y as already causing dee+ concernconomic growth was only slightly above ! Q an# the >F raise# alarm

that consi#erable :vulnerabilities; persiste# Oussia aces our key +ro)le.s,all o !ic! ill dra.atically orsen i sanctions i.+osed )y HS and t!e EH are

urt!er tig!tened%

Io ink0 VinsertW

Io >nternal ink0 oil isn8t key to Jussia8s economy)

A#omanis !2 — $ark Ado.anis, #or)es :ontri)utor, 7/1C/12,

!tt+%//or)esco./sites/.arkado.anis/2012/07/1C/russias-econo.y-in-2012-a-strong-start-and-an-uncertain-uture/.he >F recently cut its orecast or OussiaLs 201 J>P grot! ro. 4 +ercent to B +ercent, and

repeate# its &orecast that 27!2 economic growth woul# come in right at -percent !e Oussian $inistry o Econo.ic >e5elo+.ent is slig!tly less o+ti.istic, +redicting t!at 2012 J>P

grot! ill )e in t!e 4-7 range t!oug! it reser5es t!e rig!t to re5ise t!is u+ard i necessary3 Well the

results o& the 5rst hal& o& 27!2 are now available ro. Oosstat an#3 at 9rst glance,

t!ey ould a++ear to )e ground or signi9cant o+ti.is.% G,P grew at a -)(Q rate3 5%e#capital &ormation grew at -)"Q3 an# retail turnover gallope# ahea# at a

rapi# *)(Q annual rate) Also on the positive si#e o t!e ledger was a +Q growth

in #isposable incomes an# a strikingly large !7Q #ecline in unemployment

http://www.forbes.com/sites/markadomanis/2012/07/18/russias-economy-in-2012-a-strong-start-and-an-uncertain-future/






to a post1$oviet low) Jussia has now o9cially surpasse# its pre1crisis G,P

peak an# is #oing so with oil prices that are roughly '+7 a barrel less than

they were in 277L 3 when the worl# energy market was at the height o& its

#eca#e1long run up in prices, and it! nota)ly loer le5els o )ot! une.+loy.ent and inMation So

while the Jussian economy isn8t e%actly a worl#1conquering colossus3 it8s

arguably in better shape than its ever been0 prices are more stable3 moreworkers are active3 an# investment an# consumption are increasing)

.urn0 low oil prices spark economic #iversi5cation eorts that

are key to long1term economic growth)

6ommersant 7* — OussiaLs >aily "nline (e Source, “o "il Prices $ay Pus!

H+ OussiaLs Econo.y,* 7/1N/200N,!tt+%//ko..ersantco./+70040/rR00/oR"ilRPricesR$ayRPus!RH+ROussiaLsR Econo.y/

!e "PE: Oeerence 'asket !as allen )elo 6N0 +er )arrel, or t!e 9rst ti.eo5er t!e last 95e .ont!s, closing at 6B0C at t!e (e ;ork ec!angeyesterday &oe5er, utures or ig!t Seet gre Analysts e+lain it, sayingt!at stags decided to )uy .ore contracts at attracti5e lo +rices %perts

note that a new #rop is the start o& a long1term tren# o& a #ecline in oil

prices) Jussian authorities have alrea#y given their pre#ictions o& how

Jussia8s economy will be aecte# by lower oil prices !e :entral 'ankLs!ead Sergey gnatye5 said t!at Jussia woul# not suer even i& oil &alls

below '2=1+7 per barrel nde+endent e+erts are o a di=erent o+inion,t!oug! Wit! a Hrals )arrel at 6C0 a Oussian oil co.+any !as ater-ta net +ro9to 6N )illion annually Hrals decline to 60, t!e net +ro9t ill +lu..et to67C )illion ;et, a &all in natural resources prices may give a positive

impulse to the Jussian economy) :4ertainly3 i& the natural resourcesin#ustry slows #own3 other sectors may spee# up as the 4entral <ank

will no longer have to strengthen the ruble to tren# #own ination,*E5geny (ados!in at t!e rast )ank said “.his is what Jussian business has

long been asking &or); A sharp #rop in oil prices may &orce the Jussiangovernment to reinvigorate re&orms an# #iversi&y economy3 which will

boost Jussia8s economy) ven i& authorities pre&er a passive stance

an# keep on increasing bu#get e%penses ahea# o& presi#entialelection3 Jussia8s gol# reserves an# stabili/ation &un# will help the

economy to slow #own as smoothly as possible

Io >mpact0 the 8(L economic crisis proves that Jussia8s

economy is resilient)

<eehner 7= — ionel, $asters degree in nternational and Pu)lic A=airs ro.:olu.)ia, :ouncil o #oreign Oelations - :ouncil o #oreign Oelations, “s OussiaLsEcono.y Ounning out o EnergyI*, "cto)er 2C, 200, !tt+%//crorg/econo.ic-de5elo+.ent/russias-econo.y-running-out-energy/+B11B

http://www.kommersant.com/p705040/r_500/Low_Oil_Prices_May_Push_Up_Russia's_Economy/


http://www.cfr.org/economic-development/russias-economy-running-out-energy/p9119








!ad scrounged or credits ro. t!is )ank Oil &ever has not in&ecte# all Jussians !e le5el

o ent!usias. a.ong t!e general +u)lic and +articularly a.ong e+erts does not .atc! t!e le5els o)ser5edater S+utnik and cos.onaut Jagarin ere launc!ed into s+ace, to say not!ing o t!e ecite.ent ater t!e

1B4 ar 5ictory A.ong t!e .ost +ersistent critics o t!e oil renKy is Egor Gai#ar who suggeste#

that the lea#ershipBs oil #elirium an# its #isregar# &or the instability o&

oil prices were #angerous to the country $everal in#epen#ent

politicians an# ournalists have secon#e# Gai#arBs critique o t!e Fre.lins

Q!ydrocar)on doctrine,Q #emonstrating concern &or the Dtime bomb in our

political systemQ :oncerned a)out t!e Fre.lins Q.uddled 5ision o t!e orld,Q so.e inde+endent

.inds in Oussia, suc! as >.itry $urato5, t!e editor o (o5aya JaKeta, insisted% Q .he intellect o& thegovernment changes inversely with the price o& oilQ nN eonid OadKik!o5sky, a

a.ous li)eral ournalist, rote a)out t!e in5erse correlation )eteen t!e le5el o de.ocracy and t!e +rice ooil W!at is .ore, e5en Dladisla5 Surko5, until no t!e Fre.lins leading ideologue c!allenging $ed5ede5, in a

struggle or inMuence o5er Putin, suggested t!at, it! gas as its only )asis, the Jussian economy

woul# inevitably reveal its &ake prosperity in the Dpost1hy#rocarboneraQ Oussia is not t!e only country in t!e orld t!at is o)sessed it! oil E5ery country, in one ay or

anot!er, is +reoccu+ied it! oil W!ile t!e HS, Euro+e, :!ina, and ndia are concerned a)out uel su++ly andt!e ad5erse inMuence o !ig! oil +rices on t!e econo.y and standard o li5ing, se5eral countries, including

Oussia, !a5e turned t!eir oil resources into ea+ons or ac!ie5ing t!eir do.estic and oreign goals As thee%periences o& $talin an# 6hrushchev showe#3 Jussian lea#ers

sometimes overstretch the potential o& their a#vantages an# lose asober perspective o& reality esmeri/e# by his clout3 Putin may accept

Dthe invitationD o& the Jussians to stay in power ater 200C oday, 1 o t!e

Oussians ould 5ote or !i. i !e decided to try or a t!ird ter., !ic! !e +ro.ised not to do n t!e oreignarena, Putin !as already s!on less illingness to coo+erate it! t!e West and t!e HS in +articular &is oreign+olicy .ay !arden e5en .ore &oe5er, it is unlikely t!at $osco ill de.onstrate direct !ostility toard t!e

West in t!e near uture !e +ost-So5iet s+ace is anot!er story, !oe5er .he i#ea that oil will

allow Jussia to take control over Ukraine3 Georgia3 an# <elorussia is

#eeply engraine# in the min#s o& 6remlin politicians) Ce can e%pect ane%acerbation o& the political #evelopments in the post1$oviet space3

which will un#oubte#ly complicate relations with the Cest Aside ro. t!eda.age to Oussias international relations, t!e oil deliriu. is .ore +ro)le.atic to t!e countrys long-ter.

national interests .he over1con5#ence in oil revenues may lea# to a #ecline

in the spirit o& entrepreneurship3 to a re&usal to mo#erni/e in#ustry3 or

even to an acceptance o& #ein#ustriali/ation .he obsession with high

oil prices e%plains why the 6remlin sees &ew obstacles to the countryBscontinue# move towar# an authoritative regime t also e+lains t!e Fre.lins

cons+icuous disregard or t!e groing +ro)le. o corru+tion in society Wit! t!e 5ision o t!e Oussianleaders!i+ )lurred, it .ay )eco.e increasingly insensiti5e to 5arious destructi5e tendencies in t!e country !e i.+act o t!e +rice o oil on +olitical decision-.aking in Oussia is crucially i.+ortant to t!e orld ands!ould )e closely .onitored



2A4 — Jussian ,emocracy .urn

ow oil prices key to Jussian #emocratic transition — high

prices preserve corruption

Fraste5 N — 5an Fraste5, c!air o t!e :entre or i)eral Strategies in So9a,'ulgaria, eecuti5e director o t!e nternational :o..ission on t!e 'alkans,N/1/200N, “!e energy route to Oussia de.ocracy,*!tt+%//o+ende.ocracynet/glo)aliKation-institutionsRgo5ern.ent/de.ocracyRenergyRN7s+n an atte.+t to e+lain t!e Oussian re5olution to ady "ttoline $orrell, 'ertrand Oussell once re.arked t!at,a++alling t!oug! 'ols!e5ik des+otis. as, it see.ed t!e rig!t sort o go5ern.ent or Oussia% Q you ask yoursel

!o #yodor >ostoe5skys c!aracters s!ould )e go5erned, you ill understandQ >n e%plaining the

recent resurgence o& authoritarianism in Jussia one does not need to reread >ostoe5sky

or dra on t!e 'ols!e5ik legacy >t is enough to take into account the rise o& the priceo& oil At least t!is is !at one .ig!t t!ink !en reading the new Free#om House stu#y (ations

in ransit 200N released on 1 Yune 200N in 'erlin3 t!at rates t!e de.ocratic +eror.ance in tenty-se5en

countries in t!e Euro+ean Hnion and its eastern neig!)our!ood !e study shows that theskyrocketing o& oil prices in the last year has le# to #eteriorating

governance stan#ar#s3 restrictions on me#ia an# the u#iciary3 an# rising

corruption in all &our energy1rich countries o& the &ormer $oviet Union

Oussia, urk.enistan, FaKak!stan and AKer)aian .he stu#y is a power&ul illustration o&

!o.as Frie#manBs D5rst law o& petropoliticsQ or.ulated in #oreign Policy .agaKine

$arc!/A+ril 200N ?su)scri+tion only@3 According to t!is la Qthe price o& oil an# the pace o&&ree#om always move in the opposite #irection in oil1rich petrolist statesQ

t ollos t!at the worst enemy o& Jussian #emocracy is not the 6remlin or

oligarchs but the high price o& oil) .he soaring price o& oil has ma#e theenergy1rich post1$oviet states more power&ul, less #emocratic an# more

corrupt) .he oil money that has oate# the state bu#get #ramatically#ecreases Jussian state #epen#ence both on &oreign &un#ing an# on the

ta%es collecte# &rom its citi/ens Oussias reliance on estern credits !as turned into Euro+es

reliance on Oussian oil and gas !e result is t!at Jussia #oes not want to be lecture# any

more\ s!e ants to lecture (o when the Jussian government has more money

than it knows how to spen#3 the Jussian government has lost interest inimproving the quality o& its governance, and concentrates instead on deciding !o. to )uy

and !o. to lea5e in t!e cold $ore .oney .eans larger and )etter client netorks <ut even more

important K the high price o& oil has given birth to a new state i#eology Koil nationalism) QWe, t!e +eo+leQ !as )een transor.ed into QWe, t!e +eo+le !o !a5e oilQ !e countrys

oil is at t!e core o t!e ne Oussian state identity Oil, not !istory or culture, is at the heart o&

JussiaBs claim to great1power status >t is oil that makes Jussians &eelpower&ul3 special an# privilege# Any criticism o& the government is simply#ismisse# as an attempt by &oreigners to put their han#s on Jussian oil A

green re5olution !e co.)ination o t!e QorangeQ ears o t!e elites and t!e ne +rice o oil !as +roduced a realregi.e c!ange in Oussia n less t!an to decades Oussia !as )een transor.ed ro. a co..unist one-+arty stateinto an oligarc!ic one-+i+eline state !e .ono+oly o +oer is no 9ed not in any article o t!e constitution )ut int!e legislation regulating t!e use o t!e energy inrastructure W!en at t!e .ost recent Euro+ean Hnion-Oussiasu..it, at Soc!i in $ay 200N, JaK+ro. reected EH de.ands or Oussia to o+en its +i+eline netork to access )yinde+endent +roducers and ot!er countries, t!is as a declaration o t!e ne Oussian +!iloso+!y o +oer !eestern res+onse to t!e rise o Oussia as a non-de.ocratic energy su+er+oer is a .iture o indignation, ear and



dou)le-standard +olitics !e 5isit in $ay o t!e Hnited States 5ice-+resident >ick :!eney in it!uania is a distur)ingillustration o t!is ne reality :!eney ent to Dilnius !ere !e erociously attacked Oussias de.ocratic record\ t!enet day !e Me to FaKak!stan and +raised (ursultan (aKar)aye5 or sta)ilising !is country t!e A.erican 5ice-+resident reads t!e de.ocracy ranking in t!e (ations in ransit 200N sur5ey !e ill learn t!at in FaKak!stan t!ereis e5en less reedo. t!an in Oussia 'ut !at senior .e.)ers o t!e A.erican ad.inistration are reading t!esedays is not re+orts o !u.an-rig!ts organisations )ut re+orts on t!e HSs energy-resource )alance !e result is a

+olicy t!at is at t!e sa.e ti.e .orally a++alling and strategically rong So, the Dsecon# law o&

petropoliticsQ +ace !o.as #ried.an3 is that the price o& oil an# the will o&#emocratic governments to promote #emocracy in energy1rich states

always move in opposite #irections (o, it is clear that the #emocratisation

o& Jussia is precon#itione# on the &all o& the price o& gas an# oil an# the

#e1monopolisation o& the Jussian energy sector .he success o& the west inovercoming its oil an# gas #epen#ency an# moving towar#s renewable1

energy sources will be the one an# only in#icator o& the success o&

uropeBs #emocracy1promotion policies) .alking #emocracy without5ghting high oil prices #oes not make sense any longer !e Euro+ean Hnions

de.ocracy-+ro.otion e=ort ill !a5e results only i it is co.)ined it! a co..on EH energy +olicy A coalitionco.+osed o old cold arriors, estern-unded (J"s and reedo.-lo5ing yout! is no longer ca+a)le o )ringingde.ocracy to Oussia\ a ne, e=ecti5e coalition needs to )e .ore o an eclectic .iture o en5iron.entalists,

)usiness leaders and inno5ati5e scientists n t!is contet, Dladi.ir Putin is a)solutely rig!t to )elie5e t!at t!e onlyreal c!allenge t!at !e aces is not ro. it!in Oussian society )ut ro. outside W!ere Putin is rong is in earingt!e s+ectre o an Qorange re5olutionQ t!at could )e e+orted to Oussia W!at !e s!ould )e araid o is a green

re5olution in t!e est Only when the price o& oil &alls in the west will &ree#om rise

in Jussia) So, i you ant to see Oussia ree and de.ocratic, sto+ signing anti-Putin +etitions and 5oting or

!ardline anti-co..unists !is ill c!ange not!ing W!at you s!ould do is to turn don t!e lig!ts !en you lea5e

your a+art.ent, sell your A.erican car and start using +u)lic trans+ort .he 5ght &or #emocracy

to#ay is a 5ght against the tyrannical price o& oil)

Jussian #emocracy prevents proli&eration an# U$1Jussia

nuclear conicts)

cFaul ! — $ic!ael $c#aul, Peter and &elen 'ing Senior #ello at t!e &oo5ernstitution, “Pull Oussia into t!e West,* :!ristian Science $onitor, 2001!tt+%//cs.onitorco./2001/072N/+11s1!t.lSince co.ing to oZce, President 'us! !as .ade real +rogress in c!allenging so.e o t!e lingering legacies o t!e:old War &e !as ad5anced a 5ision o deending HS national security interests t!at is not constrained )y :old War

logic and agree.ents $r <ush8s new approach to international security issues has

yiel#e# real results—inclu#ing .ost nota)ly President Putin8s agreement in Yuly torethink Jussia8s categorical reection o& missile #e&ense systems <ut to

en# the 4ol# Car totally will require <ush to a#vance new thinking on the

other maor legacy o& that era—the #ivi#e between rich an# poor3#emocratic an# autocratic, IA.O an# non1IA.O—that still separates urope

into ast an# Cest .his 5nal remnant o& the 4ol# Car will #isappear only

when Jussia becomes a #emocracy3 &ully integrate# into Cesterninstitution s Hnortunately, the promotion o& Jussian #emocracy has taken a

back seat to arms control n t!e long run, this is a ba# tra#e &or American

security interests 'us! is our 9rst truly +ost:old War +resident 'eore )eco.ing +resident, e5en 'ill

:linton orried a)out .ulti+le ar!eads on So5iet :'$s, +ondered co..unist e+ansion in Asia, and as curiousenoug! a)out t!e So5iet Hnion to tra5el t!ere 'us! as doing ot!er t!ings during t!e :old War $y guess is t!at!e ne5er .et a QSo5ietQ citiKen Hnlike .ost o !is oreign-+olicy ad5isers, !o .ade t!eir careers 9g!ting t!e :oldWar, 'us!Ls t!inking is unencu.)ered )y a +ast era #or .any, t!is lack o e+erience is rig!tening ;et 'us!Lslack o )aggage also +resents o++ortunities el5e years ater t!e all o t!e 'erlin Wall, and 10 years ater t!e



So5iet Hnion )roke u+, it is striking !o .any :old War +ractices continue ens o t!ousands o HS troo+s re.ainin Jer.any, Pentagon ar +lans still ai. to destroy it! nuclear .issiles Oussian .ilitary +lants .any o !ic! are

long out o )usiness3, and HS and Oussian !eads o state still .eet to discuss ar.s control Q.he best

#e&ense against a hostile Jussia in the &utureX Promoting Jussian#emocracy an# integration into the Cest now)Q <ush8s willingness to think

beyon# the 4ol# Car must be applau#e# Already, !e !as co.+elled e5eryone to ret!ink t!e

strategic eGuation )eteen o=ensi5e and deensi5e ea+ons syste.s Alt!oug! still unilling to discuss concretenu.)ers, <ush has reiterate# his campaign promise to re#uce—unilaterally, i

necessary—the number o& nuclear warhea#s in the U)$) arsenal) n agreeing it! Putin

t!is +ast Yuly to link t!e discussion o t!ese reductions it! consultations a)out deense syste.s, 'us! !as .o5edcloser to con5incing t!e Oussians t!at !is +lans or .issile deense need not t!reaten t!eir security 'ut gettingOussian acGuiescence on t!is ne eGuation is t!e easy +art o dis.antling :old War legacies Ater all, Presidents ;eltsin and :linton agreed years ago t!at nuclear arsenals s!ould )e reduced ar )elo le5els agreed to in Start And des+ite all t!e +osturing, Putin and !is security oZcials donLt really )elie5e t!at t!e Anti-'allistic $issile reatyis t!e QcornerstoneQ o strategic sta)ility )eteen t!e Hnited States and Oussia !ey rig!tly !a5e calculated t!ate5en t!e .ost ro)ust HS .issile deense syste. ill not .ake nuclear deterrence o)solete $ost i.+ortant,Oussian go5ern.ent oZcials kno t!at a HS .issile deense syste. is a tool o li.ited utility in .ost oreign andsecurity +olicy issues And t!atLs t!e +ro)le. it! 'us!Ls current +olicy toard Oussia 'y ocusing al.ost

eclusi5ely on securing Oussian acGuiescence to .issile deense and HS it!draal ro. t!e A'$ treaty, <ushhas #evote# almost no attention to the most important issue in U)$)1

Jussian relations—Jussian #emocracy an# Jussian integration into theCest >& Jussia becomes a &ull1blown #ictatorship in t!e net 10 years, a U)$)missile #e&ense system will be a rather useless weapon in the arsenal &or

#ealing with an enemy Jussia >&3 in this worst1case scenario3 autocratic

Jussia #eci#es to inva# e (A" .e.)er atvia3 #estabili/e the Georgian

government3 or tra#e nuclear weapons with >ran3 >raq3 or 4hina3 ourmissile #e&ense system will #o little to #eter these hostile acts against

U)$) national interests Q 'us! can nudge Putin in a .ore de.ocratic direction, t!en !e ill )e

re.e.)ered as t!e +resident !o dis+elled t!e last lingering ele.ents o t!e :old WarQ .he best #e&enseagainst these potential hostile acts is to promote Jussian #emocracy an#

integration into the Cest now >& Jussia becomes a &ull1blown #emocracy in

t!e net 10 years, t!en the prospects &or conict between the United $tates an#Jussia3 )e it over t!e at5ian )order or the balance o& nuclear weapons3 will be

re#uce# #ramatically A de.ocratic Oussia .o5ing toard entry into t!e Euro+ean Hnion and e5en

(A" ill also .ake +ossi)le t!e uni9cation o Euro+e and t!e 9nal disa++earance o East-West alls )e it t!roug!5isa regi.es or .ilitary alliances3 t!at still di5ide Euro+e



!AJ — Oil Iot 6ey .o Jussian conomy

Jussia has #iversi5e# — makes economy resilient to shocks)

elik !2 — Ya.es $elik, 7/4/2012, Oe+orter, 'usiness >aily, '': World Ser5ice,

“Oussia .o5es to di5ersiy econo.y it! tec!nology +roects,* '':,!tt+%//))cco./nes/)usiness-1CN22C4

enty .iles est o $osco, a new technology race, rat!er like t!e s+ace race o t!e 1BN0s, is opening

up) E n t!e area o ar.land, Jussia is trying to buil# its own version o& $ilicon Malley -

the $kolkovo >nnovation 4entre) E t is part o& the government initiative to#ivert the country away &rom its economic #epen#ence on oil and gas an#

towar#s a new kin# o& in#ustry)8 >t has been a key policy &or >.itry e#ve#ev,

t!e .an !o as Oussias +resident until !e as re+laced )y Dladi.ir Putin at t!e )eginning o $ay 20128 !e Skolko5o +roect isidely criticised in Oussia and construction ork !as still not started in earnest .ore t!an to years ater t!e +ro+osals as

announced8 Another aim o& this propose# technology #rive is to keep cleverJussians in the country3 along with their money1making i#eas, rather than

them leaving )ecause t!ey are ed u+ it! corru+tion and t!e eig!t o )ureaucracy8 :as! not credit8 any o&

these technology companies are able to start up because o& &un#sacquire# &rom venture capitalists) E 'ut !o do t!ese 5enture ca+italists decide !o to )ackI8 :ontinue

reading t!e .ain story8 “8 Start Xuote8 'uying t!ings online, !ic! is a nor.al t!ing to do in t!e West, is ust starting !ere*8

Oic!ard :reitK.an8 #ast ane Dentures8 QCe look &or proven business mo#els that work

abroa# an# we basically copy them an# bring them to Jussia,Q says Oic!ard

:reitK.an at #ast ane Dentures8 QWe 9nd t!e ideas, e 9nd t!e +eo+le, e 9nd t!e unding,Q !e says8 QCe give a

management team the opportunity to start up a company3 assiste# with

in&rastructure3 an# let them try to buil# that companyQ8 !e Jussiangovernment is promoting technology an# internet1base# companies, and $r

:reitK.an says t!e de5elo+.ent at $kolkovo is a goo# e%ample o& using state money

along with private &un#ing) E !e success o suc! 5entures de+ends on Oussians ada+ting to ne ideas8 Q!e

use o t!e internet and e-co..erce sites, )uying t!ings online, !ic! is a nor.al t!ing to do in t!e West, is ust starting !ere,Q $r:reitK.an says8 QPeo+le tend not to +ay )y credit cards, t!ey tend to +ay t!e courier t!at deli5ers t!e ite.8 :ontinue reading t!e.ain story8 “8 Start Xuote8 ts or t!e good o t!e state to de5elo+ ne )usinesses*8 Oic!ard :reitK.an8 #ast ane Dentures8 Q!ere is less trust o credit cards, less trust o t!e goods, so t!e .arket isnt as de5elo+ed !ere yet as it is in t!e WestQ8 'usinessas usual8 ooking a!ead, it! t!e ne Dladi.ir Putin +residency, t!oug!ts turn to !at t!e )usiness cli.ate is going to )e in t!enet e years8 QWe are not +lanning or any .aor c!anges,Q says $r :reitK.an8 QE5ery cou+le o eeks t!ere is an in5est.entco..ittee t!at sits don and goes t!roug! a range o ideas t!at are de5elo+ed )y t!e .anage.ent, t!e s!are!olders and t!e)usiness analysts,Q !e says8 &e .aintains t!at t!e state !as .oney, es+ecially as t!e oil +rice is +ro)a)ly going to re.ain good int!e .ediu.-ter. - .ay)e t!ree to 95e years8 QSkolko5o as created under President $ed5ede5s +residency dont t!ink t!at isgoing to c!ange t!ink t!at ill continue to !a5e su++ort )ecause its or t!e good o t!e state to de5elo+ ne )usinesses,Q !esays8 $s S!ali.o5a 8 $s S!ali.o5a says s!e created okata to )e a nationide ser5ice8 'ranc!ing out8 okata is a s.all co.+anytaking ad5antage o t!e +ro-tec!nology cli.ate, !ic! recei5ed unding ro. #ast ane Dentures8 ̂ !anna S!ali.o5a, t!e c!ieeecuti5e, says !er co.+any allos +eo+le to searc! or goods and ser5ices online in t!e )roc!ures and catalogues o retailers andser5ice +ro5iders8 S!e !as taken t!e idea ro. a Jer.an co.+any doing t!e sa.e t!ing and i.+le.ented it in Oussia8 QWe are

5ery lucky )ecause we have such really strong sharehol#ers,Q s!e says8 QWe !a5e #ast ane

Dentures, !o are s+ecialists in internet start-u+s as t!ey kno t!is industry 5ery ell,Q s!e says8 S!e concedes okata .ay not )ea ty+ical start-u+ )ecause t!ey !a5e a +roduct t!at as already de5elo+ed and tested in Euro+e8 Q'ut still t!ink t!at t!ere are

.any )ureaucratic t!ings in Oussia, !ic! .akes lie not so easy,Q s!e says8 &oe5er, t!at does not deter !er and s!e sees !er)usiness groing outside t!e .ain cities8 Q>nternet connectivity in Jussian regions maye%cee# L=Q by 27!=) .his makes the regions highly attractive &or

a#vertisers,Q s!e says8 QWe created okata as a national ser5ice t!at ill co5er t!e !ole countryQ



Oil prices not key to economy — ination an# prevents oil &rom

#riving growth

6elly !! — riter or Oeuters idia, $ay 1B, 2011, “Oussias econo.y struggles

or sustaina)le grot!* !tt+%//inreutersco./article/2011/0/1C/id(ndia-710B201101C3JussiaBs economy is struggling to attain sustainable growth #espite the

surge in prices &or its oil e%ports3 #ata showe# on Ce#nes#ay, +ointing toanot!er toug! decision on oZcial interest rates later t!is .ont! >n#ustry output

grew at its slowest rate in !L months in April3 while pro#ucer prices rosemore than &orecast an# weekly consumer ination3 stuck at 7)! percent,underlines t!e conMicting +ressures on t!e central )ank Ple#ging to keep &ull1

year ination below ")= percent a!ead o +residential elections in $arc! 2012,the central bank is e%pecte# to continue tightening monetary policy -- but

a sluggish economy will complicate its #ecision1making on how to control

prices an# manage rouble appreciation #riven by high oil prices n5estors!a5e )een scrutinising data or clues on t!e central )anks .o5e ater t!e regulatorune+ectedly raised all key rates last .ont!, including t!e )enc!.ark re9nancing

rate .he latest #ata3 inclu#ing $ondays 5gures showing gross #omesticpro#uct growing a weaker than e%pecte# -)! percent year1on1year #espitesurging oil prices, suggests that emerging uropeBs largest economy is

struggling QCe woul# have e%pecte# that given the high oil prices

something o& this woul# trans&er to the real economy 3 but the big story is

ination3 which is eating into the real income o& consumers,Q said >a5id"ley, an e.erging .arkets econo.ist at :a+ital Econo.ics in ondon

anu&acturing an# construction key K oil prices #on8t increase

growth

6elly !! — riter or Oeuters idia, $ay 1B, 2011, “Oussias econo.y struggles

or sustaina)le grot!* !tt+%//inreutersco./article/2011/0/1C/id(ndia-710B201101C34ru#e has hel# above '!77 per barrel &or a thir# month in a row 11 more

than '+7 above what ha# been initially assume# in the 27!! bu#get 11ensuring &resh cash inows into the economy an# propping up JussiaBs

tra#e an# current account surplus .he conomy inistry sai# late last

.ont! t!at it was relying on in#ustry to put the economy onto a

sustainable path to -)2 percent gross #omestic pro#uct growth this yearQanu&acturing sectors o& the in#ustry will be the #rivers o& economic

growth in 27!!3 with growth #ynamics o& ")= percent,Q t!e .inistry said in a

docu.ent descri)ing econo.ic scenarios <ut while manu&acturing grew =)+percent year1on1year in April3 it was #own +)* percent on the month,Wednesdays data ro. t!e #ederal Statistics Ser5ice s!oed %traction o& raw

materials3 inclu#ing oil and gas, was also #own on t!e .ont!, a&ter a perio#when rising cru#e prices encourage# pro#uction Qndustry in Oussia strongly

reacts to c!anges in eternal de.and, )ut high oil prices are not enough any

more an# &rom the point o& view o& internal growth3 e%pectations about

growth in the secon# quarter come3 5rst o& all3 &rom construction ,Q said

http://in.reuters.com/article/2011/05/18/idINIndia-57105920110518






(atalya "rlo5a, an econo.ist at Ala-'ank 4onstruction was one o& main#rivers o& JussiaBs stellar per&ormance in the secon# hal& o& the last

#eca#e3 be&ore the 277L crisis )roug!t a !alt to 5irtually all +roects "ley at:a+ital Econo.ics said the upshot is that growth will likely pick up in thesecon# hal&3 with +re-election spen#ing taking hol# an# the spike in

ination &a#ing to take some o& the pressure o the central bank



!AJ — ,iversi5cation .urn

Jeliance on oil guarantees long term political instability an#

economic collapse — only #iversi5cation solves

Hockenos ** — Paul &ockenos, or.er editor o t!e ournal nternationalePolitik, colu.nist or Al-YaKeera, Yune N, 2014, Al YaKeera,!tt+%//a.ericaalaKeeraco./o+inions/2014/N/5ladi.ir-+utin-russiac!inanaturalgasoilcurseecono.y!t.lA cornerstone in PutinLs +oer +lay, Jussian oil an# gas supplies are essential to a

resurgent Jussia) "nly Saudi Ara)ia e+orts .ore oil t!an Jussia, !ic! boasts nearly aquarter o& the worl#8s ?non1OP4@ oil pro#uction 'ut Jussia8s lopsi#e#

#epen#ence on its petroleum re5enues which account &or "7 percent o& the

country8s annual e%ports and =2 percent o& the &e#eral bu#get3 un#erminesits political stability in the long run) Putin8s recapture o& the mineral

e%traction in#ustry ro. t!e +ri5ate sector has hastene# the country8s sli#e into

authoritarianism an# state1controlle# capitalism) E $oreo5er, given an unstableglobal market, Putin8s gambit stakes economic per&ormance on variables

beyon# oscow8s control Unless he takes ra#ical measures to #iversi&y

Jussia8s economy in the near &uture3 its bottom will eventually &all out3

&acilitating his #emise)8 As itnessed in t!e Hkraine crisis, the clout Jussia packs with

its petroleum resources3 at least in the short term3 is un#eniable Precipitousprice hikes on petroleum e%ports were use# to #iscipline the unruly post1

ai#an Ukrainian lea#ers, !ile HkraineLs +re-$aidan Oussian loyalists ere rearded Jussia8s

leverage reverberatesva &ar beyon# gas1#epen#ent 4entral urope n $arc!,

as t!e Hnited States and t!e Euro+ean Hnion .ulled +uniti5e action against $osco in t!e ake o t!e :ri.ea

anneation, Germany8s reluctance was #i9cult to overlook ore than a thir#

o& its importe# gas comes &rom Jussia And it! OussiaLs 0-year, 6400 )illion gas deal it!:!ina signed last .ont!, Putin tried to s!o t!e HS t!at it is not t!e only su+er+oer !e can do )usiness it! 8 S+oils o t!e So5iet era8 At !o.e, t!e Fre.linLs recou+ing o +etroleu. ric!es or t!e +ur+oses o t!e state and itselites +a5ed t!e ay or Putin to re.ake ;eltsin-era Oussia into a centraliKed, autocratic regi.e under !is controlW!en Putin 9rst ca.e into oZce in 2000, t!e s+oils o t!e So5iet Hnion !ad )een di55ied u+ a.ong t!e oligarc!s —understanda)ly +ro5oking t!e ire o an i.+o5eris!ed +o+ulation, es+ecially one eaned on statist, anti-.arkett!inking $oreo5er, t!e constitution alloed t!e state to reser5e oners!i+ o5er su)terranean resources !isena)led t!e Fre.lin to rest control o t!e )ulk o gas and oil industry re5enues ro. t!e +ri5atiKed oil co.+anies,tycoons suc! as $ik!ail F!odorko5sky and oreign oil co.+anies8 'y t!e .id-2000s, OussiaLs oil +roduction assurging, as ere +rices or +etroleu. +roducts on t!e international .arket, !ic! laid t!e )asis or econo.icreco5ery and sta)ility in Oussia !is as a elco.e relie ro. t!e !ards!i+ caused )y t!e i.+losion oco..unis. a decade )eore #inally, a5erage Oussians could )uy s.art+!ones and ne cars and take 5acationsa)road W!ile OussiaLs ascent sloed during t!e 200C0B 9nancial crisis, it )ounced )ack Guickly, continuing to)olster t!e .iddle class, sell state co=ers and en!ance PutinLs +o+ularity !is relati5e econo.ic i.+ro5e.entcata+ulted t!e Oussian leader into an undis+uted +osition o +oer as )ot! +resident and +ri.e .inister 8 ;et

energy e+erts argue t!at Putin8s soli#1looking &ortress is built on san#) .he :curseo& oil3; a +!eno.enon in !ic! mineral wealth corrupts autocratic states and o&ten

lea#s to civil stri&e3 is usually t!e .isortune o underde5elo+ed countries W!ile Jussia is not a

classic ea.+le o suc! a country, it clearly !as .any o t!e sa.e risks as t!e “+etrostates*% na.ely, lack o&

#emocracy3 #omestic conict3 stunte# re&orms3 high corruption an#

economic #isarray8 >n the past 2= years3 Jussia8s petrochemical resourceshave li&te# the country out o& the #umps but also brought it crashing

#own) .hey also create# &avorable con#itions &or Putin to amass power in an



e5er .ore centraliKed state, silence t!e o++osition and ci5il society and, as o 2014, assert a clai. to great-+oerstatus )y anneing a so5ereign territory8 According to $ic!ael Ooss, t!e aut!or o “!e "il :urse,*

petroleum1rich states that rely on e%traction o& rents &rom state1owne#

assets3 rather than t!e ta% revenue o t!eir age earners and +roducti5e sectors, ten# to bemore authoritarian !ose states, or ea.+le, are not )e!olden to t!eir citiKens in ter.s o

e+enditures Accountability is in#e5nitely suspen#e# !ile social services an#

in&rastructure proects are given or taken away arbitrarily by apaternalistic state) E 2014 is t!e year t!at Putin oZcially re5ealed !is intentions, in retros+ect it .ig!t

also )e 5ieed as t!e +innacle o !is +oer and OussiaLs glo)al +retensions 8 $oreo5er, oil1a##icte#

countries are constantly at the mercy o& the worl# market3 which makeslong1term planning impossible .heir economies are e%tremely sensitive to

marginal shi&ts in supply an# #eman#) >n a volatile in#ustry suc! as energy, the

country8s &ate is #etermine# by prices3 which can mean boom or bust) !e

lack o trans+arency in!erent in +etroc!e.ical industry dealings acilitates corru+tion and conceals inco.+etencen 2010, or ea.+le, Putin +us!ed t!roug! las !alting +u)lication o inor.ation a)out t!e go5ern.entLs oil andgas )usinesses, .aking t!e records o= li.its to critics and t!e .edia

High oil pro5ts allow Jussia to avoi# #iversi5cation—this will

crush the economy long term

.empera !! — $ic!ele, “s Oussia >i5ersiying ts Econo.y or "nce $oreStrengt!ening ts Already Strong SectorsI* PE:"', $arc!#ro. t!e So5iet +eriod t!e Oussian #ederation in!erited a rigid industrial structure on !ic! it !as )uilt its +resent-day +roducti5e syste. it! su)stantial continuity !e strict con9guration o t!e So5iet +lanned econo.y !as letOussia it! e )ig industrial co.+lees !ic! ere or t!e .ost +art less eZcient and +roducti5e t!an t!e estern

Euro+ean ones .he main and dri5ing economic sectors were at t!e ti.e, an# remain today%

energy, ea+ons .anuacturing and steel and alu.iniu. +roduction !e +eculiar so5iet econo.ic +olicies+re5ented any signi9cant di5ersi9cation until t!e early nineties, !en a general econo.ic colla+se and t!e loss o

t!e satellite states econo.ies su++ort led to an arrest in any +ossi)le +roducti5e de5elo+.ent .he ar-reac!ing

privati/ation wave that occurre# a&ter the &all o& communism !as partlyreshape# these tra#itional econo.ic #ivisions, lea5ing a good slice o t!e )iggest actories in

t!e !ands o t!e +u)lic sector t!roug! its state-oned or state controlled enter+rises and t!e !olding co.+anies

.his change happene#, es+ecially under t!e Eltsin go5ern.ent tenure, without any eect

on the whole pro#uctive structure ece+t or t!e oners!i+ o so.e o t!e .ore +ro9ta)le state

enter+rises !e internal +olitical and 9nancial scenery e.erged in t!is ay and and )roug!t Oussia to t!e ne.illenniu. it! a roug!ly tri+artite econo.ic structure !e 9rst seg.ent is co.+osed )y a nu.)er o s.allenter+rises and acti5ities !ic! su=ered !uge tec!nological )ackardness and isolation ro. t!e rest o t!ecountryLs econo.y !e second seg.ent is .ade u+ o an etended +u)lic sector !ic! stretc!es to co5er t!e.aority o strategic 9nancial and +roducti5e enter+rises once oned )y t!e so5iet regi.e !e control o5er t!esestrategic econo.ic strong +oints is eerted t!roug! +u)lic !olding co.+anies or )y t!e ederal go5ern.ent directly !e t!ird econo.ic +art, !ic! ca.e to lig!t at t!e )eginning o t!e ne .illenniu., is constituted )y t!e stateenter+rises or so.e o t!eir )ranc!es t!at t!e so called “oligarc!s* ere a)le to gat!er at t!e ti.e o t!e 5ast, non-

trans+arent and sus+ect +ost-so5iet +ri5atiKations .his situation le# to an al.ost motionlesseconomic structure3 where a small number o& primary sectors have been

a#vantage# at the e%penses o& #ynamic3 wi#esprea# an# balance#economic #evelopment) At t!e sa.e ti.e the maority o& Jussian human an#

monetary resources have been #evote# to those sectors3 leaving only a

minor role to all other activities) #ro. PutinLs rise to +oer in 1BBB onards, t!is un)alanced

trend !as )een going on it!out any interru+tion and is still e5ident today (e5ert!eless t!e last ele5en years !a5eseen t!e rising need to co+e it! t!e lack o econo.ic alternati5es outside o t!e a)o5e .entioned +illars, t!at!istorically !a5e )een t!e )ack)one o OussiaLs +roducti5e syste. !e necessity to enlarge t!e econo.ic o+tions



!as )een elt )y $osco as a +riority on +a+er, )ut it !asnLt )een already addressed successully !roug!out t!eten years o PutinLs !old on +oer, t!ere !a5e )een so.e e=orts to sol5e t!e +ro)le. o i.)alance )eteeno5erde5elo+ed and underde5elo+ed econo.ic sectors &oe5er, t!e 5arious atte.+ts to di5ersiy Oussian econo.y!a5e )een, it see.s, in 5ain t is also +ossi)le to aZr. t!at in t!e sa.e +eriod o ti.e, !at could !a5e )eenconsidered as a te.+orary eakness, caused )y t!e understanda)le +ostso5iet 9nancial and institutionaldiZculties, !as )eco.e OussiaLs +er.anent structural eature, kee+ing t!e national econo.y ro. )eing !el+ul tot!e )ulk o t!e +o+ulation n t!is contet t!e last ten years !a5e seen t!e unding o t!e t!ree key Oussian+roducti5e sectors deence, energy and steel3 rise until t!e great .aority o t!e total state in5est.ent s+ending e take into consideration 2010 and t!e )eginning o 2011, e can easily o)ser5e t!at t!e tendency descri)eda)o5e !asnLt c!anged considera)ly "n t!e contrary, in "cto)er 2010, Pri.e $inister Putin and Energy $inisterS!.atko announced at a conerence !eld in gas-ric! Si)eria t!at in5est.ents in t!e gas sector ill escalate until200 to an a.ount o a++roi.ately 40 )illion dollars !e +lan !inges on t!e national gas .ono+oly o JaK+ro.,t!e state co.+any !ic! is t!e strategic +oint on !ic! Oussian econo.ic and +olitical +oers rely $oreo5er t!enuclear energy and oil +roduction out+ut ill )e aug.ented t!roug! large su++le.entary in5est.ents .ade )y+u)lic and +ri5ate Oussian agencies !e deence sector ill !a5e an e5en larger s!are o t!e in5est.ents at !andor t!e uture, con9r.ing t!e +ast trend 'y 2020 t!e .ilitary s+ending ill reac! al.ost 2 o Oussian J>P, it! aetensi5e ar.y and reneal o !ea5y ea+ons ort! N0 )illions dollars u+ to t!e sa.e year !e steel industry isolloing t!e sa.e +at!, .ostly or to reasons% t!e unGuenc!a)le Asian de.and t!at kee+s ali5e t!e +ro9ta)ilityo t!e +roduction, and t!e !o.e consu.+tion stirred directly or indirectly3 )y state econo.ic acti5ities !ese!uge in5est.ent +lans, ocused on t!e e already-de5elo+ed econo.ic sectors, ill a)sor) .ost o t!e +u)lic9nancial resources in t!e a++roac!ing decades tLs a situation t!at re5eals t!e .isleading nature o t!edeclarations and actions taken )y t!e Oussian +olitical aut!orities a!ead o an urgent and idely recogniKed needto di5ersiy t!e Oussian econo.y n act t!e necessity and t!e ill to ork e=ecti5ely or t!e di5ersi9cation o t!e

econo.ic structure !as )een a central issue in t!e oZcial state.ents .ade )y $osco, .ore t!an once in t!e lastyears #or !at concerns t!e +olicies oriented toards t!is goal, t!e agree.ents it! t!e Euro+ean Hnion in t!es+ring 2010 !ose content ent ro. kno !o and tec!nology transer to )ilateral coo+eration in researc! .ust)e underlined #urt!er.ore a national +lan to .oderniKe and u+grade t!e +roducti5e acti5ities in Oussia !as )eenlunc!ed in t!e all 2010 it! a .assi5e co..it.ent )y t!e go5ern.ent, )ut !ic! re.ained largely on +a+er E5ent!oug! so.et!ing !as )een done, t!e endea5ours .ade )y t!e +u)lic aut!orities !a5e so ar allen a+art,generating acti5ities se+arated and isolated ro. t!e general and rail3 econo.ic net !is outco.e !as tragicallyrese.)led t!e national outlook de+icted )y t!e t!ree .ain national sectors inside a eak econo.y n addition, it.ust )e noted t!at tec!nological researc! and t!e +roducti5e acti5ities !ic! !a5e Mouris!ed in t!e last years as aconseGuence o t!e e=orts .ade )y $osco to encourage inno5ation and di5ersi9cation o t!e econo.y, !a5e ke+ta strong association it! t!e t!ree .ain national econo.ical sectors n t!is ay t!e +ossi)le )ene9ts o anenlarge.ent to t!e !ole econo.y o dyna.ic and ne acti5ities !a5e re.ained li.ited to little circle o industrieslinked to t!e .ain ones !e S+ecial Econo.ic ^ones SE^s3, esta)lis!ed in t!e last decade as a tool to attractin5est.ents and start ne enter+rises on t!e Oussian territory, are to )e considered as anot!er ea.+le o ailedatte.+t to enlarge t!e econo.ic +artici+ation o a ider seg.ent o t!e +o+ulation !ey didnLt generate t!e

e+ected e=ect on t!e countryLs ellness as a !ole, only i.+ro5ing arti9cial arit!.etical indees, sacri9cingla)our rig!ts and en5iron.ental las it!out a real +ositi5e outco.e or t!e .aority o t!e +eo+le !e sa.e goesor t!e #oreign >irect n5est.ents in Oussia !ey !a5e )een .ainly directed to t!e t!ree dri5ing sectors o t!enational econo.y, al.ost it!out touc!ing ot!er +arts o t!e national econo.ical structure t!at are in need osu++ort W!ile in ter.s o oreign in5est.ents dra t!e gas and oil industry ke+t on gaining ground in t!e last eyears, t!e rest o econo.y, es+ecially t!e s.all and .ediu. enter+rises, lagged )e!ind al.ost to a standstill !e+oor udicial and institutional accounta)ility, !olds in5estors ro. risking so.et!ing in ot!er acti5ities t!an t!e onesalready de5elo+ed !ose attac!.ent to state interests assures a suZcient degree o certainty in t!e .id-ter.re+ay.ent !e strong +ledge o $osco in attracting oreign in5est.ents, e.erging in t!e last decade, !as risensi.ultaneously to a lack o internal autono.ous econo.ic action, a+art ro. t!e t!ree .ain sectors and a eot!ers !is circu.stance is still +resent and yet t!e ine=ecti5eness o t!is strategy !as not )een ully understoodand o5erturned )y +olitical aut!orities n act it +re5ents t!e econo.y ro. acting autono.ously and t!e +oliticalactors ro. taking t!e +ro+er role in s!a+ing a co.+lete, .odern and )alanced industrial +olicy !e concentrationo t!e oreign in5est.ents in a s.all nu.)er o +roducti5e sectors !as caused a .ounting 5ulnera)ility o t!e t!reesectors t!e.sel5es As t!e eig!t o oreign ca+itals gre in t!ese seg.ents o national econo.y, so did t!e

+otential risks in5ol5ed in a sudden donturn or retire.ent o in5est.ents t !a++ened in t!e last t!ree years it!t!e e=ects o t!e international 9nancial crisis n 200B oreign direct in5est.ents in Oussia ell )y 1 against 200C,!ile t!e 2010 9gure as e5en orse !is s!ar+ and !ar.ul dro+ as generated )y t!e concentration o oreignca+itals in t!e +ri.ary and narro +art o t!e national econo.y Anot!er +ro)le. connected to t!e .isseddi5ersi9cation o Oussian econo.y and t!us its +olariKed and i.)alanced nature, is its e+osure to t!e oscillationso orld .arket trends !is is es+ecially true or t!e energy sector, !ic! is .ainly e+ort oriented and .akes u+or t!e .aority o t!e state .onetary resources and reser5es n act t!e Muctuation o oil and gas +rices isdangerous or Oussia, gi5en t!e lack o Mei)ility in its econo.y, and t!e +ro.inence o t!is sector inside t!enational econo.ic setting A +roo o t!e diZculties e+lained a)o5e !as )een gi5en recently )y t!e 1 all in gasand oil sales to EH during 200B and 2010 At t!e sa.e ti.e t!e econo.ic grot! is di.inis!ed )y C in 200B !ise+lains )rieMy )ut clearly t!e da.aging e=ect caused )y t!e lo range o +roducti5e o+tions +resent in t!e



Oussian econo.ic structure, es+ecially in ti.es o 9nancial tur)ulence or .arket +rices 5ariations Anot!er ea.+leis gi5en )y t!e 5ery !ig! une.+loy.ent rate o)ser5ed in so.e o t!e )iggest Oussian cities !ic! are do.inated

)y an al.ost single sector industry !e so called “mono1in#ustrial; cities represent the tip

o& the iceberg an# the most apparent icon o& the neglecte# +roducti5e

#iversi5cation in the country) .he aul, direct and imme#iate result on the

population o& those cities3 in terms o& ob losses an# consequent #istress3

is a mirror in which Jussia can reect its larger )ut si.ilar structural economicproblems on a national le5el !e eistence o t!e t!ree .entioned sectors in a +ri5ileged +osition inside t!e

Oussian econo.y !as a5oured t!e creation o econo.ic, 9nancial and +olitical centres o +oer As receivers

o& the highest amount o& monetary resources an# investments &romabroa# as ell as ro. t!e go5ern.ent, those in#ustries have #evelope# a big

inuence ahea# o& the other economical players in the country) <eing the

backbone o& the Jussian +roducti5e economy3 they have prece#ence over

other issues an# are now able to #irect re&orms so as to avoi# anystructural re&orm o& the Oussian economic system) .he stronger this

inuence is3 the more #i9cult will be to change the present unair and +olariKed

econo.ical pattern !is in turn strengt!ens t!e inMuence !eld )y t!e t!ree sectors t!e.sel5es !is condition,

as it is easily understanda)le, !olds 5ery negati5e i.+lication or t!e rest o t!e econo.y as ell as or t!eecono.ic structure as a !ole, and in t!e end or t!e Oussian +o+ulation At t!e .o.ent, the most visibleo& the #etrimental eects is the absence o& the relocation o& wealth +roduced

a.ong t!e society and t!e !ars! ineGuality !ic! is a trade.ark o +ost so5iet Oussia n t!is contet, it is

almost impossible &or me#ium an# small ventures to prosper an# to

broa#en t!e economic options or citiKens and go5ern.ent, !ic! is a result o t!e s!ortage in +u)lic

su++ort, +olitical strategic 5ision and allocation o resources to .ore recei5ers t!an t!e accusto.ed ones .he

energy sector surely plays the biggest role in oering the successi5e Jussian

governments an enormous .onetary also +olitical and electoral3 revenue which has#iscourage# and still does3 t!e +roducti5e #iversi5cation o t!e econo.y !e t!ree +illars o Oussian

econo.y energy, ea+ons and steel3 !a5e created t!e i.age o t!e state a)road as a and !a5e s!a+ed t!e +ost-

so5iet countryLs structure )ot! +olitically and econo.ically >t seems that this tren# it8s notturning aroun# an# that the envisage# change towar#s #iversi5cation has

a long way to go yet) A+art ro. t!e conseGuences already e+osed, t!ere are to .ore reMections to

)e .ade !e de5elo+.ent o t!ese t!ree sectors is !ar.ing t!e en5iron.ent +roducing goods in an unsustaina)le

ay or unsustaina)le +ur+oses Hy#rocarbons, 5ast Guantities o steel and !ea5y ea+ons are old

as!ioned pro#ucts belonging to the :ol# economy; o& the twentieth century3

whose usage will be less an# less &requent in the upcoming yearsunortunately a+art ro. t!e ea+ons3 W!atLs .ore, t!e +roduction, on an etre.ely large scale, o !ea5yea+ons !as a dou)le .oral re+ercussion "n one side t!e e+ort o ea+ons and ar tec!nology in general+roduces 5iolence in ot!er +arts o t!e orld\ on t!e ot!er side t!e !uge deence s+ending at !o.e is re.o5ingand ill e5en .ore so in t!e near uture, gi5en t!e +lan outlined a)o5e3 essential resources ot!erise 5ital to ace.any social and econo.ic +ro)le.s !ic! )adly a=ect Oussia !e t!ree sectors are still gaining ground inside t!ecrisis !it Oussian econo.y, de5elo+ing ra+idly )ut in a Guantitati5e ay .ore steell, .ore ea+ons, .ore gas,.ore alu.iniu. etc3 Oat!er t!an taking into account t!e need to raise signi9cantly t!e Guality standards and,

.ost o all, consider ot!er goals or t!e uture o its econo.y and society, Jussia is still chasing a&teran economic mo#el both unsustainable an# alrea#y out o& time)



Failure to #iversi&y &rom oil e%poses Jussia to international

economic uctuations

.empera !! $ic!ele, “s Oussia >i5ersiying ts Econo.y or "nce $ore

Strengt!ening ts Already Strong SectorsI* PE:"', $arc!3/ !e S+ecial Econo.ic ^ones SE^s3, esta)lis!ed in t!e last decade as a tool to attract in5est.ents and start ne

enter+rises on t!e Oussian territory, are to )e considered as anot!er ea.+le o ailed atte.+t to enlarge t!eecono.ic +artici+ation o a ider seg.ent o t!e +o+ulation !ey didnLt generate t!e e+ected e=ect on t!ecountryLs ellness as a !ole, only i.+ro5ing arti9cial arit!.etical indees, sacri9cing la)our rig!ts anden5iron.ental las it!out a real +ositi5e outco.e or t!e .aority o t!e +eo+le !e sa.e goes or t!e #oreign>irect n5est.ents in Oussia !ey !a5e )een .ainly directed to t!e t!ree dri5ing sectors o t!e national econo.y,al.ost it!out touc!ing ot!er +arts o t!e national econo.ical structure t!at are in need o su++ort W!ile in ter.so oreign in5est.ents dra t!e gas and oil industry ke+t on gaining ground in t!e last e years, t!e rest oecono.y, es+ecially t!e s.all and .ediu. enter+rises, lagged )e!ind al.ost to a standstill !e +oor udicial andinstitutional accounta)ility, !olds in5estors ro. risking so.et!ing in ot!er acti5ities t!an t!e ones alreadyde5elo+ed !ose attac!.ent to state interests assures a suZcient degree o certainty in t!e .id-ter. re+ay.ent !e strong +ledge o $osco in attracting oreign in5est.ents, e.erging in t!e last decade, !as risensi.ultaneously to a lack o internal autono.ous econo.ic action, a+art ro. t!e t!ree .ain sectors and a eot!ers !is circu.stance is still +resent and yet t!e ine=ecti5eness o t!is strategy !as not )een ully understoodand o5erturned )y +olitical aut!orities n act it +re5ents t!e econo.y ro. acting autono.ously and t!e +oliticalactors ro. taking t!e +ro+er role in s!a+ing a co.+lete, .odern and )alanced industrial +olicy !e concentrationo t!e oreign in5est.ents in a s.all nu.)er o +roducti5e sectors !as caused a .ounting 5ulnera)ility o t!e t!reesectors t!e.sel5es As t!e eig!t o oreign ca+itals gre in t!ese seg.ents o national econo.y, so did t!e+otential risks in5ol5ed in a sudden donturn or retire.ent o in5est.ents t !a++ened in t!e last t!ree years it!t!e e=ects o t!e international 9nancial crisis n 200B oreign direct in5est.ents in Oussia ell )y 1 against 200C,!ile t!e 2010 9gure as e5en orse !is s!ar+ and !ar.ul dro+ as generated )y t!e concentration o oreign

ca+itals in t!e +ri.ary and narro +art o t!e national econo.y Another problem connecte# tothe misse# #iversi5cation o& Jussian economy an# t!us its polari/e# an#

imbalance# nature3 is its e%posure to the oscillations o& worl# market

tren#s) .his is especially true &or the energy sector3 which is .ainly e%portoriente# an# makes up &or the maority o& the state monetary resources

an# reserves n act the uctuation o& oil an# gas prices is #angerous &or

Jussia3 given the lack o& e%ibility in its economy3 an# the prominence o&

this sector insi#e the national economic setting) A proo& o t!e diZculties e+lained

a)o5e !as been given recently by the !=Q &all in gas an# oil sales to U #uring277( and 2010 At the same time the economic growth is #iminishe# by LQ in

277() !is e+lains )rieMy )ut clearly t!e da.aging e=ect caused )y t!e lo range o +roducti5e o+tions +resent

in t!e Oussian econo.ic structure, es+ecially in ti.es o 9nancial tur)ulence or .arket +rices 5ariations

High oil prices un#ercut Jussian economic #iversi5cation

Jia Iovosti !2 “Hnrest in i)ya !urts Oussian econo.ic di5ersi9cation,

analysts say,* /14, !tt+%//enrianru/)usiness/2011014/1N2BB4!t.l3orts o& Jussia, one o t!e orlds largest crude +roducers, to increase the share o& its

non1energy economy has been nippe# in the bu# by higher oil prices

&ollowing the unrest in ibya, a signi9cant oil su++lier to t!e international .arket, analysts say

Hnrest in i)ya, a .e.)er o t!e "rganiKation o Petroleu. E+orting :ountries "PE:3 and t!e orlds 12t! largestcrude e+orter, +ro+elled oil +rices to 610 +er )arrel, t!e !ig!est in t!e last to and a !al years !is .ig!t see.

a )oon or Oussia, !ere energy re5enue accounts or N o t!e )udget re5enue, )ut analysts say it

#eprives the economy o& incentive to #iversi&y with the bulk o& investment

coming into the !ig!ly pro5table energy sector) DHigh oil prices push us back to ))) the pre1crisis #evelopment mo#el in the me#ium1term prospect3D Aleei

>e5yato5, an Hralsi) )ank analyst, said Q.he economy starts &ocusing on the raw

http://en.rian.ru/business/20110314/162994533.html

http://en.rian.ru/business/20110314/162994533.html



materials sector3 while other in#ustry growth will slow #ownQ n 2010, as oil +rices

eased, Oussias +rocessing industry e+anded 11C co.+ared it! a N grot! o t!e .ining industry, statisticss!o Windall oil re5enues Moing into t!e country +ut t!e central )ank at t!e crossroads !et!er it s!ould targetinMation, like central )anks in de5elo+ed states, or cur) t!e strengt! o t!e ru)le !e central )ank started c!angingits +olicy to target inMation, one o t!e Fre.lins e5erlasting oes, last all, !en it idened t!e Moating corridor oits currency )asket, consisting o dollars and euros, and cut t!e 5olu.e o its .ont!ly inter5entions 'ut .ore+etrodollars !unting or t!e ru)le .ake t!e national currency .ore e+ensi5e !ic! translates into less co.+etiti5e

Oussian e+orts, +ri.arily in oil QOising oil +rices c!ange central )anks +olicy t is returning to its +re5ious +olicy,Q>e5yato5 said 'ut easing t!e ru)le .eans sitc!ing on t!e +rinting +ress and ueling inMation Q oil +rices are!ig!, it is diZcult or t!e central )ank to 9g!t inMation !ic! is considera)lly Mat no t is diZcult to +re5entinMation ro. groing !en +roducers costs are rising and ca+ital, !ic! correlates it! t!e oil +rice, is co.ing in,QAleandra E5tiye5a ro. D' :a+ital said 'ut in t!e s!ort-ter., Oussia ill )ene9t ro. soaring oil +rices !ic!ill !el+ it re+lenis! state co=ers QWe !a5e a c!ance to )alance our de9cit-ridden )udget t!anks to t!e oil +rices,Qn5estcae analyst >.itry Ada.ido5 said A strong inMo o liGuidity ill also !el+ re+lenis! t!e countrys Oeser5e#und, set u+ to cus!ion t!e ederal )udget against a all in oil +rices, !ic! as )attered considera)ly )y t!einternational 9nancial crisis

High oil prices create ination an# the #evaluation o& non1oil

sectors o& the economy K low oil prices lea# to growth

<ernstam an# Jabushka !—$ic!ael S 'ernsta., a researc! ello at t!e &oo5ernstitution, Stanord Hni5ersity, is an econo.ic de.ogra+!er !o studies econo.icsyste.s in t!eir relations!i+ it! inco.e, +o+ulation, 9nancial de5elo+.ent,natural resources, t!e en5iron.ent, conMict, and ot!er social c!ange A(> Al5inOa)us!ka is t!e >a5id and Yoan raitel Senior #ello at t!e &oo5er nstitution “!e>utc! >isease% Peter t!e Jreats Oeal egacyI*, Yuly 2, 2001,!tt+%//!oo5erorg/researc!/+roects-and-+rogra.s/russian-econo.y/N0203"n Yune 2B, 2001, the Jussian government state# that it woul# soon intro#uce

legislation to re#uce the obligatory selling o& &oreign currency procee#s by

e%porters to the 4entral <ank ro. 7 to 0 +ercent.his measure, as e !a5e discussed in detail it! statistical

e5idence on t!is site Q!e Secret o Oussian Econo.ic Jrot!% esting an "ld &y+ot!esis it! (e >ataQ and Q:an $ore i)eral Su)sidies S+ur Jrot! and Oeduce nMationIQ3,

threatens economic growth an# 5scal solvency

(e5ert!eless,Jussia is abu// with talk o& the ,utch #isease !e current con5entional isdo. as su..ariKed in a

Yune 20, 2001, Wall Street Yournal article entitled QOussias Strong Ou)le >a.+s &o+es or Etended Jrot!Q is t!at !ig! co..odities +rices are causing an econo.ic slodon,

t!reatening Oussias reco5ery !is 5ie !olds t!at high oil prices3 although the source o& recent growthan# strong pro5ts in the oil sector3 are causing ination an# real ruble

appreciation that will strangle the growth o& non1oil in#ustries &or years to

come !ere is a related, t!oug! so.e!at contradictory, ear t!at +ro9ts in t!e oil sector and eGuity +rices3 ill decline i orld +rices all !ile do.estic +roduction costs rise

&ig! oil +rices are credited it! Oussias strong C grot! in 2000, t!e !ig!est rate in .ore t!an 0 years E5ery dollar rise in Oussias oil is said to contri)ute 04 to J>P Energy and.etals constitute C0 o e+orts and t!e )ulk o t!e do.estic eGuity .arket !e +re5ailing 5ie in Oussia is t!at de5aluation o t!e ru)le ater August 1BBC +layed an i.+ortant role inrecent grot! )y increasing do.estic de.and, as Oussian consu.ers sitc!ed to c!ea+er do.estic goods

Su)scri)ers to t!e >utc! disease argue t!at the conversion o& large &oreign currency earnings intorubles3 which are sol# to the 4entral <ank un#er its "=Q repatriation rule3

lea#s to increasing the monetary base3 thereby ination) $ince JussiaBs

ination e%cee#s that o& its tra#ing partners3 the ruble is appreciating in

real terms3 which re#uces the competitiveness o& non1commo#itiespro#ucers)

Jeal ruble appreciation is thus presumably causing a slow#own in growth

currently running at 43 say t!ose in t!e >utc! disease sc!ool o t!oug!t Wit! annual inMation running at 1-20 t!is year, the ruble willappreciate as much as !=Q in real terms .his ruble appreciation must be

curtaile# to restore !ig!ergrowth)W!ats t!e +olicy anser to t!is conundru.I

"n t!e a)o5e argu.ent, t!e anser see.s clear >& high oil prices are the cause o& ruble appreciation3

economic slow#own3 an# the ,utch #isease3 which crow#s out the

http://www.hoover.org/research/projects-and-programs/russian-economy/6020

http://www.hoover.org/research/projects-and-programs/russian-economy/6020



!AJ — ,utch ,isease

High oil prices cause Jussian imperialism

6hrushcheva 7L (ina F!rus!c!e5a is an associate +roessor o international

a=airs at t!e (e Sc!ool, “!e Oussians are :o.ing,* :!ronicle o &ig!erEducation, B-, eis3JussiaBs resurgence is largely the result o& international econo.ic conditions, in +articular the

worl#Bs energy crisis) As long as the price o& oil remains high3 Putin will be

able to promote an image o& Jussia -- one o t!e orlds .ain energy su++liers -- as a #ivinelyor#aine# nation3 #estine# to withstan# the decay and destruction o t!e Cest) Su#ging

by JussiaBs recent incursion into Georgia3 that is more than ust a slogan)

Putin is prou#ly unintereste# in Cestern criticism3 !ic! !as earned !i. )road +o+ular

su++ort at !o.e He believes that JussiaBs quick show o& &orce has taught alesson to the Unite# $tates3 Georgia3 an# all o& the &ormer $oviet satellites

seeking closer ties with the Cest) His popularity will allow him to go on to

make the case that .bilisi3 $evastopol3 an# .allinn )elong to Oussia and -- i necessary -- shoul# be taken by &orce

High oil prices hurts relations with Jussia an# causes Jussian

e%pansionism K history proves

Applebaum !!—$asters in O ro. t!e ondon Sc!ool o Econo.ics, 'A ro.

;ale Anne, !e Was!ington Post, “W!en oil +rices rise, Oussia !as reedo. o5er a)arrel*, uesday, Yanuary 4, 2011, !tt+%//as!ington+ostco./+-

dyn/content/article/2011/01/0/AO201101004070!t.l3W!y t!e c!ange o toneI W!y noI $any co.+le t!eories !a5e )een !atc!ed to e+lain it !is )eing Oussia, none can )e +ro5ed 'ut +er!a+s t!e e+lanation is 5ery si.+le% "il is

once again a)o5e 6B0 a )arrel - and t!e +rice is rising And i t!ats t!e reason, its not!ing ne n act, i& one were to plot the rise an#&all o& $oviet an# Jussian &oreign an# #omestic re&orms over the past -7

years on a graph3 it woul# match the &all an# rise o& the international oil

price or !ic! do.estic crude oil +rices are a reasona)le +roy3 with astonishing precision)

o see !at .ean, )egin at t!e )eginning% >n the !("7s3 oil prices began to rise signi5cantly3 alongwith the then1$oviet UnionBs resistance to change) !e +re5ious decade it! oil +rices at 62 or 6 a )arrel,

not adusted or inMation3 !ad )een one o Mu and e+eri.entation 'ut ater "PE: +us!ed +rices u+ in t!e 1B70s, oil re5enue +oured in - and the $oviet Union

entere# a perio# o& internal DstagnationD an# e%ternal aggression So5iet leader eonid

<re/hnev investe# heavily in the military, !alted internal reor.san# in 1B7B !en oil as at 62 a )arrel3 -

inva#e# A&ghanistan

'reK!ne5 as e5entually olloed )y ;uri An#ropov , !o ha# the goo# &ortune to run the $oviet Union

when oil prices were still high at !is deat!, in 1BC4, t!ey a5eraged 62C a )arrel3 An#ropov coul# thusaor# both an internal crack#own on dissidents an# a continue# tense relationship

with the Cest) 'ut Andro+o5 as olloed )y $ik!ail Gorbachev, !o took over ust as pricesplunge#) n 1BCN it! oil don to 614 a )arrel3, he launche# his re&orm programs, +erestroika and glasnost 'y 1BCB

!en oil as still only at 61C3 !e alloed t!e 'erlin Wall to all, reed :entral Euro+e and ended t!e :old War

Prices Muctuated, )ut t!ey #i# not really rise again in the !((7s +lunging as lo as 611 in 1BBC3,the years

when <oris eltsin was still trying to be best &rien#s with <ill 4linton , t!e Oussian

.edia ere relati5ely ree and t!ere as still talk, at least, o .aor econo.ic reor.s <ut in !((( ?when oil prices rose to 61N a

)arrel3, ;eltsins +ri.e .inister, Dladi.ir Putin3 launche# the secon# 4hechen war3 the Cest

http://www.washingtonpost.com/wp-dyn/content/article/2011/01/03/AR2011010304070.html






bombe# <elgra#e3 an# the moo# in Jussia turne# #istinctly anti1Cesternonce again)

!e ortunatePutin took over as +resident in 2777, at the start o& a long and seemingly

ine%orable rise in oil prices ndeed, GorbachevBs calls &or internal re&orm were long

&orgotten )y 200 !en oil +rices ere cree+ing u+ to 627 a )arrel3 !e days !en ;eltsin +us!ed or Oussia to oin Western institutions ere a distant .e.ory )y 200C,

!en

Jussia inva#e# Georgia and oil as at 6B1 a )arrel3

High oil prices allow Jussia to challenge U$ hegemony

<ennett !2 graduate H :!icago and E.ory Sc!ool o a Yo!n “"il Prices

#ueling Oussias >isru+tion o HS #oreign Policy* A+ril 04, 2012!tt+%//usnesco./nes/articles/2012/04/0/oil-+rices-ueling-russias-disru+tion-o-us-oreign-+olicy3JussiaBs burgeoning oil an# natural gas e%ports are un#erwriting Jussian

eorts to regain status as a worl# superpower Jussia, once an old oe, is again

proving to be a maor obstacle &or AmericaBs &oreign interests3 an# willcontinue to be a thorn in the countryBs si#e as long as oil prices remain

high Jussian lea#ers have the Obama a#ministrationBs eorts to pressure>ran into giving up its nuclear weapons ambitions #i9cult at every turn)oscow has also oine# 4hina in reecting a U)I) measure that woul#

strike a #iplomatic blow to Syrian +resident 'as!ir al-Assa#, rustrating W!ite &ouse oZcials .he

Chite House will also likely seek new3 harsh sanctions against Iorth 6oreai& it launches a long1range rocket that coul# one #ay be 5tte# with a

nuclear weapon capable o& hitting U)$) tur&) <ut e+erts say again t!at oscow--along

it! su++ort ro. 'eiing-- will likely stan# in the say ?See +ictures o t!e 5iolence in Syria@ JussiaBsreturn to the &ore as a check against AmericaBs global whims has escalate#

in recent months, as Oussian Pri.e $inister Dladi.ir Putin as elected as President, and is setting !is agenda or a

t!ird ter. HS-Oussian relations returned to t!e ront +ages last eek ater ")a.a urged outgoing Oussian President >.itry$ed5ede5 to Qgi5e .e s+aceQ on se5eral issues, including a Euro+ean .issile deense s!ield t!at $osco o++oses ikely J"P

+residential no.inee $itt Oo.ney soon ater called Oussia A.ericas Qto+ geo+olitical ene.yQ QPutin still aspires&or Jussia to be a superpower,Q says Ste5en Pier, a or.er HS a.)assador to Hkraine Q.here are

only two ways &or Jussia to achieve that0 nuclear weapons3 an# oil and natural

gas salesQ !e +rice o a )arrel o oil as nearly 610 at .idday uesday, steadily cli.)ing ro. a 2-eek lo o 67N +er )arrelin "cto)er "il +rices )egan to rise in late 2010, +eaking at 611 +er )arrel in $ay 2011, )eore di++ing last su..er and t!en risingagain ?W!ose Oussia :o..ent Was $ore >a.aging% ")a.as or Oo.neysI@ Oussia is t!e orlds second-largest oil e+orter at .illion )arrels a day, and its t!e nint!-leading natural gas e+orter at C2 )illion cu)ic .eters a year, according to t!e :A World#act)ook Oussia rakes in nearly 600 )illion annually in e+orts, it! t!e :A listing +etroleu. and natural gas as its to+ to

co..odities #rances 'urell, 5ice +resident o t!e Atlantic :ouncil, says Oussias oil revenues Dgive it a

com&ort /oneD &rom which its lea#ers &eel they have the global cache tomake things tough &or Cashington) 'urell says s!e Q+laces .ore eig!tQ or Oussias recent glo)al

.uscularity on QPutins re-e.ergenceQ !e Oussian once-and-soon-again +resident Qclearly sees +laying t!e national card as t!e

strong guy internationally )ene9ts !i.,Q s!e says 'ut, .ake no .istake, bloate# national coers &rom

high oil an# gas prices un#erwrite PutinBs muscle1e%ing, e+erts say



,iversi5cation >nevitable

,iversi5cation is inevitable K Jussia will import key

technologies an# business mo#els &rom the west)

<lau !7 — Yo!n 'lau N/0/2010, re+orter or >W, Jer.an national )roadcastingnetork, “Oussia looks estard or !el+ it! !ig!-tec! di5ersi9cation,*>W!tt+%//dde/russia-looks-estard-or-!el+-it!-!ig!-tec!-di5ersi9cation/a-742N4NAter .ore t!an a decade o relati5e reedo., JussiaBs economy is #epen#ent on the

energy sector) Iow lea#ers in oscow want to buil# up a high1techin#ustry it! !el+ ro. t!e West8 Jra+!ic de+icting a .icroc!i+8 Oussia !o+es to race a!ead toard !ig!-

tec! di5ersi9cation8 &it )y t!e glo)al 9nancial crisis t!at led to a s!ar+ all in trade, Jussia has

embarke# on a campaign to #evelop its economy away &rom being simplyan e%porter o& primary commo#ities, such as oil an# gas President >.itri $ed5ede5

is staking .uc! o !is econo.ic 5ision on creating a glo)ally co.+etiti5e !ig!-tec! industry8 Part o&

oscowBs plan is to buy into or even acquire key companies locate# intechnologically a#vance#3 competitive markets such as Germany an#France) E n9neon s+eculation8 JussiaBs growing appetite &or technology companies

is the likely cause o& renewe# speculation about Jussian 5nancial hol#ing

company $istema acquiring a stake in German chipmaker >n5neon) E !e

Oussian go5ern.ent, #inancial i.es >eutsc!land re+orted it!out citing sources, !as called on 'erlin to letSiste.a take a 2B-+ercent stake in n9neon According to t!e re+ort, )ot! $ed5ede5 and Pri.e $inister Dladi.irPutin insisted on t!e +lan in talks it! Jer.an :!ancellor Angela $erkel8 n9neon c!i+8 n9neon is on Oussias!ig!-tec! acGuisition radar8 Siste.a !as declined to co..ent, and n9neon is +ro5iding little inor.ation As+okes+erson told >eutsc!e Welle t!e c!i+.aker Qis not currently !olding talksQ it! t!e Oussian co.+any,declining to co..ent on !et!er t!e to 9r.s or t!e leaders o t!eir countries !a5e negotiated in t!e +ast 8 n>ece.)er 200B, Siste.a con9r.ed talks a)out )eco.ing a +artner in a +ossi)le in5est.ent in n9neon )y t!eOussian state8 $unic!-)ased n9neon already !as so.e o+erations in t!e ^elenograd region near $osco, !ere

Oussias largest se.iconductor co.+anies, $ikron and Angstre., o+erate acilities8 Already a )ig user o Jer.antec!nology8 Angstre. is already a )ig user o tec!nology ro. Jer.any\ t!e .anuacturer, or instance, !ired$bW ^ander in Stuttgart to )uild a ne c!i+ actory and also took o5er a +roduction line o+erated )y Ad5anced$icro >e5ices A$>3 in Jer.any8 Anot!er key co.+onent o $ed5ede5s !ig!-tec! di5ersi9cation +lan is to create

a Oussian eGui5alent o Silicon Dalley .he Jussian presi#ent3 who this month toure#

4ali&orniaBs high1tech mecca3 inten#s to buil# a technology center calle#$kolkovo outsi#e o& oscow He hopes talente# an# entrepreneurial

Jussians3 i& given su9cient &un#ing an# scienti5c &ree#om3 will hatch

lucrative inventions to help break the countryBs #epen#ence on gas an#

oil8 Oussian President >.itry $ed5ede5 and Jer.an :!ancellor Angela $erkel8 $erkel and $ed5ede5 are

re+ortedly talking a)out a Oussia-n9neon !ooku+8 ts not as i Oussia needs to start ro. scratc!, t!oug! !ecountry !as long )een a leader in a5iation and s+ace tec!nology, !ere, it! t!e !el+ o ad5anced .icroelectronicstec!nology and e+ertise, it !o+es to )eco.e a orce again Oussia as also at t!e cutting edge o +!oto5oltaics

until t!e go5ern.ent ceased unding 1 years ago8 ChatBs necessary now3 most e%pertsagree3 is a change o& &ocus) E B,octoring with intellectual property rightsB E

QOussia clearly needs to di5ersiy its econo.y,Q Fre#rik ri%on3 #irector o& the uropean

4entre &or >nternational Political conomy in <russels, tol# ,eutsche Celle

Q'ut itBs not so much a question o& whether it will #iversi&y but how)DE

ri%on pointe# to earlier attempts by Jussia to buil# its own high1techin#ustry) .he attempts &aile#3 he sai#3 &or a number o& reasons3 inclu#ing a

lack o& su9cient &un#ing3 isolating local companies &rom &oreign



competition an#3 in particular3 D#octoring with intellectual propertyrights)D E &e also cited a lack o trans+arency in Oussian )usiness as anot!er issue t!e country ill need to

o5erco.e in order to )uild a sustaina)le !ig!-tec! industry8 QOussian co.+anies dont !a5e t!e cor+oratego5ernance regulations t!eir counter+arts in t!e West !a5e,Q Erion said QSo it can )e 5ery diZcult to kno !osalays )e!ind a co.+any, !et!er its t!e go5ern.ent or so.e ot!er grou+Q 8 Oeci+rocity is )etter8 Aleander

Oa!r, an e+ert on Oussia at t!e Jer.an :ouncil or #oreign Oelations in 'erlin, )elie5es t!at !ile a nee# &or

transparency is Dcorrect3D he argues that reciprocity3 at this point inJussiaBs economic #evelopment3 is better) E QYust 20 years ago, +ri5ate oners!i+ in Oussia

as or)idden,Q Oa!r told >eutsc!e Welle, adding t!at Qti.e is still neededQ or Oussia to esta)lis! t!e le5el o

trans+arency e+ected )y estern co.+anies8 ChatBs important now3 he sai#3 is &or

Jussian companies to be able to buy into western companies an# vice

versa QAccess to each otherBs market nee#s to be the same,Q Oa!r said Q!is still

reGuires so.e +olitical e=ortQ



$au#i Arabia



!I4 — ow Oil Prices 4ause $au#i >nstability

ow oil prices lea# to civil unrest in $au#i Arabia

Hargreaves !+ — Ste5e &argrea5es, 7/1C/1, Sta= Oe+orter or :((, “#alling oil

+rices could s+ark glo)al tur.oil*, :((,!tt+%//.oneycnnco./201/07/1C/nes/econo.y/o+ec-oil/'ut i& oil prices &all over the ne%t &ew years, as so.e analysts +redict, t!ee=ects ont )e all roses OP4 ?.he Organi/ation o& the Petroleum %porting

4ountries@3 or ea.+le, coul# be on the losing en# And that coul# lea# tounrest in countries aroun# the worl#) "il +roducing nations in t!e $iddle Eastand else!ere !a5e used )ulging oil re5enues o t!e last e years to +lacate t!eir+eo+le Io place is this more true than $au#i Arabia, which has subsi#i/e# !ousing, !ealt! care, gasoline and a host o& ot!er things to t!e tune o !undredso )illions o dollars since the Arab $pring protests began in 27!7 As a result,$au#i Arabia now nee#s oil prices close to '!77 a barrel ust to balance its

bu#get) >& oil prices &all3 it may have to cut social spen#ing n a countryt!ats )een a relia)le oil e+orter to t!e glo)al .arket or o5er !al a century, yethas )ot! a restless segment clamoring &or re&orm as well as e%tremists in

the ranks, t!e re+ercussions could etend ell )eyond "PE: D>tBs not in the U)$)interest to have a more unstable i##le ast3 e5en i e are i.+orting no oilro. t!at region,Q sai# $eg!an OB$ullivan, a +roessor at &ar5ards Yo!n #Fennedy Sc!ool o Jo5ern.ent !o s+ecialiKes in $ideast +etro-+olitics DOr

Jussia either3D she a##e#, reerring to t!e orlds second largest oil e+orter"PE: in a )ind% !anks to an energy )oo. in Hnited States, :anada and else!ere,+lus a sloing o :!inese de.and as t!at econo.y .atures and s!its to lessenergy-intensi5e industries, #eman# &or OP4 oil may &all by a million barrels

a #ay over the ne%t three years, according to t!e latest +roections ro. t!enternational Energy Agency :ou+led it! rising oil consu.+tion at !o.e and a+roected all in oil +rices, "PE: nations could see a 0 cut in re5enue )y 201C,according to re5or &ouser, an analyst at t!e O!odiu. Jrou+

http://money.cnn.com/2013/07/11/news/economy/oil-70/index.html?iid=EL

http://money.cnn.com/data/commodities/?iid=EL

http://money.cnn.com/2013/05/08/news/economy/oil-companies-america/index.html?iid=EL



http://money.cnn.com/data/commodities/?iid=EL

http://money.cnn.com/2013/05/08/news/economy/oil-companies-america/index.html?iid=EL




2I4!IJ

$au#i Arabia is completely #epen#ent on oil revenues — social

services an# employment

u&t !+ — Jal ut, Senior ad5iser to t!e Hnited States Energy Security :ounciland co-aut!or o QPetro+oly% !e :olla+se o A.ericas Energy Security Paradig.,“A.erican oil )oo. is )ad nes or Saudi Ara)ia*, (esday, /2C/201,!tt+%//nesdayco./o+inion/o+ed/a.erican-oil-)oo.-is-)ad-nes-or-saudi-ara)ia-gal-lut-1Cith no revenues &rom personal income ta% an# -7 percent o& its 2Lmillion citi/ens un#er the age o& != 1 not to mention a male population

that is mostly employe# in the bloate# public sector 1 $au#i Arabia is

heavily #epen#ent on oil revenues to provi#e cra#le1to1grave social

services to its people. And the 5nancial liability has only gotten heavier

since the Arab $pring &orce# the regime to 5ght public #iscontent with evermore gifts and subsi#ies. To make things worse, $au#i Arabia is the worl#Bs si%th -

sixth! - largest oil1consuming country, guzzling more crude than major industrialized

countries such as German, outh "orea, and #anada. Cith so much o& its oil consume#

at home, the kingdom has onl $ m%d to ex&ort - even as government ex&enditures are on the

rise.'

$au#i Arabia requires high prices to maintain its economy

u&t !+ — Jal ut, Senior ad5iser to t!e Hnited States Energy Security :ounciland co-aut!or o QPetro+oly% !e :olla+se o A.ericas Energy Security Paradig.,

“A.erican oil )oo. is )ad nes or Saudi Ara)ia*, (esday, /2C/201,!tt+%//nesdayco./o+inion/o+ed/a.erican-oil-)oo.-is-)ad-nes-or-saudi-ara)ia-gal-lut-1All t!is is to say t!at in or#er &or $au#i Arabia to guarantee its economic

viability3 it must ensure that the break1even price o& oil - t!e +rice +er )arrelit needs to )alance its )udget - matches the countryBs 5scal nee#s) .his

break1even price - t!e Qreasona)le +riceQ or, as t!e Saudi Ara)ian eu+!e.is. !asit, t!e Qair +riceQ - has risen sharply in recent years Qn 1BB7, t!oug!t 20 dollarsas reasona)le n 200N, t!oug!t 27 dollars as reasona)le,Q (ai.i e+lained in$arc! Q(o, it is aroun# '!77 and say again it is reasona)leQ8 Accordingto t!e Ara) Petroleu. n5est.ents :or+oration, t!e )reak-e5en +rice is currently

6B4 +er )arrel, less t!an t!e current s+ot +rice or 'rent crude ran needs oil to )eat 612 +er )arrel to )reak e5en, !ic! e+lains t!e eud )eteen ran and SaudiAra)ia it!in "PE:3 'ut a)sent dee+ +olitical reor.s t!at create ne sources oinco.e, the break1even price will surely grow Accor#ing to Jiya#h1base# Sa#wa >nvestment3 one o& the worl#Bs most important knowle#ge bases on

$au#i ArabiaBs economy3 by 2727 the break1even price will reach '!!L per

barrel At t!is +oint, t!e Saudi Ara)ia $onetary Agencys cas! reser5es ill )eginto drain ra+idly and t!e )reak-e5en +rice ill soar to 617 a )arrel )y 202 and to

http://www.newsday.com/topics//Canada



http://www.newsday.com/topics//Iran


http://www.newsday.com/topics//OPEC

http://www.newsday.com/topics//Riyadh




http://www.newsday.com/topics//OPEC

http://www.newsday.com/topics//Riyadh



o5er 600 )y 200 And t!is cuts to t!e !eart o t!e dile..a% o )alance its )udgetin t!e uture, Saudi Ara)ia ill need to eit!er drill .ore )arrels and sell t!e. orloer +rices or drill eer )arrels - acti5ely reducing glo)al su++ly - and sell eac! ata !ig!er +rice



$au#i <ackstopping

$au#i perception o& #eman# re#uction will cause them to

release spare capacity — crashing prices an# &orcing out

alternative energies &or #eca#eseyer an# $wart/ L — Jregory $eyer and S+encer SartK, Adunct Proessor

Hni5ersity o P!oeni b sta= riter or t!e Wall Street Yournal, //200C,“E(EOJ; $AEOS% Saudi #ears " &ig! "il Prices #ade Wit! >e.and,* noa5aila)le at !tt+%//snu=ys.it!s)log)logs+otco./200C/0/saudi-ears-o-!ig!-oil-+rices-ade!t.l3Saudi Ara)ias role in t!e glo)al oil .arket !as so.eti.es )een likened to t!e#ederal Oeser5e, cali)rating its out+ut de+ending on .arket signals :ritical to t!isuniGue standing !as )een Saudi .aintenance o a cus!ion o Qs+are ca+acity,Q noesti.ated at a)out to .illion )arrels a day #or .uc! o t!e recent +eriod, the

king#om has re&raine# &rom tapping into all or most o& its spare capacityWit!in oil industry circles in +laces like &ouston, t!e Saudi +oer !as also carried aso.e!at o.inous connotation Face# with growing pro#uction ro. t!e HF,$eico and ot!er non-"PE: countries in the mi#1!(L7s3 $au#i Arabia oo#e#the market in an eort to #rive out high1cost pro#uction an# reassert its

#ominant market share !e 1BCN oil +rice cras! us!ered in .ore t!an 1 yearso .ostly-loer crude +rices, instilling a .e.ory o econo.ic !ards!i+ on t!eestern oil industry t!at continues to )e reMected in 'ig "ils caution during t!ese

!eady ti.es .he shi&t to lower petroleum prices also impe#e# the

#evelopment o& renewable energy &or about two #eca#es n !is )ook, !e

PriKe, >aniel ;ergin co.+ared t!e Saudi tactic in t!e 1BC0s to +oer +lays )y Yo!n

Oockeeller and ot!er !ea5yeig!ts in t!e !istory o oil !o !a5e used a QgoodseatingQ to dri5e out co.+etitors Q(o one is orrying a)out o5er-su++ly,Q ;erginsaid in an inter5ie nstead, t!e .arket is +reoccu+ied it! .eeting grot! in:!ina, ndia and ot!er ast-de5elo+ing econo.ies QChat ?the $au#is@ have

#iscovere# is that the tolerance level in consumers is higher than theythought3D sai# .homas ippman3 an a#unct scholar at the i##le ast

>nstitute, a Was!ington researc! institute Ji5en t!e s+ecter o !ig!er de.and inAsia and t!e increased cost o )ringing on ne oil +roduction, .any analysts)elie5e t!e long-ter. +rice o oil is in t!e 64-6N0 a )arrel range Oecent co..ents)y (ai.i suggest t!e Saudi oZcial sees an e5en !ig!er Moor t!an t!at ) DA line has

been #rawn now below which prices will not &all3D Iaimi sai# in $arc! in an

inter5ie it! PetroStrategies, a #renc! energy +u)lication :iting t!e .arginalcosts o )iouels and :anadian tar-sands, (ai.i de9ned t!e Moor as Q+ro)a)ly)eteen 6N0 or 670Q (ai.i in A+ril said Saudi Ara)ia as +utting o= a +lan toe+and oil ca+acity )eyond 12 .illion )arrels )ecause o concerns a)out de.andgrot! QHnless e see really genuine de.and, e !a5e to +ause rig!t no and see!at !a++ens,Q (ai.i told Petroleu. Argus So.e energy analysts say the

$au#i move suggeste# a more sober outlook on oil prices) D>& they see a loto& risk on the #eman# si#e then you coul# see very low prices an#

http://www.phoenix.edu/




potentially a lot o& un#erutili/e# capacity #own the roa#3D sai# Fene#lock3 a &ellow at JiceBs <aker >nstitute)

orts to increase oil supply or re#uce #eman# will cause

$au#i1le# OP4 to engineer a price crash$orse 2 — Edard $orse, or.er >e+uty Assistant Secretary o State ornternational Energy Policy, #oreign A=airs, $arc!/A+ril, e)sco,!tt+%//oreigna=airsco./articles/7C0/edard-l-.orse-and-a.es-ric!ard/t!e-)attle-or-energy-do.inance3A si.+le act e+lains t!is conclusion% N +ercent o t!e orlds +ro5en oil reser5es are in t!e $iddle East, 2+ercent or 2N1 )illion )arrels3 in Saudi Ara)ia alone As t!e largest single resource !older, Saudi Ara)ia !as auniGue +etroleu. +olicy t!at is designed to .ai.iKe t!e )ene9t o !olding so .uc! o t!e orlds oil su++ly $au#i ArabiaBs goal is to assure that oilBs role in the international economyis maintaine# as long as possible) Hence $au#i policy has always

#enounce# eorts by in#ustriali/e# countries to wean themselves &rom oil

#epen#ence3 !et!er t!roug! ta +olicy or regulation Saudi strategy ocuses on t!ree di=erent +olitical

arenas !e 9rst in5ol5es t!e ties )eteen t!e Saudi kingdo. and ot!er "PE: countries !e second concernsOiyad!s relations!i+ it! t!e non-"PE: +roducers% $eico, (oray, and no Oussia #inally, t!ere is Saudi Ara)ias

link to t!e .aor oil-i.+orting regions -- .ost i.+ortantly (ort! A.erica, )ut also Euro+e and Asia Given the

si/e o& the $au#i oil sector3 the king#om has a unique an# critical role in

setting worl# oil prices) $ince its overri#ing obectives are ma%imi/ing

revenues generate# &rom oil e%ports an# e%ten#ing the li&e o& itspetroleum reserves3 Jiya#h aims to keep prices high as long as possible)

<ut the price cannot be so high that it stiMes de.and or encourages other

competitive sources o& supply (or can it )e so lo t!at t!e kingdo. cannot ac!ie5e .ini.u.

re5enue targets .he critical balancing act o& $au#i &oreign policy, t!ereore, is to

maintain oil prices within a reasonable price ban#) Sto++ing oil +rices ro. alling )elo

t!e .ini.u. le5el reGuires coo+eration ro. ot!er "PE: countries and occasionally ro. non-"PE: +roducers

Pre5enting oil +rices ro. rising too !ig! reGuires kee+ing enoug! s+are +roduction ca+acity to use in ane.ergency !is latter eature is t!e signal c!aracteristic o Saudi +olicy !e kingdo. can a=ord to .aintain t!iss+are ca+acity )ecause o t!e a)undance o its oil reser5es and t!e co.+arati5ely lo cost o de5elo+ing and

+roducing its reser5e )ase n todays sot .arket, in !ic! $au#i Arabia +roduces around 74 .)d, t!e

kingdo. has close to + mb# o& spare capacity) ts s+are ca+acity is usually a.+le enoug! to

entirely dis+lace t!e +roduction o anot!er large oil-e+orting country i su++ly is disru+ted or a +roducer tries toreduce out+ut to increase +rices (ot only does t!is s+are ca+acity !el+ t!e kingdo. kee+ +rices in c!eck, )ut it

also ser5es to link Oiyad! it! t!e Hnited States and ot!er key oil-i.+orting countries >t is a blunt

instrument that makes policymakers elsewhere behol#en to Jiya#h or energy

security !is s+are ca+acity is greater t!an t!e total e+orts o all ot!er oil-e+orting countries -- ece+t Oussia $au#i spare capacity is the energy equivalent o& nuclear weapons3 apower&ul #eterrent against those who try to challenge Saudi leaders!i+ and$au#i goals t is also t!e center+iece o t!e HS-Saudi relations!i+ !e Hnited States relies on t!at ca+acity

as t!e cornerstone o its oil +olicy !at arrange.ent as 9ne as long as HS +rotection .eant Oiyad! ould not

Q)lack.ailQ Was!ington -- an assu.+tion t!at is .ore diZcult to acce+t ater Se+te.)er 11 $au#i ArabiaBs

OP4 partners must also cooperate it! t!e kingdo. in +art to preventJiya#h &rom pro#ucing a glut an# having prices collapse\ s+are ca+acity also ser5es

to +ressure key non-"PE: +roducers to coo+erate it! Saudi Ara)ia !en necessary 'ut unlike t!e nuclear

deterrent, the $au#i weapon is actively use# when require#) .he king#om has

perio#ically ?an# brutally@ #emonstrate# that it can use its spare capacity



to #estroy e%ports &rom countries challenging its market share !is tactic is t!e

ea+on t!at Saudi Ara)ia could use i $osco ignores Oiyad!s reGuests or coo+eration

$au#i Arabia will oversupply the market i& threatene# by

alternative energy

eyer an# $wart/ L — Jregory $eyer and S+encer SartK, Adunct Proessor

Hni5ersity o P!oeni b sta= riter or t!e Wall Street Yournal, //200C,“E(EOJ; $AEOS% Saudi #ears " &ig! "il Prices #ade Wit! >e.and,* noa5aila)le at !tt+%//snu=ys.it!s)log)logs+otco./200C/0/saudi-ears-o-!ig!-oil-+rices-ade!t.l3.he $au#i national most vocal in outlining the potential threat o&

renewable energy has been &ormer petroleum minister S!eik! A!.ed ^aki amani, !o !eld (ai.is o) ro. 1BN2 to 1BCN Per!a+s ;a.anis .ost ot-Guotedstate.ent as !is +rediction t!at Q!e Stone Age did not end or lack o stone, andt!e "il Age ill end long )eore t!e orld runs out o oilQ !e co..ent !as )een

cited as early as t!e 1B70s, )ut ;a.ani !as continued t!e .antra S+eaking lasteek, amani sai# his a#vice to OP4 is Dto increase pro#uction an# lower

prices because this is harm&ul mi#term ?an#@ long term to OP4 itsel& ,Qaccording to a re+ort in Energy ntelligence D>t will increase the activities to5n# alternative sources o& energy3 an# OP4 will remain helpless at that

time)D ;a.ani as una5aila)le or an inter5ie, )ut t!e :entre .ade a5aila)le itsEecuti5e >irector, #ad!il 4halabi, !o as Acting $ecretary General o& OP4 in!(L+1!(LL) :!ala)i said leading "PE: +roducers are )eing s!ort-sig!ted inseeking e5er-!ig!er oil +rices W!ile de.and grot! !as )een i.+ressi5e inde5elo+ing countries so ar, :!ala)i arned t!at :!inas use o coal, nuclear energyand ot!er sources ill dis+lace oil Qts a .atter o ti.e,Q :!ala)i said





$au#i Arabia Answers



ow Prices ,on8t Hurt $au#i Arabia

ow prices #on8t impact $au#i Arabia — they want to maintain

goo# relations with the U)$) — empirics prove

J. *2= — Oussian (es+a+er, N-2-14, “Saudi Ara)ia 5s !ig! oil +rices% tLs notall a)out t!e .oney,* !tt+%//rtco./)usiness/o+ec-.eeting-increase-oil-cartel-+rices-saudi-ara)ia-C04/Oig!t no oil su++ly !ea5ily eceeds de.and leading to alling +rices tLs anad5antage or oil consu.ers in t!e HS and Euro+e, )ut it is )ad nes or .ost "PE:+roducers like raG, ran, DeneKuela, Angola, and Oussia So !en "PE: as .eetingin Dienna, so.e oil states like raG ere e+ected to ask t!e cartel to cur) out+utand +us! +rices )ack u+ !e oil dri5en econo.y o Oussia, !ic! is not an "PE:.e.)er, as also seeking .ore e+ensi5e oil 'ut $au#i Arabia, t!e orldLslargest oil +roducer, turns out to be willing to see <rent &all &urther — even

below the current price o 6BN +er )arrel So why #on8t the $au#is want

higher pricesX Dladi.ir OoK!anko5sky ro. Ior# 4apital e%plains0 :Ce8veseen this be&ore in the "7s #uring the om 6ippur Car3 when the U$ aske#$au#i Arabia to lower oil prices, it! (ort! A.erica in turn o=ering to !el+ int!e construction o oil drilling acilities .his time $au#i Arabia is also likely to

please the U$3 seeking to keep a li# on prices and inning o5er su++ort on t!e.atter o its Jul neig!)ours* Sanctions i.+osed )y t!e HS in res+onse to e!ransreusal to cur) its nuclear +rogra. !a5e already signi9cantly cut ranian crudee+orts — ro. a)out 2 .illion )arrels a day last year to )eteen 12 and 1C.illion )arrels no, according to esti.ates )y HS oZcials



!I4 — ow Prices Hurt i##le ast $tability

High Oil Prices key to i##le ast stability

Hargreaves !+ — Ste5e &argrea5es, re+orter or :((, 7/1C/1, :(( $oney,

“#alling oil +rices could s+ark glo)al tur.oil*!tt+%//.oneycnnco./201/07/1C/nes/econo.y/o+ec-oil/As a result, $au#i Arabia now nee#s oil prices close to '!77 a barrel ust to

balance its bu#get) >& oil prices &all3 it may have to cut social spen#ing) >n

a country thatBs been a reliable oil e%porter to the global market &or overhal& a century3 yet has both a restless segment clamoring &or re&orm as

well as e%tremists in the ranks3 the repercussions coul# e%ten# well

beyon# OP4) >tBs not in the U)$) interest to have a more unstable i##le

ast3 even i& we are importing no oil &rom that region,Q said $eg!an

"Sulli5an, a +roessor at &ar5ards Yo!n # Fennedy Sc!ool o Jo5ern.ent !os+ecialiKes in $ideast +etro-+olitics Q"r Oussia eit!er,Q s!e added, reerring to t!e

orlds second largest oil e+orter "PE: in a )ind% !anks to an energy )oo. inHnited States, :anada and else!ere, +lus a sloing o :!inese de.and as t!atecono.y .atures and s!its to less energy-intensi5e industries, de.and or "PE:oil .ay all )y a .illion )arrels a day o5er t!e net t!ree years, according to t!elatest +roections ro. t!e nternational Energy Agency 4ouple# with rising oilconsumption at home an# a proecte# &all in oil prices3 OP4 nations coul#

see a +7Q cut in revenue )y 201C, according to re5or &ouser, an analyst at t!eO!odiu. Jrou+



!I4 — ow Prices Hurt i##le ast conomies

ow prices #evastate i##le ast economies

Al 6hatteb +!( — uay Al F!atte), ounder and director o raG Energy

institute, /1B/14, &uZngton Post, “W!y World "il Prices S!ould 'e &ig! andSta)le* !tt+%//!uZngton+ostco./luay-al-k!attee)/!y-orld-oil-+rices-s!ouR)R4BB2B!t.l>es+ite t!e lo cost o $iddle East oil +roduction, only a &ew o& the regionBs

smaller states coul# cope with an e%ten#e# price #rop below '!77) ostnee# an oil price o& '(7 or greater to cover current government spen#ing3

it! t!e $# orecasting 9scal de9cits in nearly all o t!e regions oil-e+orters )y201 in t!e e5ent o a .aor +rice dro+ E5en at 6100 +er )arrel, +u)lic s+ending ise+ected to slo don in t!e region .hese countries have grown #epen#enton their high oil rents, s+ending !uge su.s on unrealistic energy su)sidies todo.estic consu.ers and ailing to in5est in uture generations ven >raq, des+ite

e+eriencing t!e regions largest s+ike in do.estic +roduction, is running up anever1mounting #e5cit as government spen#ing outstrips e%pan#e#

revenues) ast years )udget reac!ed 611B )illion, a !o++ing si-old increase on2004 s+ending le5els, !ile t!e go5ern.ent is e+ected to s+end u+ards o 610)illion t!is year W!ile oil +roduction in raG is at its !ig!est le5el in decades .illion )arrels a day in #e)ruary, it! so.e 2C .illion destined or e+ort 3,increase# revenues are entirely #epen#ent on high oil prices Any #rop in

prices .eans t!at raGs de9cit - +er+etually !o5ering at around 17 woul# spiralout o& control Worse, o+erating costs or raGs oil industry are rising aster t!anits oil inco.e, lea5ing eer and eer unds or ca+ital in5est.ent, des+eratelyneeded or true econo.ic de5elo+.ent



2I4!IJ — ow Prices Hurt i##le ast conomies

ow Oil Prices 6ill OP4 conomies

.atlow (L — >idi Firsten atlo, re+orter at $osco i.es, 11/24/1BBC, !e

$osco i.es, !tt+%//t!e.oscoti.esco./nes/article/o+ec-.inisters-gat!er-to-discuss-lo-oil-+rices/2C2CB4!t.lW!ile lo +rices are good nes or consu.ers, many OP4 states are &acing

potentially serious situations back home n $au#i Arabia, !ere oil +ro5ideso5er 70 +ercent o t!e national inco.e, economic growth this year will #rop toa negligible 7)+ percent co.+ared to 7 +ercent in 1BB7, a )anking and ratingsagency said Saturday QFor every one #ollar &all in the oil price3 it is

estimate# that the country loses in the vicinity o& '2)= billion in bu#get

revenues,Q :y+rus-)ased :a+ital ntelligence said in a re+ort Wit! a5erage +ricesalling ro. 61C in 1BB7 to around 612, $au#i Arabia can e%pect ust 62N )illionin oil e+ort re5enues3 2- percent below bu#get, t!e agency said Fuaits state-

run nes agency said last eek it e+ected oil re5enue or 1BBC to )e 4 +ercentloer t!an last year



Mene/uela



!I4 — ow Prices 4ause Mene/uelan >nstability

ow oil prices lea# to Mene/uelan instability

Hargreaves !+ — Ste5e &argrea5es, re+orter or :((, 7/1C/1, :(( $oney,

“#alling oil +rices could s+ark glo)al tur.oil*!tt+%//.oneycnnco./201/07/1C/nes/econo.y/o+ec-oil/

!e +ain ont )e e5enly s+read >ran3 Mene/uela an# Iigeria are alrea#y

thought to be e%cee#ing spen#ing relative to what oil revenues bring in3

an# are particularly vulnerable to a &all in oil prices in the ne%t &ew yearsD>n >ran3 it coul# be a &actor in regime change,Q said Ste=en &ertog, anassistant +roessor o $iddle East +olicy and econo.y at t!e ondon Sc!ool oEcono.ics) D>t coul# certainly instigate a wave o& popular unrestQ nMene/uela3 !ere +re5ious atte.+ts to )ring +ennies-a-gallon gas prices closerto market rates prece#e# #ea#ly riots an# the toppling o& the government3

&alling oil revenue coul# also bring about a change in regime, according to

&ertog -- alt!oug! !e t!inks t!e c!ange ould +ro)a)ly occur at t!e )allot )oinstead o t!e streets



!I4 — ow Prices Hurt 4ana#ian conomy

High oil prices help 4ana#ian economy — oil in#ustry an#

government royalties

4ana#ian Press *2- — !e :anadian Press, N/24/2014, “Oising oil +rices% 'adnes or consu.ers, good nes or :anadian oil industry,* :D(es,!tt+%//ct5nesca/)usiness/rising-oil-+rices-)ad-nes-or-consu.ers-good-nes-or-canadian-oil-industry-11CC402B[iKKOF(sX:AJAO; -- conomists see .ore goo# t!an )ad &or 4ana#aBs economy as recent tensions in >raq #rive up global cru#e oil pricesScotia)ank co..odity .arket s+ecialist Patricia $o!r says t!e increase !as a Qto-+ronged i.+act,Q )ut t!e )ene9ts s!ould outeig! t!e dra)acksQ" course on t!e +ositi5e side, it really bolsters earnings &or Cestern4ana#aBs oil in#ustry, )ut also t!e oil industry in (eoundland and a)rador,Qs!e said .hat, in turn, brings more ta% an# royalty revenues to government

coers"n t!e donside, crude is a )ig actor in gasoline +rices So t!e !ig!er it goes, t!e.ore consu.ers are +inc!edQ'ut ould guess t!at the positive impact on earnings an# also on our

merchan#ise tra#e per&ormance woul# oset the negative i.+act onconsu.ers o !ig!er gasoline +rices,Q said $o!r

odd 4raw&or#3 senior economist at the 4on&erence <oar# o& 4ana#a3

agrees the higher prices will be goo# &or the bottom line o& in#ustry an#government alike, )ut not necessarily on a sustained )asis



A.0 Other Areas



A.0 High Prices Hurt Asian conomies

Asian economies resilient to oil prices — strong balance o&

payments create prevent impact

<aoria *2* — Oa!ul 'aoria, regional econo.ist or Asia-Paci9c at 'arclays,N/2N/2014, “AsiaLs Oising Oesilience to "il Prices,* Wall Street Yournal,!tt+%//)logssco./econo.ics/2014/0N/2N/asias-rising-resilience-to-oil-+rices/>n#ia3 4hina an# $outh 6orea are among the Asian economies that rely

heavily on oil &rom >raq, )ut s+illo5ers ill a=ect t!e entire region, as AsiaLsindustrialiKed, e+orting countries are large net i.+orters o oil $alaysia is t!eregionLs only net e+orter o energy co..odities, .aking it a )ene9ciary o !ig!eroil +rices note t!at e do not adust our analysis or t!e +ossi)ility t!at de.andcould all as oil +rices rise3

!e i..ediate i.+act o !ig!er oil +rices ill )e elt in current-account )alances and, against a )ackdro+ o #ed ta+ering, +ersistently !ig!er +rices could create

9nancing issuesven so3 the resilience o& Asia8s balance o& payments has strengthene# inrecent years3 along with the :bran# premium; o& many o& the region8s

e%ports) oil a5erages 610 +er )arrel in t!e second !al or t!e year, 5ersus our)ase case o 6110 +er )arrel, e esti.ate t!at t!e regionLs cu.ulati5e current-account sur+lus ould all )y 6N0 )illion — to a still-!ety 62B )illion

!at .eans oil prices woul# nee# to rise #ramatically be&ore Asia8s e%ternal

surplus came un#er pressure\ indeed, we estimate oil prices woul# nee# toaverage '!(7 a barrel &or a &ull year to cut Asia8s current account surplus to Kero 'y ay o co.+arison, in 2011 it ould !a5e reGuired a ter.inal oil +rice o

ust 6120 +er )arrel to i+e out AsiaLs current-account sur+lus



High Prices <a#ow Prices

Goo#



High Prices <a# — Global conomy



General Global conomy

High oil prices prevent global economic growth — '!27 a barrel

causes global recessions

6enne#y *2* — Si.on Fennedy, re+orter or 'loo.)erg (es in ondon,N/2N/2014, “Oising "il Prices oo. "5er World Econo.ic Oeco5ery,*'loo.)erg'usinesseek, !tt+%//)usinesseekco./articles/2014-0N-2N/rising-oil-+rices-loo.-o5er-orld-econo.ic-reco5ery.he global economy &aces a new threat ro. an old ene.y% oil A s+ike in t!e+rice o crude ores!adoed econo.ic slu.+s in eac! o t!e last our decades Soeconomists are worrying because the price o& <rent cru#e, considered t!e)enc!.ark or t!e industry, recently reache# its highest point in nine months

—a)o5e 611 a )arrel !e u.+ in +rice ca.e a.id res! 5iolence in raG, t!e"rganiKation o t!e Petroleu. E+orting :ountriesL second-)iggest +roducer aterSaudi Ara)ia 'rent started t!e year a)out 6N c!ea+er

.he rule o t!u.) &avore# by many economists is that every '!7 increase inthe price o& a )arrel o oil en#s up re#ucing global growth by about two1

tenths o& a percentage point .hat8s not an inconsequential amount or an

already lackluster e+ansion !e World 'ank on Yune 10 cut its outlook or 2014glo)al grot! to 2C +ercent ro. 2 +ercent in Yanuary “!ere is no dou)t t!at,beyon# a certain point3 higher prices become a maor constraint on globaleconomic activity, particularly i& the price reects supply problems, rat!ert!an )uoyant de.and,* says Yulian Sessop3 chie& global economist at 4apital

conomics in on#on nergy importers such as 4hina an# Sapan woul#

suer the most &rom any ump in price, t!oug! e+orters in t!e $iddle Eastould )ene9t, according to (eil $acFinnon, a glo)al .acro strategist at D' :a+italin ondon "il no !as t!e +ro)a)ility o all-out ci5il ar in raG )aked into its +rice,as ell as t!e +ros+ect o .ore 5iolence in Hkraine !ose to risks add 610 to 61to t!e +rice o a )arrel o crude

!ings could still turn around i t!e raG crisis dissi+ates And "PE: says itLscon9dent it can +u.+ enoug! etra oil to .ake u+ or a s!ortall in raGi +roduction

!e orld is also .ore energy-eZcient t!an it once as, and t!e HS !as largerdo.estic su++lies, !ic! can +ut a ca+ on +rice risesE5en at 6100 a )arrel, t!oug!, oil can act as a drag on glo)al grot! Worldideecono.ic acti5ity as already eakening in t!e early +recrisis days o 200C, !enoil )reac!ed 6100 a )arrel "il t!en slu.+ed it! t!e cras! )ut re)ounded to 6100in 2011, !a.+ering t!e reco5ery 4apital conomics suggests there is a 20

+ercent risk o& the 5ghting in >raq pushing oil up to '!273 which it says isthe #anger point0 .hat price is associate# with previous global economic

slow#owns “W!atLs .ore,* says Yesso+, “a strong an# sustaine# recovery

seems unlikely as long as oil is above '!77*



7 .he global economic recovery will be weak an# unsustainable as long

as oil prices remain above '!77 per barrel3 accor#ing to the

macroeconomic think tank 4apital conomics Yulian Sessop3 hea# o&commo#ities research3 sai# Yune 20 that i t!e unrest in raG drags on like t!eci5il ar in Syria !as, he e%pects even with Cestern oil reserves an#

increase# output &rom $au#i Arabia a##ing to global oil supply3 pricescoul# settle at '!27 per barrel :&or an e%ten#e# perio#);

:.his woul# be the level at which global growth has &altere# in the past3;

he a##e#)

High oil prices #ue to i##le ast conicts threaten the global

economy

4hapman *2* — >a5id :!a+.an, ec!nical Analyst T n5est.ent $anager

it! Econo.ics >egree, N-2N-14, “Oising "il Prices A Pro)le. or t!e WorldEcono.y*, Jold Seek, !tt+%//nesgoldseekco./JoldSeek/140C0CB+!+

"il +rices a++ear to )e or.ing a +otential ascending triangle o5er t!e +ast eyears !e !ig! t!us ar in t!is +attern as at 6114 in A+ril 2011 !e current to+ ot!e +attern is near 6111 and a )reakout a)o5e t!at le5el could suggest a .aor.o5e to t!e u+side t!e +attern is correct as an ascending triangle a )reakouto5er 6111 could suggest a .o5e toards t!e to+ o t!e .aor c!annel currentlynear 614C/610 oil +rices ere to .o5e t!ose le5els it could )e suggesting t!att!e situation in raG dee+ens Persistent high oil prices woul# also threatenthe &ragile global recovery) !e !uge +attern ro. 1BC0 a++ears as a !ugeascending edge triangle (or.ally t!at is a )earis! +attern !e to+ o t!e c!annel!ooks t!e 1BC0 to+ u+ it! t!e to+ o 200C !e )otto. c!annel starts it! t!e1BBC lo and runs along t!e lo o 200C !e to+ o t!e c!annel is currently near

61B0 !ile t!e )otto. o t!e c!annel is currently near 6C0 .here appears to beconsi#erably more latitu#e &or a sharp rise in oil prices as oppose# to any#own move t!e ascending triangle +attern is correct t!ere a++ears to )econsidera)ly .ore a)ility or oil +rices to rise it!in t!e triangle .he turmoil in

>raq an# $yria are civil wars that are threatening to sprea# into other

countries an# #rag in &oreign powers) >n the mi##le o& this sits some o& thelargest oil reserves in the worl# an# one o& the maor choke points &or the

shipment o& oil >& oil prices were to rise &urther because o& a &urther

#eterioration o& the conict in the i##le ast it coul# become a maorproblem &or the worl# economy)

High oil prices threaten the global economy

Jugaber 4rutsinger !! — :!risto+!er S Ouga)er T $artin :rutsinger,

:!risto+!er% re+orter or AP, nternational rade at 'ureau o (ational A=airs T$artin% re+orter or AP, 0-10-11, “&ig!er oil +rices t!reaten glo)al econo.y*, !eWas!ington Post, !tt+%//as!ington+ostco./+-dyn/content/article/2011/0/10/AO20110100470C!t.lIsid]S20110100N222



Higher oil prices are slowing global economic growth, and t!e i.+act is likelyto s+read in co.ing .ont!s Stocks sink a.id concerns out o :!ina and Euro+e,continued tur.oil in Ara) orld Hne.+loy.ent rate sli++ed in $d and Da in

Yanuary, !eld steady in >:Oil prices helpe# raise the U)$) tra#e #e5cit to a seven1month high in

Yanuary, !en crude +rices ere 6C70 a )arrel "il is no trading at .ore t!an6100 a )arrel, suggesting t!e ga+ ill iden in co.ing .ont!s ven &ast1growing4hina isnBt immune 1 higher oil prices contribute# to a rare tra#e #e5cit

there in February) D>tBs a ba# start3 because we all know the oil shock is

still coming3D said Paul As!ort!, an econo.ist at :a+ital Econo.icsPricier oil #ampens consumer spen#ing an# that cuts into economic

growth) $urging oil prices can also stir up ination &ears3 triggering higher

interest rates that cut into househol# an# business spen#ing) n Yanuary,A.ericas oreign oil )ill rose B +ercent, or 604 )illion, to 64B )illion !ats t!e!ig!est .ont!ly total since "cto)er 200C Since t!en, +olitical tur.oil in i)ya,Egy+t and unisia !a5e sent oil +rices surging At t!e sa.e ti.e, acceleratingecono.ic grot! in Asia and atin A.erica !as also )oosted de.and !e i.+act is5isi)le in )old nu.)ers eac! .orning on gas station .arGuees across t!e HnitedStates Pu.+ +rices !a5e risen 1 +ercent in t!e +ast .ont! to a national a5erageo 6 a gallon, according to AAA, Wrig!t E+ress and "il Price nor.ationSer5ice Airlines !a5e also )een ra+idly raising t!eir ares to o=set !ig!er uel costsA.erican Airlines said !ursday it is increasing its )ase ares )y 610, t!e se5ent!+rice !ike t!is year )y HS airlines Yay 'ryson, global economist at Wells #argoSecurities, said !e !as cut his U)$) growth estimate or t!e Yanuary-$arc! +eriodto 2B +ercent, don ro. a)out +ercent last .ont! $uc! o t!at reduction is#ue to the impact o& higher oil an# gas prices) !e 64N )illion trade de9cit in

Yanuary also ill su)tract ro. econo.ic grot! Higher prices &or oil helpe##rive imports up at the &astest rate in !L years3 as #i# rising #eman# &or

&oreign cars3 auto parts an# machinery .+orts rose at nearly tice t!e +aceo e+orts, to 62141 )illion, t!e :o..erce >e+art.ent said %ports rose to anall1time high o 61N77 )illion !at isnt all )ad nes A ider de9cit is +artly asign o greater s+ending )y )usinesses and consu.ers <ut it also means that

more o& that spen#ing is going overseas3 re#ucing U)$) economic growth) .+orts o oreign-.ade autos and auto +arts increased 14 +ercent, or 62N7 )illion,as auto +roduction rose in t!e HS and :anada >e.and or )ig-ticket ca+ital goodssuc! as industrial .ac!inery and co.+uters increased 2 +ercent .+orts oconsu.er goods, suc! as clot!ing, s!oes, electronic a++liance and toys and ga.es,ere u+ 22 +ercent Qo t!e etent t!at t!is surge reMects t!e strengt! o do.esticde.and it isnt necessarily a disaster,Q As!ort! said Jising oil prices can

slow the economy in another way0 by spurring central banks to raiseinterest rates #e econo.ists e+ect t!e HS #ederal Oeser5e to take suc! aste+ 'ut t!ats a +otential +ro)le. in Euro+e <oth the uropean 4entral <ank

an# the <ank o& nglan# appear to be preparing interest rate hikes in thene%t couple o& months3 in an eort to keep ination in check) any

analysts &ear that coul# bring a &altering economic recovery in urope to a

halt) !oug! Jer.any, Euro+es econo.ic +oer!ouse, is groing strongly, anu.)er o countries, nota)ly t!e !ig!ly inde)ted nations suc! as Jreece and



Portugal, are e+ected to contract urt!er t!is year Euro+e is a .aor source o HSe+orts and a slodon t!ere could eig! on t!e HS reco5ery !e tur.oil in t!e$iddle East could !a5e a )igger i.+act on Euro+es econo.y t!an t!e HS,econo.ists at 'ank o A.erica $errill ync! rote in a researc! note !e HS !asa lot o natural gas, !ic! ser5es as alternati5e energy source, and can re9ne a

ider 5ariety o crude oil, t!e econo.ists said Euro+ean countries are .oree+osed to rising oil +rices )ecause t!ey +ri.arily consu.e t!e Qseet crudeQ+roduced )y i)ya Oe9neries in Euro+e are not as ell eGui++ed as t!ose in t!eHS to +rocess ot!er 5arieties o oil Still, t!e i.+act on )ot! t!e Hnited States andEuro+e ill likely )e li.ited, econo.ists said $ark ^andi, c!ie econo.ist at$oodys Analytics, recently cut !is orecast or econo.ic grot! in 2011 ro. B+ercent to +ercent &e cited rising oil +rices and e+ected s+ending cuts inWas!ington as t!e reasons or t!e donard re5ision ^andi also )oosted !isesti.ate o t!e a5erage +rice o oil t!is year ro. 6B0 to 6100 "il +rices ould!a5e to to+ 610 a )arrel to truly t!reaten t!e reco5ery in t!e HS and around t!eorld, .ost econo.ists say Pricey oil is hurting even the strongest

economies) 4hina3 which typically runs huge tra#e surpluses with the resto& the worl#3 reporte# a surprise #e5cit o& '")+ billion or #e)ruary &ig!er+rices or oil and ot!er co..odities pushe# imports up !()- percent while its

e%ports #roppe# 2)- percent) !e e+ort decline reMected t!e act t!at :!inese)usinesses ere idled or t!e eeklong unar (e ;ear !oliday Analysts said t!erare trade de9cit or :!ina as likely to )e te.+orary and not t!e start o a trend$ore e+ensi5e oil isnt )ad nes or e5eryone Saudi Ara)ia, ran and DeneKuelaand ot!er "PE: .e.)ers, as ell as Oussia and $eico, )ene9t ro. t!e rise in+rices

Oil prices nee# to #ecrease to allow economic growth

6atusa !! — $arin Fatusa, n5est.ent Analyst, Senior Editor o :asey Energy>i5idends, :asey Energy :on9dential, T :asey Energy Oe+ort, 0B-2-2011, “W!ato "il Prices Oeally $ean*, $oney S!o (etork,!tt+%//.oneys!oco./articlesas+Iaid]JHOH-24N1C"il +rices in large +art reMect glo)al senti.ent toards our econo.ic uture—+ros+erous, groing econo.ies need .ore oil !ile slu.+ing, s!rinking econo.iesneed less, and so the price o& cru#e in#icates whether the maority believes

we are hea#e# &or goo# times or ba# !at e+lains t!e orry—t!ose orriedin5estors and econo.ists are using oil +rices as an indicator, and alling +ricesindicate )ad ti.es a!ead <ut oil prices have to correct when economies slow

#own3 or else high energy costs #rag things #own even &urther) And t!ecurrent relations!i+ )eteen oil +rices and glo)al econo.ic out+ut is not +retty >n&act3 every time the cost o& oil relative to global pro#uction has hit current

levels—an# that8s a&ter the sharp corrections earlier this month—an

economic slump3 i& not a recession3 has &ollowe#3 accor#ing to a Jeutersarticle) !e “arning signal* t!at is currently Mas!ing red is t!e Oil %pense

>n#icator, !ic! is the share o& oil e%penses as a proportion o& worl#wi#e

gross #omestic pro#uct ?speci5cally3 it is oil price times oil consumption



gross do.estic +roduct Annual glo)al e+enditures on ra energy !a5e cli.)ed toan esti.ated 6C trillion to 6B trillion, eceeding 10 +ercent o t!e 670 trillion orldgross do.estic +roduct !ose 9gures, !oe5er, o.it t!e succession o +rice u+-c!arges along t!e .anuacturing, .arketing and deli5ery c!ain or energy-relatedco.+onents o goods and ser5ices “ donLt t!ink t!e econo.y is e5er going to gro

again not on a sustained )asis,* &all said in an inter5ie Since last s+ring, oil+rices !a5e retreated )elo 6100 a )arrel, and glo)al su++lies are Mus!, e5endes+ite trade sanctions t!at !a5e cur)ed +etroleu. e+orts ro. ran, t!e orldLssecond largest +roducer<ut 4hristine aGar#e3 chie& o& the >nternational onetary Fun#3 sai#recently that high oil prices remain :a maor threat; that coul# tip the

global economy into recession3 especially i& >ran triggers a :price shock;

by retaliating with &urther e%port cuts) Jesearchers at her agency have

pre#icte# that oil prices will permanently #ouble to about '277 a barrelover the ne%t #eca#e !e soaring +rices, u+ ro. less t!an 624 a )arrel adecade ago, are e+ected to cost Euro+ean nations 600 )illion t!is year, nearlytri+le t!e a5erage t!ey +aid or i.+orted oil ro. 2000 to 2010, +artly )ecause ot!e sunken 5alue o t!e euro, $aria Dan der &oe5en, eecuti5e director o t!e Paris-)ased nternational Energy Agency, said recently Energy costs also can s!are )la.eor cri.+ing A.erican orkersL standard o li5ing Adusted or inMation, .edianeekly earnings o5er t!e last Guarter-century rose less t!an 610, !ile crude oil+rices nearly tri+led and net HS gasoline +rices dou)led n a +a+er +u)lis!ed in200B, &a.ilton re+orted t!at t!e +rice o crude oil !as u.+ed s!ar+ly in ad5anceo 10 o t!e 11 HS recessions since World War &is )igger disco5ery as t!at t!es!ar+ rise in +rices )eore t!e econo.ic colla+se o 200C didnLt ste. ro. an Ara)oil e.)argo, .ilitary conMict or ot!er $iddle East su++ly disru+tion, as occurred)eore 95e ot!er .aor econo.ic donturns nstead, it as largely “)oo.ingde.and and stagnant +roduction* t!at )rieMy sent t!e +rice to a record 614 a)arrel in Yuly 200C, +ro)a)ly accelerating t!e crisis t!at sank t!e orld econo.y, !eound $ure enough3 a&ter oil prices pulle# back in 277( an# 27!73consumption shot up by more than = percent last year3 an# prices spurte#

above '!77 a barrel again) .he worl# economy soon slumpe# into its

current #ol#rums Iow scientists an# economists are &retting about theimplications i& oil becomes so unaor#able that it lea#s to a chain1reaction

surge in the costs o& other &uels) W!at i oil +rices get so !ig! t!at itLsecono.ically attracti5e to con5ert natural gas and coal su++lies to liGuid uelsI Will+rices or t!ose resources rocket into t!e stratos+!ere, tooI s t!ere no ay out oenergyLs gri+I

!e kinds o tradeo=s t!at lie a!ead .ig!t )e ee.+li9ed )y t!e sudden (ort!A.erican natural gas rus!, !ic! !as led to a su++ly glut and +lu..eting gas+rices !e )argain +rices s+arked a )urst o interest in con5erting cars and trucksto c!ea+er, cleaner-)urning natural gas 'ut only 10,000 natural gas-+oered5e!icles are on HS roads, and re+lacing a siKa)le s!are o t!e nationLs 20 .illion5e!icle Meet it! s+ecially )uilt natural gas-+oered .odels ould take decadesand reGuire installation o t!ousands o reueling stations #urt!er, Sadad Al&usseini, a or.er to+ oZcer o t!e Saudi Ara)ian national oil co.+any Ara.co,told $c:latc!y t!at an intensi5e con5ersion to natural gas ould .ake “a glo)al



natural3 gas crunc! al.ost ine5ita)le in t!e net decade* W!ile t!ere are 5astde+osits o natural gas in t!e Hnited States and orldide, “ine+ensi5e gasreser5es are 9nite,* !e said “!e .ore oil is dis+laced )y gas on a cras! )asis, t!easter t!e lo-cost reser5es are de+leted* ea#ing a#vocates o& a theory thatglobal oil pro#uction will soon peak an# begin a potentially economically

#isastrous #ecline are stan#ing 5rm3 although they8ve ha# to push backtheir #ooms#ay #ates several years) “!e 9rst !al o t!e age o oil sa t!isra.+ant e+ansion o industry, trans+ortation, trade, agriculture,* said :olin:a.+)ell, an C1-year-old retired ris! +etroleu. geologist !o ounded t!e +eak oil.o5e.ent “!e +o+ulation ent u+ si ti.es in +arallel o5er 100 to 10 years triggered )y t!e c!ea+, easy energy t!at .ade e5eryt!ing +ossi)le “(o e acet!e second !al, !ic! is a)out to dan, !ic! ust under.ines t!is !ole orldsyste. under !ic! eLre no li5ing,* !e said “(aturally, no one ants to ad.itt!at* .he global economy is :premise# on e%pansion3 where what we &aceis contraction,* :a.+)ell said

High oil prices hurt global economic growth

Jubin !2 — Ye= Ou)in, or.er c!ie econo.ist and c!ie strategist at :': World$arkets nc, 0B-2-12, “&o &ig! "il Prices Will Per.anently :a+ Econo.icJrot!*, 'loo.)erg, !tt+%//)loo.)ergco./nes/2012-0B-2/!o-!ig!-oil-+rices-ill-+er.anently-ca+-econo.ic-grot!!t.l#or .ost o t!e last century, c!ea+ oil +oered glo)al econo.ic grot! <ut in thelast #eca#e3 the price o& oil has qua#ruple#3 an# that shi&t will

permanently shackle the growth potential o& the worl#8s economies) .he

countries gu//ling the most oil are taking the biggest hits to potentialeconomic growth) !atLs so)ering nes or t!e HS, !ic! consu.es al.ost a

9t! o t!e oil used in t!e orld e5ery day (ot long ago, !en oil as 620 a )arrel,t!e HS as t!e loco.oti5e o glo)al econo.ic grot!\ t!e ederal go5ern.ent asrunning )udget sur+luses\ t!e o)less rate at t!e )eginning o t!e last decade asat a 40-year lo (o, grot! is stalled, t!e de9cit is .ore t!an 61 trillion andal.ost 1 .illion A.ericans are une.+loyed An# the U)$) isn8t the only

country getting squee/e#) From urope to Sapan3 governments arestruggling to restore growth) 'ut t!e economic reme#ies being use# are

#oing more harm than goo#3 )ased as t!ey are on a unda.ental )elie t!atecono.ic grot! can return to its or.er strengt! 4entral bankers an# policymakers have &aile# to &ully recogni/e the suocating impact o& '!771a1

barrel oil Ounning !uge )udget de9cits and kee+ing )orroing costs at record

los are only co.+ounding current +ro)le.s .hese policies cannot be long1term substitutes &or cheap oil because an economy can8t grow i& it can nolonger aor# to burn the &uel on which it runs) .he en# o& growth means

governments will nee# to ra#ically change how economies are manage##iscal and .onetary +olicies need to )e recali)rated to account or sloer +otentialgrot! ratesEnergy Source "il +ro5ides .ore t!an a t!ird o t!e energy e use on t!e +lanete5ery day, .ore t!an any ot!er energy source And you can dra a straig!t line



)eteen oil consu.+tion and gross-do.estic- +roduct grot! !e .ore oil e)urn, t!e aster t!e glo)al econo.y gros "n a5erage o5er t!e last our decades, a1 +ercent )u.+ in orld oil consu.+tion !as led to a 2 +ercent increase in glo)alJ>P !at .eans i J>P increased 4 +ercent a year -- as it oten did )eore t!e 200Crecession -- oil consu.+tion as increasing )y 2 +ercent a year At '27 a barrel3

increasing annual oil consumption by 2 percent seems reasonable enough)At '!77 a barrel3 it becomes easier to see how a 2 percent increase in &uelconsumption is enough to make an economy collapse)

#ortunately, t!e re5erse is also true W!en our econo.ies sto+ groing, less oil isneeded #or ea.+le, ater t!e )ig decline in 200C, glo)al oil de.and actually ellor t!e 9rst ti.e since 1BC !atLs !y t!e )est cure or !ig! oil +rices is !ig! oil+rices W!en +rices rise to a le5el t!at causes an econo.ic cras!, loer +ricesine5ita)ly ollo Over the last &our #eca#es3 each time oil prices have

spike#3 the global economy has entere# a recession) :onsider t!e 9rst oils!ock, a&ter the om 6ippur Car in !("+3 !en t!e "rganiKation o Petroleu.E+orting :ountriesL Ara) .e.)ers turned o= t!e ta+s on roug!ly C +ercent o t!eorldLs oil su++ly )y cutting s!i+.ents to t!e HS and ot!er sraeli allies 4ru#eprices spike#3 an# by !("-3 real G,P in the U)$) ha# shrunk by 2)=

percent) !e secon# OP4 oil shock !a++ened during ranLs re5olution and t!esu)seGuent ar it! raG >isru+tions to ranian +roduction during t!e re5olutionsent crude +rices !ig!er, pushing the Iorth American economy into a

recession &or the 5rst hal& o& !(L7) A e .ont!s later, ranLs ar it! raG s!uto= N +ercent o orld oil +roduction, sending (ort! A.erica into a dou)le-di+recession t!at )egan in t!e s+ring o 1BC1 Fuait n5asion W!en Sadda. &usseinin5aded Fuait a decade later, oil +rices dou)led to 640 a )arrel, an un!eard-ole5el at t!e ti.e .he 5rst Gul& Car #isrupte# almost !7 percent o& the

worl#8s oil supply3 sen#ing maor oil1consuming countries into a recessionin the &all o& !((7) Guess what oil prices were #oing in 277L3 when the

worl# &ell into the #eepest recession since the !(+7sX #ro. trading around60 a )arrel in 2004, oil prices marche# stea#ily higher be&ore hitting a peak o& '!-" a barrel in the summer o& 277L) Hnlike +ast oil +rice s!ocks, t!is ti.et!ere asnLt e5en a su++ly disru+tion to )la.e !e s+igot as ide o+en !e+ro)le. as, e could no longer a=ord to )uy !at as Moing t!roug! it !ereare .any ays an oil s!ock can !urt an econo.y Chen prices spike3 most o& us

have little choice but to open our wallets) Paying more &or oil means we

have less cash to spen# on &oo#3 shelter3 &urniture3 clothes3 travel an#

pretty much anything else) %pensive oil3 couple# with the averageAmerican8s re&usal to #rive less3 leaves a lot less money &or the rest o& the

economy) Corse3 when oil prices go up3 so #oes ination) And !en inMationgoes u+, central banks respon# by raising interest rates to keep prices incheck #ro. 2004 to 200N, HS energy inMation ran at +ercent, according to t!e:onsu.er Price nde n turn, o5erall inMation, as .easured )y t!e :P, acceleratedro. 1 +ercent to al.ost N +ercent W!at !a++ened net as a 95eold )u.+ ininterest rates t!at de5astated t!e .assi5ely le5eraged HS !ousing .arket Higher

rates poppe# the speculative housing bubble3 which brought #own the

global economy) Hnortunately, t!is +attern o oil-dri5en inMation is it! us againAn# worl# &oo# prices are being aecte# According to t!e ood-+rice inde



tracked )y t!e Hnited (ations #ood and Agriculture "rganiKation, t!e cost o oodrose al.ost 40 +ercent ro. 200B to t!e )eginning o 2012 And since 2002, t!e#A"Ls ood-+rice inde, !ic! .easures a )asket o 95e co..odity grou+s .eat,dairy, cereals, oils and ats, and sugar3, is u+ a)out 10 +ercent#ood Prices A dou)le !a..y o rising oil and ood +rices .eans inMation ill )e

!ere sooner t!an anyone ould like to t!ink Oising inMation rates in :!ina and ndiaare a clear signal t!at t!ose econo.ies are groing at an unsustaina)le +ace :!ina!as .ade J>P grot! o .ore t!an C +ercent a +riority )ut needs to recali)rate itst!inking to recogniKe t!e da.+ing e=ects o !ig! oil +rices Jrot! .ig!t not stallentirely, )ut clocking dou)le-digit gains is no longer easi)le, at least it!outtriggering a cala.itous increase in inMation :!ina and ndia, t!e ne engines oglo)al econo.ic grot!, are orced to ado+t anti-inMationary .onetary +olicies, t!eri++le e=ects or resource-)ased econo.ies suc! as :anada, Australia and 'raKilill )e elt in a !urry.riple1#igit oil prices will en# the lo&ty economic hopes o& >n#ia an# 4hina3

which are looking to achieve the same sort o& sustaine# growth that Iorth

America an# urope enoye# in the postwar era !ere is an una5oida)leo)stacle t!at +uts suc! a.)itions out o reac!% odayLs oil isnLt Moing ro. t!esa.e +laces it did yesterday $ore i.+ortantly, itLs not Moing at t!e sa.e cost:on5entional oil +roduction, t!e easy-to-get-at stu= ro. t!e $iddle East or est

eas, !asnLt increased in .ore t!an 95e years And t!atLs it! record crude +ricesgi5ing e+lorers all t!e incenti5e in t!e orld to drill According to t!e nternationalEnergy Agency, con5entional +roduction !as already +eaked and is set to declinesteadily o5er t!e net e decades !at doesnLt .ean t!ere onLt )e any .ore oil(e reser5es are )eing ound all t!e ti.e in ne +laces W!at t!e decline incon5entional +roduction does .ean, t!oug!, is t!at uture econo.ic grot! ill )eueled )y e+ensi5e oil ro. noncon5entional sources suc! as t!e tar sands,o=s!ore ells in t!e dee+ aters o t!e orldLs oceans and e5en oil s!ales, !ic!co.e it! en5iron.ental costs t!at range ro. car)on-dioide e.issions to+otential groundater conta.ination And e5en i ne su++lies are ound, !at.atters to t!e econo.y is t!e cost o getting t!at su++ly Moing >t8s not enough

&or the global energy in#ustry simply to 5n# new caches o& oil\ the cru#e

must be aor#able) .riple1#igit prices make it pro5table to tap ever1more1e%pensive sources o& oil3 but the prices nee#e# to pull this cru#e out o&

the groun# will throw our economies right back into a recession) .he energy industryLs task is not si.+ly to 9nd oil, )ut also to 9nd stu= e can a=ord to)urn And t!atLs !ere t!e industry is ailing Eac! ne )arrel e +ull out o t!eground is costing us .ore t!an t!e last .he resources may be there &or the

taking3 but our economies are alrea#y telling us we can8t aor# the cost) oday, t!e orld )urns a)out B0 .illion )arrels o oil a day our econo.ies are nolonger groing, .ay)e e onLt need any .ore t!an t!at We .ig!t e5en needless $ay)e t!e oil tra++ed in t!e tar sands or under t!e Arctic "cean can stay!ere nature +ut it



High oil prices hin#er the global economy an# its recovery

.he Guar#ian !! — Associated Press, 12-14-11, “&ig! oil +rices t!reaten glo)al

econo.y, EA arns*, !e Juardian,!tt+%//t!eguardianco./)usiness/2011/dec/14/iea-!ig!-oil-+rices-glo)al-econo.y

High oil prices threaten to worsen a global economic slow#own an# cru#epro#ucers shoul# consi#er boosting output3 the chie& economist &or the

>nternational nergy Agency sai# on Ce#nes#ay Q.he current high oilprices have the potential to strangle the economic recovery in many

countries,Q #ati! 'irol said in a s+eec! in Singa+ore Q !o+e t!at !ig! oil +ricesdont slo don :!inese econo.ic grot! and t!e negati5e e=ect t!at ould !a5eon t!e glo)al reco5eryQ :rude !as u.+ed to 6100 a )arrel ro. 67 in "cto)era.id signs t!e HS econo.y ill likely a5oid a recession $ost econo.ists e+ectglo)al grot! to slo net year as Euro+es de)t crisis t!reatens to drag t!econtinent into recession 'irol suggested crude +roducers s!ould )oost out+ut a.idgroing de.and in de5elo+ing countries and alling in5entories in ealt!y nations

!e "rganisation o Petroleu. E+orting :ountries is .eeting later on Wednesdayin Dienna to decide !et!er to c!ange t!e cartels out+ut Guotas Q. sure "+ecknos .uc! )etter t!an .e !at to do,Q 'irol said !en asked i "+ec s!ould raiseout+ut Q'ut seeing t!at oil +rices are still !ig! today and t!e negati5e e=ect t!at!as on t!e reco5ery o t!e glo)al econo.y, !o+e t!e energy +roducing countriesill take t!ese t!ings into account and .ake t!eir decision accordinglyQ <irol sai#

cru#e prices coul# rise to '!=7 by 27!= i& oil1pro#ucing countries in the

i##le ast an# Iorth A&rica #onBt invest '!77bn a year to maintaine%isting 5el#s an# #evelop new ones) $ore t!an B0 o glo)al crude+roduction grot! during t!e net 20 years ill co.e ro. t!at region, led )y SaudiAra)ia, ran, raG, Fuait, Algeria and Hnited Ara) E.irates, 'irol said QOecent

de5elo+.ents, including t!e Ara) s+ring, !a5e c!anged t!e .indset o .anygo5ern.ents,Q 'irol said Qn so.e countries, oil investments have been

#iverte# to social spen#ing) Oil policies are taking on a more nationalistic

tone3 which means not to increase pro#uction as much as is nee#e# in theworl# marketQ

>F says high oil prices threaten the global economy

Hu9ngton Post !2 — Oeuters, 02-24-12, “$#% Jlo)al !reat o Oising "ilPrices Oig!t n #ront " HsL*, &uZngton Post 'usiness,!tt+%//!uZngton+ostco./2012/02/24/oil-+rices-rising-+ro.+t-i.-arning-

glo)al-econo.yRnR12BBN7!t.l.he >nternational onetary Fun# agge# higher oil prices as a risingthreat to the global economy on Fri#ay3 urging policymakers to keep a

close eye on western tensions with >ran3 which is &acing punitive measures

against its cru#e supplies ooming U)$) sanctions on rans oil )uyers, as ellas an i.+ending Euro+ean Hnion oil e.)argo, have &orce# countries to cut back

on purchases &rom the worl#Bs 5&th1largest e%porter o& cru#e3 pushing up

the price o& the commo#ity Policy.akers ro. around t!e glo)e are con5erging



on $eico :ity or a .eeting o 9nance .inisters and central )ankers ro. t!eJrou+ o 20 econo.ic +oers, and se5eral o t!e. raised concerns o5er t!es+iralling crude costs QA new risk on the hori/on3 or maybe not on the

hori/on3 maybe right in &ront o& us3 is high oil prices3D ,avi# ipton, #irst>e+uty $anaging >irector o t!e nternational $onetary #und, said in a +resentation

at t!e J20 gat!ering Q!e situation in ran is a risk t!at e !a5e to )e t!inkinga)out Our assessment is that the global economy is not really out o& the#anger /one,Q i+ton added, noting, !oe5er, t!at it as too early to re5ise dont!e #unds grot! orecasts i+ton as s+eaking ust ater HS reasury Secretary

i.ot!y Jeit!ner said Was!ington as eig!ing t!e circu.stances t!at couldarrant ta++ing t!e HS strategic oil reser5e to counter t!e su++ly disru+tions ro.ran .he &ear o& tightening supplies3 e%acerbate# by a threat &rom .ehran

to close the $trait o& Hormu/ 1 the main Gul& oil shipping lane 1 have li&te#

prices to new highs) Western +oers are increasingly at logger!eads it! rano5er its e=orts to generate nuclear +oer ran insists it ants to !arness ato.icenergy or +eaceul ends, )ut t!e West sus+ects it is trying to acGuire nuclearea+ons A day ater !itting a record !ig! in euro ter.s, <rent cru#e umpe#above '!2- a barrel3 raising worries that a run o& sharp price gains coul#

stymie the euro /oneBs growth prospects3 making it har#er &or

governments to meet bu#get targets an# pull the currency bloc out o& its#ebt crisis $eico, !ic! is !osting t!e J20 .eeting, !as )een +us!ing or t!eeuro Kone to take urt!er ste+s to sol5e t!e de)t crisis and or +olicy.akers to .ake+rogress on increasing t!e $#s 9re+oer, lest it )e needed to !el+ in Euro+e 'utso.e countries !a5e said t!ere can )e no talk o .ore $# resources it!out astronger Euro+ean 9reall, !ic! is to )e discussed a.ong Euro+ean Hnion leadersnet eek Angel Jurria, t!e Secretary-Jeneral o t!e "rganisation or Econo.ic:o-o+eration and >e5elo+.ent, olloed u+ on Jeit!ners co..ents )y saying t!e

u.+ in oil +rices ere due to +olitics and ould not )e sol5ed )y releasingreser5es Q!ese +rices are due to a great etent )ecause t!ere is a lot otension, t!ese discussions e5ery day o5er t!e Straits o &or.uK and srael,Q Jurriatold Oeuters in $eico :ity Jurria said t!ere as no distortion in .arkets and oil+rices o u+ to 6100 +er )arrel ere Qt!e ne nor.alQ QCe are not seeing a

situation to#ay where there is something wrong with ?market@&un#amentals3 in &act3 we are seeing a slow#own in the global economy)

.here shoul# be a re#uction in consumption3D !e said !e eak dollar alsoas cited )y analysts as a su++orti5e actor or oil !e dollar inde eakened andt!e euro !it a res! 2-1/2 .ont! !ig! against t!e dollar



mpirics

High oil prices negatively impact global economic growth

i !2 — >r $ingGi i, associate +roessor o econo.ics at Hni5ersity o Hta!, -14-

2012, “!e Jlo)al s (o $ore Dulnera)le to "il Prices t!an E5er*, "il Price,!tt+%//oil+riceco./Energy/"il-Prices/!e-Jlo)al-Econo.y-is-(o-$ore-Dulnera)le-to-"il-Prices-t!an-E5er!t.l

!is +a+er ea.ines t!e i.+act o oil +rice c!anges on glo)al econo.ic grot!Hnlike so.e o t!e recent studies, this paper 5n#s that oil price rises have ha#signi5cant negative impact on worl# economic growth rates A time1series

analysis o& the #ata &rom !("! to 27!7 5n#s that an increase in real oil

price by one #ollar is associate# with a re#uction o& worl# economic

growth rate by between 7)7- an# 7)!Q in the &ollowing year) !ereore, anincrease in real oil +rice )y 10 dollars ould )e associated it! a reduction o orldecono.ic grot! rate )y )eteen 04 and 1 in t!e olloing year For a global

economy that in average grows at about +)=Q a year3 a re#uction o& thissi/e is very signi5cant) $oreo5er, t!e regressions see. to !a5e suggested t!atthe impact o& oil price on economic growth may have increase# over the

last one or two #eca#es !is is in contradiction it! t!e idely !eld )elie t!att!e glo)al econo.y !as )eco.e less 5ulnera)le to oil +rice s!ocks !ese 9ndingssuggest t!at i& the worl# oil pro#uction #oes peak an# start to #ecline in the

near &uture3 it may impose a serious an# possibly an insurmountable

spee# limit on the pace o& global economic e%pansion)

High oil prices #amage the global economy

Carner !+ — Yere.y Warner, assistant editor o !e >aily elegra+! T )usinessand econo.ics co..entator, 11-21-201, “"il is )ot! t!e lie)lood and t!e +oisono t!e glo)al econo.y*, !e >aily elegra+!,!tt+%//telegra+!couk/9nance/oil+rices/104N40/"il-is-)ot!-t!e-lie)lood-and-t!e-+oison-o-t!e-glo)al-econo.y!t.lver since the price shocks o& the $eventies3 oil has ha# an unerringability to play havoc with the worl# economy !is s!ouldnLt entirely sur+rise,or oil is the basic &ee#stock3 or energy source3 &or much o& to#ay8s

economic prosperity an# wealth Wit!out it, e ould still )e .anually draingater ro. ell and strea., or riding to .arket in a !orse and cart #or all t!e ell-intentioned talk o decar)onisation, oil remains the li&ebloo# o& most gain&ul

economic activity) .here is no chance o& that changing in the &oreseeable&uture) ;et in +eror.ing t!is ser5ice, hy#ro1carbons have also become a key#river o& the economic cycle itsel&) A rising oil price is both #eationary

an# inationary at the same time K a poisonous economic mi% i e5er t!ereas one >& the price goes too high3 it will #epress the economy whilesimultaneously a##ing to ination) ore money spent on oil means less

&or spen#ing on everything else) #ortunately, t!ere is also a )enign re5ersee=ect E5entually, eakened de.and ill cause t!e +rice to start alling, at !ic!



reducing o5er t!e +eriod, as cas!-stra++ed consu.ers cut )ack on discretionarys+ending Worryingly, t!is see.s to )e t!e +oint e are reac!ing today >t is

there&ore probably no real surprise that companies are reporting

increasing pressure on margins an# volumes3 an# analysts are hastilystarting to revise their 27!+ growth &orecasts

ower oil prices bene5t consumers3 stocks3 an# the economy

overall

a onica !! — Paul O a $onica, Assistant $anaging Editor o :(( $oney,

0-12-2011, “"ilLs don and so are stocksI !atLs silly*, :(( $oney,!tt+%//.oneycnnco./2011/0/12/.arkets/t!e)uKK/"il +rices !a5e taken a !it in t!e +ast e days, and so !a5e stocks !e .arket did)ounce )ack a )it !ursday aternoon as oil +rices edged ro. t!eir los, )uta++arently in5estors are still orried a)out !at loer crude ill .ean or +ro9ts int!e energy sector !e )ig 95e oil co.+anies -- !ose :E"s testi9ed in ront o

:ongress !ursday a)out energy +rices and ta )reaks -- !a5e )een nota)le loserslately !at .akes sense !e +arty .ay )e o5er or t!e likes o Eon $o)il <"$,#ortune 003, :!e5ron :D<, #ortune 003, Ooyal >utc! S!ell O>SA3, 'P 'P3 and:onocoP!illi+s :"P, #ortune 003 Still, !y !as t!e entire .arket allen ust)ecause oil +rices are donI And !y did it reco5er ro. its losses !en oilre)oundedI Well, there is also chatter that the sharp pullback in

commo#ities coul# be a sign that the global economy 11 particularly

emerging markets 11 are slowing #own) <ut that is such a short1sighte#3anti1consumer point o& view) ts no onder !y so .any a5erage A.ericanst!ink t!ere is a disconnect )eteen Wall Street and $ain Street et .e e+lain it totraders it! a #og!orn eg!orn-ian re)uke Q(o no no ;ou5e got it all rong

ookit !ere son 'oy, say, )oy, loer oil +rices are good or consu.ers and t!eecono.y Jood, tell yaQ Peo+le are anious a)out gas )eing t!is close to 64 agallon !at could lead to loer a.ounts o s+ending on ot!er goods !ats not anencouraging sign or retailers or any co.+any t!at .akes consu.er +roducts $o

the &act that oil prices may 5nally be hea#ing back towar# normal levels 11

assuming that gas prices eventually &ollow suit 11 is un#eniably a goo#thing &or consumers) An# thatBs goo# &or the economy an# the broa#er

market) DHigher oil prices are a sign o& contraction3 not ination) >&

commo#ity prices are coming #own3 thatBs bullish &or consumers an#

stocks3 not bearish,Q said $a 'u)litK, c!ie strategist it! S:$ Ad5isors, a.oney .anager )ased in San #rancisco oned )y asset .anager Dirtus n5est.ent

Partners DOS3 Fee+ track o oil and ot!er co..odities\ E5en )ig )usinesses t!atarent in t!e energy sector o course3 s!ould )e reoicing #uel costs !a5e t!e+otential to eat into t!e +ro9ts o .any 9r.s Airlines, truckers and ot!ertrans+ortation co.+anies o)5iously get !urt )y !ig!er oil +rices 'ut so do leisureco.+anies like cruise line o+erators Ooyal :ari))ean O:3 and :arni5al ::3,auto.akers J$ J$, #ortune 003 and #ord #, #ortune 003 and )ig +urc!asers o+lastic like :oke F", #ortune 003 and Pe+si PEP, #ortune 003 QHistorically3 oil

prices are inversely correlate# with stock prices because oil is such a big



input cost &or companies,Q said Fate Warne, .arket strategist it! Edard Yonesin St ouis DAt some stage3 we shoul# begin to see lower oil prices as a

catalyst &or stocks to go up)D Fee+ in .ind t!at e5en t!oug! oil !as Q+lungedQ int!e +ast eek, +rices are still unco.orta)ly !ig! t asnt t!at long ago t!at +ricesere consistently in t!e 6C0 to 6B0 a )arrel range !e only t!ing t!ats really

c!anged in t!e +ast e .ont!s to ustiy t!e !uge s+ike in oil is t!at t!ere are .oreears a)out su++ly due to t!e QAra) S+ringQ re5olts in t!e +etroleu.-ric! nations ot!e $iddle East and (ort! Arica t see.s odd to suggest t!at de.and or oil in:!ina, ndia, 'raKil and ot!er de5elo+ing nations is alling o= a cli= ust )ecause oil!as +ulled )ack to )elo 6100 Hnless crude actually +lu..ets )elo t!e 6C0 to6B0 range it as in )eore e5ents in Egy+t, unisia and i)ya )eca.e odder ordaily !eadlines, all t!at a++ears to )e going on no is a re5ersion )ack to !ere+rices argua)ly s!ould )e a)sent any s+eculati5e rot! Carne sai# some

investors may also be making the mistake o& rea#ing too much into whatis happening in the markets on a short1term basis) :o..odities +lunge inone-eekI $ust )e t!e )eginning o a dou)le-di+ recession Q.here is o&ten an

overreaction to in&ormation) .here is this ten#ency where each new pieceo& #ata is viewe# as having much bigger implications than it shoul#,Q s!esaid 'u)litK agreed t!at +eo+le .ay )e o5eranalyKing t!e 5olatility in oil and ot!erco..odities !ere .ay not )e a real r!y.e or reason )e!ind t!e )ig sings)ecause it could si.+ly )e due to +rogra. trading "r to Guote Pink #loyd% Welco.eto t!e $ac!ine Q dont ant to sound all grassy knoll !ere )ut t!ink a lot o!ats going on it! t!e co..odity .arkets is a)out algorit!.ic trading andco.+uter syste.s seeking .o.entu.,Q 'u)litK said, Qo a certain degree, t!ats)een eeding t!ings on t!e ay u+ and t!e ay donQ So i oil +rices kee+ alling,resist t!e urge to declare t!at its t!e start o a ne )ear .arket or stocks nstead,youd )e )etter o= )reat!ing a sig! o relie )ecause it ust .ig!t .ean gas +ricesont !it a ne record !ig! ater all



anu&acturing

High oil restrains global economic activity — manu&acturing is

key to growth

Parkinson !+ — >a5id Parkinson, !e Jlo)e and $ail :olu.nist and Econo.ya) Editor, -22-1, “"il +rices cri++ling to .anuacturing acti5ity and econo.icreco5ery*, !e Jlo)e and $ail, !tt+%//t!eglo)eand.ailco./re+ort-on-)usiness/econo.y/econo.y-la)/oil-+rices-cri++ling-to-.anuacturing-acti5ity-and-econo.ic-reco5ery/article101BN77/

!e long-o5erdue retreat in crude oil +rices .ay +ro5ide a elco.e )reak orconsu.ers 'ut it isnLt enoug! to get oilLs oot o= t!e t!roat o t!e glo)al econo.y,

Yulian Yesso+ argues $r Yesso+, c!ie glo)al econo.ist at ondon-)ased :a+italEcono.ics, rote in a researc! note t!is eek t!at 'rent crude the Iorth $eacru#e gra#e that serves as a key global benchmark &or oil pricing K

remains at levels where3 historically3 the worl#8s energy1intensive

manu&acturing sector stalls !is des+ite 'rentLs +ull)ack in t!e +ast si eeksro. nearly 6120 HS3 a )arrel to 610C a consequence o& global #eman#concerns as well as investor risk aversion ami# the 4yprus banking crisis) !e (ort! A.erican )enc!.ark grade, West eas inter.ediate, also ell nearly 6Ca )arrel )eteen t!e end o Yanuary and early $arc!, )ut !as since reco5eredal.ost !al t!at decline3 $r Yesso+ said recent history in#icates that oil is a

hin#rance to manu&acturing activity K an#3 by e%tension3 economic

recovery K whenever <rent is more than '!77 a barrel) “!e glo)al.anuacturing P$ ?+urc!asing .anagers inde@ ell )elo 0 in early 200C !en'rent 9rst cli.)ed a)o5e 6100, and )eore t!e glo)al crisis !it !ard !e P$ alsostarted to eaken in early 2011 !en 'rent rose a)o5e 6100 again "il +rices !a5e

)een relati5ely sta)le a)o5e 6100 or .ost o t!e last to years, )ut t!e reco5ery!as )een lacklustre t!roug!out t!is +eriod, too* :High oil prices are themselves

a maor constraint on economic activity3; he sai#) :very '!7 increase in

the price o& a barrel o& cru#e represents a trans&er equivalent to aroun#7)= per cent o& global income &rom oil consumers to oil pro#ucers* W!ileglo)al J>P ould )e constrained )y less t!an t!at “oil +roducers ill s+end so.eo t!eir indall* r) Sessop still estimate# that a '!7 rise in the oil pricere#uces global G,P by about 7)2 per cent “"il +rices rose )y a)out 612 in ustto .ont!s )eteen early >ece.)er and early #e)ruary suZcient to knock around02 +er cent ro. glo)al J>P3 t see.s unlikely t!at it is entirely a coincidencet!at t!e reco5ery in t!e glo)al .anuacturing P$ !as stalled again t!is year,* !e

said :Our view is that this is evi#ence o& [#eman# #estruction38 where highoil prices un#ermine the global recovery an# hence prove to be

unsustainable) ither oil prices have to &all a lot &urther3 or #eman# willnee# to 5n# new momentum &rom another source* 'ut e5en i 'rent cruderetreated into t!e 6B0-6B range consistent it! :a+ital Econo.icsL orecast ort!e net to years “e donLt e+ect c!ea+er oil alone to +ro5ide enoug! o a)oost to glo)al de.and to o=set 9scal !eadinds,* !e said “!e cu.ulati5e 9scaltig!tening +lanned in ad5anced econo.ies adds u+ to at least 2 +er cent o t!eir



J>P o5er t!e net to to t!ree years, or 1 +er cent o glo)al J>P,* $r Yesso+ rote“o o=set t!is U oil +rices ould !a5e to slu.+ )y 60, taking 'rent to 6N0 !is isnot inconcei5a)le, )ut it is unlikely, +ro5iding anot!er reason to e+ect t!e reco5eryto re.ain sluggis!*



Poverty

$tu#y shows high oil prices e%acerbate poverty an# hurt

economic growth

Iaranpanawa <an#ara ( — At!ula (aran+anaa T Yayat!ileka S'andara, (aran+aa% 'Sc, P!>, ecturer at JriZt! Hni5ersity 'usiness Sc!ool,200B, “Po5erty and Jrot! .+acts o &ig! "il Prices% E5idence ro. Sri anka*,Purdue Hni5ersity,!tt+s%//gta+agecon+urdueedu/resources/donload/14+d >n this stu#y3 two 4G mo#els, t!e Jlo)al rade Analysis Proect JAP3 .odeland a+o5erty-ocused Sri ankan :JE .odel, were linke# in the :top1#own; mo#e to

e%amine the poverty an# growth impacts o& high oil prices on the $riankan economy !e results suggest that in the short run3 high oil prices

woul# have an overall negative impact on $ri anka]s economic growth

an# also e%acerbate poverty #urt!er.ore, results suggest t!at urban lowincome househol#s are the most a#versely aecte# group &ollowe# byrural low income househol#s who are pre#ominantly employe# in the

agricultural sector) n contrast, estate lo inco.e !ouse!olds are t!e leasta=ected out o all lo inco.e !ouse!olds oreover3 energy intensivemanu&acturing an# services sectors woul# be aecte# most compare# to

the agricultural sector !e o5erall results suggest t!at it woul# be necessary

to implement complementary policies that woul# ease out the bur#en o&high oil prices on lo inco.e grou+s in t!e s!ort run !ese co.+le.entary+olicies s!ould include t!e continuation o t!e currently o+erating uel su)sidysc!e.e, )etter targeting 5ulnera)le lo inco.e grou+s !e $# !as also )een

ad5ocating t!is argu.ent in recent eeks see !e sland, A+ril , 20113 !ere is aneed or a +ro+er uel +ricing +olicy and targeted su)sidies it!in t!e contet o+ost-ar de5elo+.ent and +o5erty alle5iation in Sri anka



services) $econ#3 this eect may be #elaye# an# not &ully &elt untilrepayments become #ue in later years



High Prices <a# — U$ conomy



General U$ conomy

U)$) markets are strong now3 but sustaine# high oil prices will

stall the economy

arketCatch *22 — Wall Street YournalLs $arketWatc!, 'yline Anora$a!.udo5a, $arketWatc! .arkets re+orter, N/22/2014, “60 u.+ in oil +ricescould stall HS econo.y,* $arketWatc!, !tt+%//.arketatc!co./story/0-

u.+-in-oil-+rices-could-stall-us-econo.y-2014-0N-22 !e eekly gains no rese.)le daily gains o yesteryear n act, t!e )enc!.arkinde !as not !ad a daily .o5e o .ore t!an 1 or .ore t!an to .ont!s Still,the stock market is on track &or soli# monthly an# quarterly gains )arring acatalyst t!at .ay result in a long-aaited +ull)ackSe5eral suc! catalysts, suc! as sectarian ar eru+ting in raG and conseGuently as!ar+ rise in oil +rices, continued tensions )eteen Hkraine and Oussia and t!e#ederal Oeser5e +olicy .eeting ere )rus!ed o= )y in5estors in eGuity .arkets in

t!e +ast eekHowever3 i& oil prices continue to climb3 stock markets will take notice,according to analysts at $organ Stanley Also read% HS oil !its B-.ont! !ig! as raGorries si..erJising oil prices translate to rising gasoline prices, )ut t!ere is lag o se5eraleeks Ji5en recent u.+ in oil +rices, gas +rices in t!e HS, !ic! !a5e re.ainedsta)le since t!e )eginning o $ay, are +oised to increase in co.ing eeks Higher

prices at the pump will be ta%ing &or consumers3 whose purchasing poweris still questionable)

!e good nes is t!at a temporary price increase o& '!7 a barrel will have no

impact on the economy a year out, according to $organ Stanley analysts !atLs

+ri.arily due to increased eZciency o cars consu.ersL c!ange o )e!a5ior !engas +rices rise A.ericans ust dri5e less

!e not so good nes is that a permanent rise o& a '!7 a barrel price

increase woul# knock #own real G,P growth )y 04 +ercent our Guarters out:A sustaine# '=7 a barrel ump in oil prices woul# be enough to stall the

U)$) recovery3; the organ $tanley note sai# situation in raG escalates urt!er, .arkets ill )e itteryJising oil prices worry the Fe# o9cials too #ederal Oeser5e :!airo.an Yanet

;ellen said escalation o ar in raG and a u.+ in oil +rices “ould )e listed asso.et!ing in t!e category o risks to t!e outlook* during !er +ress conerenceWednesday olloing t!e #"$: .eeting

ow oil prices are goo# &or U$ economic growth an# stability —

most recent evi#ence proves

evi +2* — $ic!ael A e5i, >a5id $ Ou)enstein Senior #ello or Energy and

t!e En5iron.ent in t!e :ouncil on #oreign Oelations, 0-2N-14, “!e Jeo+oliticalPotential o t!e HS Energy 'oo.*, HS &ouse o Oe+resentati5es $eeting Oe+ort,



!tt+%//docs!ousego5/.eetings/#A/#A00/201402N/101BN/&&OJ-11-#A00-Wstate-e5i$-201402N+d

!e .ain geo+olitical conseGuences ro. t!e HS oil )oo. ill also result ro.dyna.ics unrelated to e+orts Oising HS oil +roduction ill restrain oil +riceincreases &o .uc! so is !ig!ly uncertain, and de+ends on oil +roduction decisions

)y Saudi Ara)ia and, to a lesser etent, ot!er .aor oil +roducers\ t!e long-runi.+act o !ig!er HS oil +roduction could )e as little as a e dollars a )arrel+er!a+s t!e .ost likely case3 and as .uc! as tenty dollars a )arrel or .ore At a

minimum3 rising U)$) oil pro#uction re#uces the risk o& substantially

higher oil prices) ower oil prices are goo# &or U)$) economic growth3re#uce U)$) e%posure to oil market #isruptions overseas an# thus increase

U)$) &ree#om o& action in the worl#3 harm oil e%porters ?some but not all o&

which are hostile or un&rien#ly to the Unite# $tates@3 an# help oil

importers)

ower oil prices bene5t the U$ conomyUnger !+ — >a5id Y Hnger, Sta= Writer or :!ristian Science $onitor it! a

$asters >egree in Yournalis., 10-2-201, “"il +rices all )elo 6100 Still good ort!e HS econo.yI*, :S $onitor, !tt+%//cs.onitorco./En5iron.ent/Energy-Doices/201/102/"il-+rices-all-)elo-100-Still-good-or-HS-econo.yHigh supply an# low #eman# are pushing U$ oil below the '!77 mark a&ter

months o& prices clinging to triple #igits K an# prices coul# &all &urther still)Jobust oil inventories are #riving prices #own, along it! !o+es t!at easingrelations it! ran could )ring additional oil onto t!e glo)al .arket Falling oil

prices typically boost U$ economic growth as cheaper energy helpsconsumers an# in#ustryBs bottom lines) An#3 #espite the hit that the

booming U$ oil in#ustry will take3 itBs still true that cheaper oil is a netpositive &or U$ growth) t ould take a .uc! )igger +rice +lunge to derail t!e)oo. !at isnt likely to !a++en anyti.e soon, .ost analysts suggest Q!e oil.arket re.ains ell-su++lied as +roduction in t!e HS !as increased to ust s!y o7B .illion )arrels +er day, t!e !ig!est le5el since 1BCB,Q Andre i+o, +residento i+o "il Associates in &ouston, says in a tele+!one inter5ie $r i+o alsocited Qrecord +roduction out o Saudi Ara)ia and t!e .arket antici+ating t!at so.e+rogress .ig!t )e .ade )eteen ran and Hnited (ations on t!eir nuclear+rogra.Q Prices di++ed )elo 6100 $onday or t!e 9rst ti.e since Yuly, !itting alo o 6BB !ursday !ey !a5e since re)ounded a )it, rising 7 cents #riday to6B74C in .idday trading A5erage HS gas +rices dro++ed a cent to 62 +er gallon

#riday, according to AAA, t!e national .otor clu) )ased in &eat!ro, #la !atsdon our cents ro. a eek ago !e dro+s ca.e as HS crude oil stocks u.+ed alarger-t!an-e+ected 2 .illion )arrels or t!e eek ending "ct 1C, according tot!e HS Energy nor.ation Ad.inistration EA3 !at +uts in5entories at 10 +ercenta)o5e t!e 95e-year a5erage, according to an analysis )y Platts A te+id Se+te.)er

o)s re+ort released t!is eek cur)ed o+ti.is. a)out HS econo.ic grot!, +uttingadded donard +ressure on oil +rices on +roections o loer de.and !e HSecono.y added 14C,000 o)s in Se+te.)er, according to go5ern.ent data, less



t!an t!e 1C0,000 .any econo.ists e+ected rans uesday announce.ent t!at it!as !alted uraniu. enric!.ent to )o.)-grade le5els i.+ro5ed t!e outlook or HS-ran relations Sanctions !a5e cri++led rans oil industry, and in5estors !o+e aneasing o tensions could o+en u+ rans 5ast oil reser5es to t!e West !e country!as t!e orlds ourt!-largest +ro5en oil reser5es and t!e orlds second-largest

natural gas reser5es, according to EA) Oil prices remain historically high3 butthe recent #rop is a boost &or consumers an# companies who have been

waiting &or prices to reect increase# pro#uction in Iorth ,akota3 .e%as3

an# other shale &ormations across the U$) !ose sites are at risk i +rices dro+too lo, !oe5er Q#racked oil is !ig! cost oil,Q $organ >oney, a co..oditiestrader )ased in (e ;ork, rites in an e-.ail Q!ere is a cost cur5e, it! so.e a)leto +roduce under 60 and so.e only i oil +rices are a)o5e 67 +er )arrel !ats!at .any orget% t!e )oo. in HS tig!t oil su++ly eists only )ecause oil +rices are!ig! +rices dro+ to 60 or less or an etended +eriod, e could see HS oil+roduction contract and t!e )oo. ould )e o5erQ"il could di+ to 6B a )arrel )y t!e end o t!e year, i+o +roects, it! retail

gasoline !itting 620 ven then3 prices woul# remain well above the break1even point3 in a sweet spot that helps consumers while keeping #omesticoil pro#uction pro5table)Dow oil prices are still a goo# thing &or the U$

economy3D Samie Cebster3 an energy analyst it! &S P#: Energy, a glo)alconsulting 9r., rites in an e-.ail QW!ile uncon5entional oil is relati5ely e+ensi5eoil to +roduce, we are still not in the range where investment slows

measurably3 so you still have strong support &or oil5el# obs)D



G,P

ower oil prices increase G,P3 lower ination3 an# help #eman#

recovery

Janasinghe !+ — >!ara Oanasing!e, :(': Senior Writer, Oeuterscorres+ondent and su) editor, 04-17-201, “Jrot! WorriesI Asia S!ould &ail !at"il Price #all*, :(':, !tt+%//cn)cco./id/100N1177[As orries o5er t!e outlook or t!e glo)al econo.y resurace, analysts tell 4I<4

that Asia can take com&ort &rom one &act K the sharp &all in oil prices) According to :redit Suisse, a sustaine# !7 percent #rop in oil prices woul#a## !7127 basis points to gross #omestic pro#uct ?G,P@ growth in non1

Sapan Asia an# knock =71(7 basis points o hea#line ination "il +rices!a5e allen al.ost 7 +ercent in t!e last 95e days on e+ectations o sluggis!de.and ro. t!e HS and :!ina, t!e orlds to )iggest econo.ies !e +rice o'rent crude oil !as tu.)led 1C +ercent ro. a +eak o 611C a )arrel in #e)ruary to

)elo 6BC t!is eek Weaker-t!an-e+ected econo.ic data ro. t!e HS and :!inao5er t!e +ast eek !a5e !eig!tened concerns t!at t!e glo)al econo.ic outlook isnot as strong as .any e+ected ust a cou+le o .ont!s ago) <ut the &all in oil

prices provi#es a silver lining3 say analysts) $iKu!o :or+orate 'anks .arketecono.ist Dis!nu Darat!an says there are three reasons why the oil pricesli#e is positive &or Asian economies) Dost Asian countries are oil

importers3 so lower oil prices translate into more positive economic

#ynamics in terms o& consumer an# investor sentiment because it willlower ination,Q !e said D>tBs also goo# &or manu&acturers because Asia by1

an#1large is a net e%porter o& goo#s to the rest o& the worl# so there are

less cost pressures)D Q!e )igger +icture good nes is t!at lower oil prices

shi&t some o& the resources &rom oil pro#ucers to consumers3 ai#ing theglobal #eman# recovery3Q !e added &e said one ca5eat is t!at or net oile+orters in Asia suc! as $alaysia, go5ern.ent co=ers could su=er ro. t!e all inoil +rices oer "il EGuals oer nMation% Analysts pointe# to the positiveimpact lower oil prices woul# have on AsiaBs ination outlook) QJi5en t!ei.+ortance o t!e glo)al oil +rice in dri5ing inMation in Asia, this #evelopment will

re#uce upwar# price pressure,Q :redit Suisse said in a researc! note +u)lis!edlate Wednesday Q:!ina, !ailand and Singa+ore are likely to )e t!e )iggest)ene9ciaries in ter.s o loer !eadline inMationQ Price +ressures in countries suc!as :!ina and ndia !a5e )een seen as an o)stacle to urt!er .onetary easing,alt!oug! latest data suggest inMation !as started to ease n :!ina, annual

consu.er inMation eased to 21 +ercent in $arc! ro. 2 +ercent in #e)ruary,!ile data t!is eek s!oed ndias key inMation gauge eased to )elo N +ercent in$arc! or t!e 9rst ti.e since 200B Q!eres )een good nes or t!e ndianecono.y in recent eeks, t!at gold +rices, crude oil +rices !a5e co.e o=,Q Patrick'ennett, currency strategist at :': in &ong Fong told :(':s QAsia SGuak 'oQ on

!ursday D.his will have a positive impact on the tra#e an# current account#e5cit an# the J<> VJeserve <ank o& >n#iaW will be able to cut interest

rates again early ne%t monthQ :redit Suisse adds t!at )ecause ndia, as ell as



ndonesia, su)sidiKes uel !ea5ily t!e all in oil +rices is good nes or t!e +u)lic9nances in t!ose countries) >t says the lower ination pressure &rom lower oil

prices supports its view that central banks in >n#ia3 $outh 6orea an#

.aiwan will lower interest rates in the months ahea# !e 'ank o Forea took

.arkets )y sur+rise last eek )y lea5ing its )enc!.ark rate unc!anged at 27

+ercent in t!e ace o go5ern.ent +ressure to gi5e t!e econo.y a )oost 5ia a ratecut t !as ke+t .onetary +olicy steady or t!e +ast si .ont!s

ow oil prices encourage G,P growth

4olten !+ — Fatie :olten, :o..unications and $e.)ers!i+ $anager at #AS, co-

editor o t!e *u+lic Interest Oe+ort, 0-21-1, “Energy and World Econo.ic Jrot!*,#ederation o A.erican Scientists, !tt+%//asorg/+ir-+u)s/energy-and-orld-econo.ic-grot!/[ootnoteR+luginRreerence

!ese e5ents are not sur+rising )ecause oil !as a 5ery lo elasticity o de.and andsu++ly it! res+ect to +rice !at .eans 5ery large +rice c!anges are reGuired to

increase su++ly or decrease de.and n addition, oil !as a 5ery !ig! elasticity ode.and it! res+ect to inco.e !at .eans economic growth strongly

increases oil #eman#) astly, oil e%pen#itures can be a large enough

component o& G,P to a#versely aect economic growth i& they grow toolarge Added toget!er, t!ese interactions can +roduce t!e olloing cycle% &ig!J>P grot! dri5es oil +rices to !ig! le5els since !ig! inco.e elasticity increases oilde.and !ile lo +rice elasticities reGuire !ig! oil +rices to )alance de.and andsu++ly 23 !e resulting !ig! s!are o J>P s+ent on oil re5erses J>P grot!\ Wit!loer J>P grot!, !ig! inco.e elasticity reduces oil de.and\Cith lower oil #eman#3 low oil price elasticities sharply lower oil prices\an# ow oil prices re#uce oil pro#uction investments but encourage high

G,P growth "il +rices are only one actor a=ecting t!e orld econo.y(onet!eless, worl# G,P growth an# oil prices are perio#ically engage# in

the cycle #escribe# above "il +rices can also sta)iliKe at le5els t!at are not !ig!enoug! to cause a donturn in J>P grot!, !ile J>P grot! is not !ig! enoug! to+us! oil +rices +ast t!e le5el !ere t!e s!are o J>P s+ent on oil re5erses J>Pgrot! 3

ower oil prices help economic growth3 metal markets

Jichter !+ — Yoe Oic!ter, 11-2-201, “:o++er Oises as oe "il Prices &el 'uoy

>e.and "utlook*, 'loo.)erg (es, !tt+%//)loo.)ergco./nes/201-11-

2/co++er-dro+s-a.id-s+eculation-ederal-reser5e-to-slo-sti.ulus!t.l4opper &utures rose to the highest in two weeks in Iew ork on

speculation that a #rop in cru#e1oil prices will help un#erpin economic

growth3 brightening #eman# prospects &or the metal) West easnter.ediate crude utures or Yanuary deli5ery ell as .uc! as 1B +ercent today ont!e (e ;ork $ercantile Ec!ange, ater ran and orld +oers reac!ed an initialdeal on t!e nationLs nuclear +rogra. :o++er gained 11 +ercent last eek a.idsigns o stronger de.and in :!ina, t!e orldLs )iggest user :.he #rop in oil



prices is positive &or the health o& the consumer an# &or economic growthoverall3; <ill O8Ieill, a +artner at ogic Ad5isors in H++er Saddle Oi5er, (e

Yersey, said in a tele+!one inter5ie “>t8s more support &or the #eman# si#e o&

the equation3 a&ter copper ha# a nice little run last week)* :o++er utures ordeli5ery in $arc! added 04 +ercent to settle at 62 a +ound at 1%07 +. on t!e

:o.e in (e ;ork ater reac!ing 62NC, t!e !ig!est or a .ost-acti5e contractsince (o5 11 $oney .anagers al.ost tri+led t!eir co++er net-s!ort +ositions, or)ets on alling +rices, to 24,0N7 utures and o+tions contracts in t!e eek ended(o5 1B, HS :o..odity #utures rading :o..ission data s!oed !e 9gures .ayindicate t!e .arket “got a little o5ersold* ater +rices declined earlier t!is .ont!,"L(eill said n5entories .onitored )y t!e S!ang!ai #utures Ec!ange ell 11+ercent last eek, t!e .ost since >ece.)er 2011, data s!oed Stock+iles.onitored )y t!e ondon $etal Ec!ange dro++ed to a nine-.ont! lo today "nt!e $E, co++er or deli5ery in t!ree .ont!s increased 01 +ercent to 67,0BB a.etric ton 622 a +ound3 (ickel, Kinc, lead and alu.inu. ell in ondon in rose



4onsumer 4on5#ence

ow gas prices boost the economy — consumer con5#ence

Geewa% !+ $arilyn Jeea, (PO Senior 'usiness Editor, :o (es

:orres+ondent, (ie.an #ello at &ar5ard, $asters ro. Jeorgeton, 10-1C-201,“>eclining Jas Prices Pu.+ H+ A S!aky Econo.y*, (PO,!tt+%//n+rorg/201/10/1C/2N222110/declining-gas-+rices-+u.+-u+-a-s!aky-econo.y3n recent eeks, econo.ists !a5e )een orrying a)out t!e negati5e i.+act o t!eno-ended go5ern.ent s!utdon and +otential de)t crisis 'ut aay ro. :a+itol&ill, the economy has been getting a big boost0 Gasoline prices have been

#eclining3 week a&ter week) n so.e +arts o t!e country, a gallon o unleadedregular gasoline is no don to less t!an 6 a gallon — a +rice .ost A.ericans!a5ent seen in t!ree years An# any time the pump price starts #ropping3

consumer spirits start rising) QW!en it alls, e5eryone !as a s.ile on t!eir ace,

and !en it goes u+, no)ody is !a++y,Q said $ike !orn)rug!, s+okes.an orXuikri+, a ulsa, "kla-)ased co.+any t!at o+erates nearly 700 gas stationsnationide >oKens o t!e. are located in t!e ulsa area, !ere .any stations sellgas or around 62BB a gallon, t!anks to lo uel taes and near)y re9neries :!uck$ai, s+okes.an or t!e AAA auto clu) in "kla!o.a, says the lowering o&

geopolitical tensions involving >ran3 $yria3 gypt an# other places in the

i##le ast has helpe# cut prices) Qensions see. to !a5e cooled t!ere,Q $aisaid QAnd no !urricanes t!reatening t!e Jul ?o $eico@, so everything looksgoo# &or continue# lower pricesQ $ais assess.ent is s!ared )y most

economists3 !o are pre#icting prices will be hea#ing even lower over the

ne%t several months Analysts +oint to a nu.)er o triggers t!at s!ot don gas

+rices, alloing t!e a5erage +rice o a gallon to slide ro. 674 in $arc! to 67 agallon t!is eek

ow oil prices increase consumer con5#ence an# bene5t the

economy

Fahey Ciseman !2 Yonat!an #a!ey T Paul Wise.an, #a!ey% Associated

Press Energy Writer T Wise.an% Associated Press Econo.ics Writer, 0-1N-2012,“oer oil +rices good nes or .otorists, ")a.a*, !e Was!ington i.es,!tt+%//as!ingtonti.esco./nes/2012/.ay/1N/loer-oil-+rices-good-nes-or-.otorists-o)a.a/3A t!reat t!atLs )een !anging o5er t!e econo.y is starting to look a lot less.enacingOil an# gasoline prices are sinking3 giving relie& to businesses an#

consumers who a &ew weeks ago seeme# about to &ace the highest &uel

prices ever President ")a.aLs re-election +ros+ects could also )ene9t, es+eciallyi +rices kee+ alling as so.e analysts e+ect A .aority o A.ericans disa++ro5edo $r ")a.aLs !andling o gas +rices in an AP-JF +oll early t!is .ont! 'ut t!atas )eore the &ull eect o& the recent #rop ha# reache# #rivers) !e



.ransportation 4osts

Oil price #ecline bene5ts consumers3 airlines3 shippers3 an#

the economy

Fahey !+ Yonat!an #a!ey, Associated Press Energy Writer, 04-22-201“oer"il Prices 'oost HS >ri5ers, Econo.y*, !e :olu.)ian,!tt+%//colu.)ianco./nes/201/a+r/22/loer-oil-+rices-!el+-dri5ers-econo.y/3A sharp #ecline in the price o& oil this month is making gasoline cheaper at

a time o& year when it typically gets more e%pensive) >t8s a relie& tomotorists an# business owners an# a positive #evelopment &or the

economy "5er t!e +ast t!ree eeks, t!e +rice o oil !as allen )y B +ercent to 6CBa )arrel !at !as !el+ed etend a slide in gasoline +rices t!at )egan in late#e)ruary (ationide, a5erage retail +rices !a5e allen )y 27 cents +er gallon, or 7+ercent, since #e) 27, to 62 +er gallon Analysts say +u.+ +rices could all

anot!er 20 cents o5er t!e net to .ont!s !e +rice o oil is )eing dri5en loer )yrising glo)al su++lies and loer-t!an-e+ected de.and in t!e orldLs to largestecono.ies, t!e Hnited States and :!ina As oil an# gasoline become more

aor#able3 the economy bene5ts because goo#s become less e%pensive to

transport an# motorists have more money to spen# on other things) "5ert!e course o a year, a decline o 10 cents +er gallon translates to 61 )illion insa5ings at t!e +u.+>iesel and et uel !a5e also gotten c!ea+er in recent eeks,!ic! is good nes or truckers, airlines and ot!er energy-intensi5e )usinesses “t.akes a )ig di=erence to .y )otto. line,* says $ike $itternig!t, oner o a!eating and air conditioning ser5ice co.+any in $etairie, a &e !as 95e +icku+trucks t!at can )urn 61,000 o gas +er eek !en +rices are near 64 a gallon

ately !eLs )een +aying as little as 61B, and sa5ing 6200 a eek Jasoline +ricesty+ically rise in t!e late inter and s+ring as re9ners s!ut don +arts o t!eir +lantsto +eror. .aintenance and )egin .aking .ore costly )lends o gasoline reGuired)y ederal clean-air regulations !e trend as earlier and less dra.atic t!is yearPu.+ +rices only ca.e it!in 1 cents o last yearLs +eak "il +roduction is groingGuickly in t!e HS and :anada, !el+ing )oost glo)al su++lies And so.e o t!eactors t!at +us!ed +rices !ig!er t!e to +re5ious years — +olitical tur.oil in (ort!Arica and t!e $iddle East and re9nery disru+tions in t!e HS — !a5enLt.aterialiKed t!is s+ring At t!e sa.e ti.e, de.and or uels is groing sloer t!ane+ected :!ina, t!e orldLs )iggest oil i.+orter, is e+eriencing sloer-t!an-e+ected econo.ic grot! And .uc! o Euro+e is in recession n t!e HS, intry

eat!er in t!e $idest and (ort!east !as ke+t .ore dri5ers o= t!e roads t!iss+ring, analysts say !e ty+ical HS !ouse!old ill s+end an esti.ated 62N ongasoline t!is A+ril, t!e eGui5alent o 7C +ercent o .edian !ouse!old inco.e,according to #red OoKell, an analyst at Jas'uddyco. !atLs 6C less t!an lastA+ril, !en !ouse!olds s+ent CC +ercent o t!eir inco.e on gas “tLs t!e di=erence)eteen going out to dinner one .ore ti.e or not,* says >iane Sonk, c!ieecono.ist at $esiro #inancial “t .atters* !e HS go5ern.ent releases its initialesti.ate o econo.ic out+ut during t!e 9rst t!ree .ont!s o 201 on #riday



High Prices <a# — $peci5c

4ountry o#ules



>n#ia



2A4 — High Prices Hurt >n#ian conomy

A) Oil prices will rise3 threatening >n#ia8s economic recovery

Jeuters3 *2L/2014, “"il +rices to rise as !ig! as 6120 +er )arrel% re+ort,*

>eccan :!ronicle, !tt+%//deccanc!ronicleco./140N1C/)usiness-latest/article/oil-+rices-rise-!ig!-120-)arrel-re+ort$u.)ai% .he government e%pects oil prices to rise as high as '!27 per

barrel &or several months )ecause o 9g!ting in raG, +otentially #riving a hole o at least 200 )illion ru+ees 6 )illion3 in the bu#get, to go5ern.ent sourcestold OeutersPrime inister (arendra o#i won last monthBs general election by a

lan#sli#e with promises o& &aster economic growth and ne o)s3 tapping

into voter anger over >n#iaBs longest slow#own in a quarter o& a centuryA!ead o !is .aiden )udget net .ont!, #inance $inister Arun Yaitley is gra++lingit! a ood inMation scare, and no aces t!e risk t!at higher oil prices coul#

swell the governmentBs subsi#y billD>& oil prices remain high e5en or t!ree to our .ont!s around 6120 a )arrel3 it

coul# have a signi5cant impact on the 5scal #e5cit an# economic growth ,Q

a senior #inance $inistry oZcial told Oeuters on condition o anony.ity !e oZcialadded t!at t!is could increase su)sidy costs )y 200-22 )illion ru+ees in t!e 9scalyear to $arc! 1, 201

!at ould t!reaten t!e de9cit target o 41 +er cent o gross do.estic +roductin!erited ro. t!e last go5ern.ent Q>& oil prices remain high3 it woul# not beeasy to meet the 5scal #e5cit target,Q t!e source addedndia, t!e orlds ourt!-largest oil consu.er, i.+orts around 4 .illion )arrels a dayo crude oil - costing 61N )illion a year at current +rices, or .ore t!an a t!ird o its

total i.+ort )ill !e last go5ern.ent )ased its interi. )udget in #e)ruary on anassu.+tion t!at ndias )asket o oil i.+orts ould cost around 610 +er )arrel ona5erage in t!e current 9scal yearPrices &or 'rent cru#e, an international oil )enc!.ark, have risen )y 6 to '!!+over the past week , during !ic! sla.ic .ilitants !a5e taken control o5er tractso nort!ern raG and t!reatened t!e aut!ority o t!e 'ag!dad go5ern.entFor every #ollar that oil prices rise3 the government incurs annual costs o&"71"= billion rupees around 612 )illion3 to compensate state oil 5rms orselling diesel, kerosene and ot!er uels at )elo cost Su)sidies are assessedGuarterly, )ased on t!e a5erage oil +rice in t!e +receding Guarter !at .eans t!att!e !ig!er e+ected oil +rice ould eed t!roug! into su)sidy costs in t!e second

!al o t!e 9scal year

<) >n#ia8s economy is critical to worl# economic or#er

Jordon <rown, or.er HF Pri.e $inister, 11-20-!7, “ndia !as a critical role in

ne orld econo.ic order% Jordon 'ron,* S+eec! to delegates at t!e &industan i.es eaders!i+ Su..it3, &industan i.es, !tt+%//!industanti.esco./india-



nes/nedel!i/india-!as-a-critical-role-in-ne-orld-econo.ic-order-gordon-)ron/article1-N2CCCCas+2>n#ia coul# be the &astest growing economy in the worl# in the ne%t ten

years as the mass o& economic activity shi&ts &rom the U$ an# urope toAsia entrusting greater responsibility on >n#ia in the new global economic

worl# or#er3 &ormer U6 prime minister Gor#on <rown sai# on Saturday8

Q.he>n#ian economy will #ouble in si/e in t!e net se5en, certainly by 2727,Qor.er 'ron told delegates at t!e &industan i.es eaders!i+ Su..it in (e>el!i8 ndias gross do.estic +roduct J>P3 is set to gro )y C in 2010-11, anda 10 grot! rate as ac!ie5a)le in t!e near ter., 'ron said during a s+ecialaddress essons ro. t!e ast Jlo)al :risis8 Q;our >n#iaBs@ role at J-20 is

absolutely critical) >n#ia is right at the centre o& the #iscussions3Q 'ronsaid8 Qt is in ndias interest t!at t!e orld econo.y gros astQ 8 >n#ia has a

crucial role to play in #riving investment3 tra#e an# consumption to pushgrowth in the worl# economy)E



!AJ — High Prices Hurt >n#ian conomy

High oil prices threaten the :Fragile Five; — >n#ia an# <ra/il

are at risk

Call $treet Sournal, 'yline :!iara Al)anese, .arket re+orter or t!e Wall

Street Yournal, and Yake $aell-Watts, *2*/2014, “"il Prices :ast a S!ado "5er

E.erging $arkets,* Wall Street Yournal, !tt+%//onlinesco./articles/oil-+rices-cast-a-s!ado-o5er-e.erging-.arkets-140C2407

!e Q#ragile #i5eQ are looking )rittle again.he recent run1up in global oil prices has reawakene# worries about

emerging economies alrea#y struggling with a slow#own in growth) Highenergy prices are shining a spotlight on the vulnerabilities o& the Fragile

Five—.urkey3 >n#ia3 >n#onesia3 $outh A&rica an# <ra/il—and t!e )ig oili.+orters in its ranks, in5estors and analysts say$e.)ers o t!e #ragile #i5e i.+ort .ore t!an t!ey e+ort and rely on ca+ital Mosto .ake u+ t!e di=erence Higher import costs &uele# by rising oil prices

coul# spur rapi# ination3 which ten#s to repel investors)

!e urkis! lira rose B against t!e dollar ro. t!e start o 2014 to its !ig! or t!eyear in .id-$ay )ut !as since eakened )y 27 ndonesias currency, t!e ru+ia!,strengt!ened C2 against t!e dollar ro. Yanuary to early A+ril )ut !as sinceerased .ost o t!ose gains ndias ru+ee as u+ N year to date t!roug! $ay 22)ut t!en lost 1'enc!.ark stock indees in urkey, ndonesia and ndia are also o= recent !ig!sSo.e investors are concerne# that the recent weakness coul# #eteriorate

into yet another sello3 especially i& oil prices continue rising or i #ederalOeser5e oZcials strike a .ore !akis! tone !e reco5ery in e.erging .arketsca.e on t!e !eels o lackluster +eror.ance last year, triggered largely )y t!e #edsignaling it ould rein in so.e easy-.oney +olicies !e #ragile #i5e ere a.ongt!e )iggest laggardsQ4ountries with current1account #e5cits relying on energy imports are

most vulnerable3Q said Ya.es Fok, +ortolio .anager at A.undi Asset$anage.ent, !ic! .anaged 611 trillion as o $arc! 1 QWe ill .onitor closely,Q$r Fok said, adding t!at t!e und !asnt cut e+osure yet )ut could do so i oil+rices kee+ rising )ack toard last years !ig!s.he price o& <rent cru#e3 the global benchmark3 has umpe# more than =Q

since Yune 10, !en sla.ist .ilitants took t!e raGi cities o $osul and ikrit raG ist!e second-largest +roducer in t!e "rganiKation o t!e Petroleu. E+orting

:ountries, and oil tra#ers are worrie# that >raqBs e%ports coul# bethreatene# i& violence sprea#s)

High oil prices threaten >n#ia8s economic recovery

Call $treet Sournal, 'yline Anant Diay Fala, Econo.ics Oe+orter, !e Wall

Street Yournal, and Saura)! :!atur5edi, Oe+orter, Wall Street Yournal, *27/2014,



“Oising "il Prices :ould >erail ndias Econo.ic :o.e)ack,* Wall Street Yournal,!tt+%//onlinesco./articles/rising-oil-+rices-could-derail-indias-econo.ic-co.e)ack-1402NC1(EW >E&—>n#iaBs heavy reliance on importe# oil, es+ecially ro. raG,makes it more vulnerable than most countries to t!e conMict t!ere, with

surging oil prices threatening to #erail t!e ne +ri.e .inisters plans toresuscitate the economy):rude-oil +rices !a5e s!ot u+ to a nine-.ont! !ig! o a)out 611 +er )arrel >n#ia

imports most o& its oil an# subsi#i/es &uel so higher oil prices are

particularly pain&ul &or AsiaBs thir#1largest economy) .hey coul#e%acerbate the countryBs 5scal an# current account #e5cits as well as its

alrea#y1high ination rates)

ndias )enc!.ark stock +rice inde !as sli++ed ro. record !ig!s !ile t!e ru+ee!as lost ground against t!e dollar since Yune 10 (e Pri.e $inister (arendra $odi!as .o)iliKed !is .inisters to try to contain t!e allout ro. !at is e5ol5ing into !is9rst econo.ic crisis since taking oZce less t!an a .ont! agoQ#or an energy-de9cit country like ndia, t!e oil crisis is a negati5e,Q "nno Ou!l, t!eWorld 'anks ndia !ead, said #ridayndian .arkets ere eeling a )it )u))ly !en t!e )ad nes ro. raG startedndias ru+ee !ad )een strengt!ening against t!e dollar and t!e countrys stock.arket as one o t!e )est-+eror.ing .arkets in t!e orld t!is year a.id !o+et!at $r $odi and !is '!aratiya Yanata Party ould use t!eir rare .aority in+arlia.ent to +ass )usiness-riendly legislation and long-delayed .oderniKation ot!e countrys +orts, roads and +oer netorksn5estors and eecuti5es see.ed to )e taking a 5ictory la+, sure t!at good ti.esere a)out to return to t!e country t!at less t!an a year ago as du))ed )yanalysts as one o t!e Qragile 95eQ e.erging .arkets e+ected to struggle as t!eHS ound don its easy-.oney +olicies.he problems in >raq are making >n#ia look &ragile again)

>n#ia is the &ourth1largest oil consumer in the worl# an# relies on imports&or more than three1&ourths o& its oil nee#s n t!e year ended $arc! 1, ndiai.+orted 1B0 .illion tons or C .illion )arrels +er day o crude oil raG accountedor a)out 1 o t!ose i.+orts, second only to Saudi Ara)ia !ic! su++lies a)out20 o ndias oil i.+orts

!e 9rst co.+anies in ndia to eel t!e e=ects, analysts say, ill )e t!e re9ners suc!as ndian "il :or+ 0BN'; b0B1 or Oeliance ndustries td !o )uy raGi oil

!ey ill !a5e to look or ne su++liers to kee+ t!eir +lants ully utiliKed i su++liesare interru+ted !at could !a5e a cascading i.+act on +etroc!e.ical co.+anies,+oer +lants and ot!er .aor users o +etroleu. +roducts"il and energy co.+any s!ares !a5e +lunged t!is eek ndian "il s!ares !a5eallen as .uc! as C, !ile Oeliance s!ares ell a)out since uesday(et, t!e rising cost o oil could add to ndias consu.er +rice inMation rate, !ic!t!e country !as only recently )een a)le to )ring don to ust o5er C in $ay ro.t!e .ore t!an 11 late last year"5er t!e +ast e years, inMation in ndia !as !o5ered at intolera)ly !ig! le5els!ile t!e 9scal and current account de9cits !a5e selled, +resenting seriousc!allenges or t!e econo.y, !ic! !as sloed to its eakest le5els in a decade !e



econo.y gre ust 47 in t!e last 9scal year, a)out !al t!e nearly B grot! itrecorded in t!e 9scal year ended $arc! 2011D>n#iaBs economy is highly sensitive3D to ination &rom ba# weather as well

as rising oil prices, #rederic (eu.ann, co-!ead o Asian econo.ic researc! at&S': said in a re+ort QA +rolonged rise in t!e cost o crude ould +ose !eadac!es

or t!e go5ern.ent and ?t!e Oeser5e 'ank o ndia@ alikeQ&S': esti.ates t!at a 610 +er )arrel increase in t!e +rice o crude oil +us!es u+!olesale inMation )y a ull +ercentage +oint o5er a 12-.ont! +eriod &ig!ergasoline +rices +us! u+ t!e +rices o ood and .ost ot!er co..odities )ecause ot!e increased trans+ortation costsOising oil +rices also inMate ndias already .assi5e su)sidy )ills ndia 9es t!e+rices on .any uels—including diesel and kerosene—at )elo cost, !o+ing tos!ield t!e +oor ro. +rice Muctuations #uel retailers are orced to lose .oney andt!en t!e go5ern.ent co.+ensates t!e. or t!e .oney t!ey lostAn oil .inistry oZcial, !o declined to )e na.ed, said e5ery dollar increase in t!e+rice o crude oil raises t!e go5ern.ents su)sidy )urden )y a)out N0 )illionru+eesD.his will be a setback to >n#iaBs eorts to improve its 5scal situation3D saidAnis :!akra5arty, an econo.ist at >eloitte, &askins T Sells



!AJ — >n#ian conomy 6ey to Global conomy

>n#ia has huge responsibility in global economy

.!e +ress Grou+, to-ti.e inner o nternational Press nstitutes ndia Aard

or "utstanding Yournalis., Furt S!orck Aard or nternational Yournalis., (ataliPriKe or Yournalis. and t!e nternational #ederation o Yournalists - Yournalis. or

olerance PriKe, -1-!2, “ndia needs to +lay .aor role glo)al econo.ic .atters%

Sur5ey,* !e ndian E+ress, !tt+%//arc!i5eindiane+ressco./nes/india-needs-to-+lay-.aor-role-glo)al-econo.ic-.atters-sur5ey/B2414B/2>n#ia nee#s to play a more constructive role in global economy3particularly in matters like international tra#e an# capital ows,go5ern.ent said today8 QJi5en its siKe and its +ro9le in t!e glo)al econo.y, >n#ia

will inevitably nee# to play an active role at global level3Q t!e Econo.icSur5ey 2011-12 said, adding t!at t!is ould not )e li.ited to ust in de)ates on !oto resol5e t!e continuing crisis and +re5ent t!e recurrence o si.ilar crises in t!e

uture8 Q'ut in inuencing the rules &or the global economy on overarchingmacroeconomic issues such as tra#e3 capital ows3 5nancial regulation3climate change3 an# governance o& global 5nancial institutions3Q t!e sur5eyadded8 >n#ia is on an a#vantageous position over many nations now

because o& its large #omestic market3 its robust investment1to1G,P ratioan# #emographic a#vantage) >t has emerge# as the &ourth largest

economy globally8 "n t!e ot!er !and, euroKone is +assing t!roug! a crisis andt!e HS econo.y, t!oug! s!on so.e i.+ro5e.ent in recent ti.es, still re.ainssluggis!8 At t!is uncture, it is not a Drealistically &easible o+tionQ &or >n#ia to

take a passive stance and ust ait out t!e +eriod o crisis, t!e sur5ey said 8 "nt!e contrary, it is imperative &or >n#ia to get itsel& engage# with the global

#evelopment both with actions an# i#eas as any untowar# #evelopmentcoul# impact it as well)E D>n#ia is alrea#y too much a part o& the global

economy an# polity\ #evelopments in the worl# will aect >n#ia #eeply

an# what >n#ia #oes will aect the worl#) .here is3 there&ore3 a nee# &or>n#ia to engage with the worl# in terms o& action an# i#eas3D the survey

sai#)E >t also sai# any rise an# &all o& the >n#ian economy has its bearing

on the global growth an# thus3 there was a nee# &or >n#ia to Dtake thisresponsibility seriouslyD)

>n#ia has critical role in worl# economy

(a.rata Fat! Ha/arika, sta= riter at S$E i.es, -C-!+, “ndia, Asia-+aci9cregion critical to orld econo.ic grot!,* S$E i.es,!tt+%//s.eti.esin/s.eti.es/nes/to+-stories/201/$ar/0C/india-asia-+aci9c-region-critical-orld-econo.ic-grot!C0402!t.l>n#ia and ot!er Asia-+aci9c regions will play a critical role in contributing tothe economic an# 5nancial growth o& the worl#, said t!e Hnion $inister or:o..erce and ndustry and etiles, Anand S!ar.a in (e >el!i on !ursday8

Q4ountries which has built capacities an# built institution will play itBs not



a #e5ning role but a critical role in the narrative o& this century) .hat iswhat the Asia1paci5c region is all about !is region in any case !as )een t!esloest to .o5e,Q !e added !ile addressing t!e :: Asia Paci9c :E" #oru.8 &esaid t!ese t!e Asia Paci9c Oegion3 are t!e countries no t!at reer to as t!ee.erging econo.ies .his economic region3 which will be U$, !* trillion plus

an# the potential is to #ouble in a #eca#e, S!ar.a added)E >n#ia is animportant part o& the $outh Asian economies, !e added, Q>n#ia is integral tothe change that is taking place) >n#ia is not an observer an# >n#ia is not a

witness3 >n#ia is center to it) An#3 we have been very clear while talking to

our partner countries an# our interlocutors) > recall telling many o& themthat you cannot look at AsiaBs economic integration without >n#ia being

the part o& the process)DE QAnd a. 5ery !a++y t!at ndia it! our )iggerneig!)our :!ina along it! Forea, Ya+an are 5ery .uc! engaged it! t!e Asiangrou+,Q S!ar.a also said8 .he new emerging countries to#ay are innovatorsan# #evelopers an# are strong partners with the #evelope# worl#, S!ar.a.entioned8

>n#ia8s economy is a critical engine o& the global economy3 also

growing more interconnecte# with the U$

'eta $harma, sta= riter or Oedi= Oeal i.e (es, 11-24-7(, “ndias grot!

critical or glo)al econo.y% (ooyi,* Oedi= Oeal i.e (es,!tt+%//)usinessredi=co./re+ort/200B/no5/24/india-grot!-critical-or-glo)al-econo.y-nooyi!t.(oting t!at >n#iaBs rapi# growth is a critical engine o& global economy,Pe+si:o c!ie ndra (ooyi !as said t!e )usiness co..unity in t!e Hnited States aseager on +laying an acti5e role in t!e countrys uture econo.ic de5elo+.ent 8

Q>n#ia is now on a traectory o& more rapi# growth) >t now stan#s in &act asa critical engine o& global growth3 a vital partner in global security an# a

mo#el &or #emocratic #evelopment,Q (ooyi, !o is t!e c!air+erson o t!e HS-ndia 'usiness :ouncil, said olloing an address )y Pri.e $inister $an.o!anSing!8 Hnderlining t!at U$1>n#ia relations have been #eepening, (ooyi said,QCeBve been able to trans&orm the U$1>n#ia relationship &un#amentally&rom one o& 4ol# Car mistrust to really strategic partnership)Q8 Q kno s+eak or all t!e )usiness interests in t!is roo. !en say t!at e is! you t!e)est or t!at de5elo+.ent,Q s!e noted Q$ore t!an t!at, e ant to acti5ely+artici+ate >n this interconnecte# worl#3 no nation will succee# unless itenoys pro5table relationships with othersQ8

>n#ia8s economy crucial to global economy3 especially in

$outhern Asia3 >. in#ustry an# services sectors key

>$A #oru. ndia, 12-B-!7, “ndiaLs Oole in a :!anging Jlo)al Econo.y,* Jolden

Die, !tt+%//g5localiKationco./en/nes1as+Iid]NNT$enuid]4B0>n#ia8s >. in#ustry has emerge# as a global lea#er &or high1qualityengineering an# #esign tasks an# &or #evelopment o& pro#ucts sol#



aroun# the worl#) At the same time it has helpe# spur a revolution in>n#ia8s internal consumer economy3 which is on track to become the thir#

largest in the worl# by 27+=) Over hal& o& the worl#8s lea#ing >. 5rms are

locate# in >n#ia an# the si/e o& this sector is e%pecte# to qua#ruple by272= $uc! o t!is grot! ill )e ueled )y s+ecialiKed, to+-Guality s.all-and-

.ediu.-siKed co.+anies8

eeting the #eman# that >n#ia8s internal marketwill generate an# &acilitating the e%port o& >n#ian high1tech consumergoo#s will be a lea#ing challenge &or the globali/ation in#ustry in the

coming #eca#e n +articular, reac!ing ndian custo.ers ill reGuire t!ede5elo+.ent o so+!isticated and +oerul a++roac!es to .ultilingualco..unication )ased on lo-cost .o)ile +lator.s, a signi9cant engineering taskAc!ie5ing t!ese goals ill reGuire ado+tion o tec!nical, cultural, and +rocessstandards and close colla)oration )eteen ndian go5ern.ent and industry andinternational organiKations in5ol5ed in ndia8 !e e.ergence o large-scale tradeMos in consu.er goods )eteen countries ndia, :!ina, Oussia, and 'raKil !astre.endous i.+lication or t!e localiKation industry, )ot! in ndia and around t!eorld (e language +airs, suc! as &indihPortuguese, ill )e increasinglyi.+ortant and critical content ill need to )e +ro5ided in a 5ariety o languages t!atare seldo. addressed today $ultinational co.+anies ill need to 9nd ays to sellto t!e “)otto. o t!e +yra.id* and creati5ely ada+t +roducts to .arket conditionsin ndia and ot!er countries8 >n#ia will also have a crucial role to play in

provi#ing services &or the growing consumer markets in all o& southern

Asia) Wit! a large and dedicated )ase o )usiness +rocess and outsourcingco.+anies, ndia ill need to add glo)aliKation ca+a)ilities to .eet oreign de.andor ser5ices At t!e sa.e ti.e, >n#ia8s twenty1two o9cial languages provi#e

access to a market o& over L77 million consumers3 making >n#ia the new

strategic market &or multinational companies looking &or new markets thatwill e%perience substantial growth)



urope



A.0 High Prices Help Pro#ucers

Higher prices not helping oil pro#ucers — increase# costs have

matche# increase# revenues

H>$ *2" — &S, glo)al inor.ation co.+any in energy, econo.ics, geo+oliticalrisk, sustaina)ility and su++ly c!ain .anage.ent, N/27/2014, “&S% Escalating :osts>ri5ing >i.inis!ing Oeturns #or "il And Jas :o.+anies >es+ite Stronger "il Prices,*"il and Jas #inancial Yournal, !tt+%//ogco./articles/2014/0N/i!s-escalating-costs-dri5ing-di.inis!ing-returns-or-oil-and-gas-co.+anies-des+ite-stronger-oil-+rices!t.l,espite stronger oil prices3 corporate returns on average capital employe#

O"A:E3 are lower than in 277!3 when oil prices were less than '+7 perbarrel, according to researc! ro. inor.ation and insig!t +ro5ider &S (;SE% &S3“Our >H$ stu#y3 which assesse# energy company per&ormance and ca+italreturns, inclu#e# more than L7 oil an# gas companies,* said (ic!olas >

:acc!ione, director at &S Energy and a lead researc!er on cost and energyco.+any +eror.ance “:ollecti5ely, these companies average# an !!Q

JOA4 in 27!2 an# L)*Q in 27!+3 both o& which are weaker than theJOA4 achieve# in 277! !en t!e W West eas inter.ediate3 crude oil +rice!o5ered at ust under 627 +er )arrel !e W crude oil +rice a5eraged 6B4 +er)arrel in 2012 and 6BC +er )arrel in 201*Said :acc!ione, “$y guess is t!at s!are!olders are asking W!at gi5esIL .heculprit is cost escalation Chile returns have increase# in recent years3

costs have accelerate# at a rate that has squee/e# margins ) .he more

than '*71per1barrel increase in global oil prices since 2772 has been oset

by signi5cantly higher costs, and to a lesser degree, eaker HS natural gas

+rices $argins !a5e )asically )een roKen*ooking at t!e u+strea. sector, !ic! co.+rises t!e .aority o )usiness o t!estudy uni5erse\ liting costs have more than qua#ruple# since 2777 to

greater than '2! per barrel) Fin#ing an# #eveloping costs have &ollowe# asimilar traectory, reac!ing nearly 622 +er )arrel o oil eGui5alent '"E3 in 201Jo5ern.ent 9scal take )ased on 9nancial disclosure3, !ic! ecludes t!e i.+act o royalty 5olu.es in t!e u+strea. sector, increased ro. 4B o +reta +ro9ts in2000, to N0 in 201



Oil $hocks



touchstone to market stability) n act, t!e U)$) shale1oil boom might roll backthe clock to the !(*7s when a U)$) oil surplus 5ia t!e eas Oailroad :o..ission3, put

Cashington, not Oiyad!3 as the worl#Bs swing pro#ucer) n a orld !ere the U)$) will

have &ew3 i& any3 oil imports to replace #uring a global supply outage3Cashington will have more #iscretion to use the $trategic Petroleum

Jeserve to help allies in times o& crisis or to prevent oil pro#ucers &romusing energy cutos to ac!ie5e 9nancial or geo+olitical goals H)$) oil an# gas e%ports willalso garner closer ties to allies an# &rien#ly countries through closer

economic relations)



A.0 Oil $hocks A#vantage

Io impact — e%perts agree economies are resilient to oil

shocks

6ahn !! — Yere.y Fa!n, $aster o Science in O ro. t!e ondon Sc!ool oEcono.ics, or.er .anaging editor at !e (e Oe+u)lic, 'oston Jlo)e 2/1/2011,“:rude Oeality,*!tt+%//)ostonco./)ostonglo)e/ideas/articles/2011/02/1/crudeRreality/3.he i#ea that a su##en spike in oil prices spells economic #oom has

inuence# America8s &oreign policy since at least 1B7, !en Ara) states, u+set it! Western

su++ort or srael during t!e ;o. Fi++ur War, drastically cut +roduction and !alted e+orts to t!e Hnited States !eresult as a sudden Guadru+ling in crude +rices and a dee+ glo)al recession $any A.ericans still !a5e 5i5id.e.ories o gas lines stretc!ing or )locks, and o t!e une.+loy.ent, inMation, and general sense o insecurity and+anic t!at olloed E5en !arder !it ere our allies in Euro+e and Ya+an, as ell as .any de5elo+ing nations

conomists have a term &or this #isruption0 an oil shock !e idea t!at suc! oil

s!ocks ill ine5ita)ly reak !a5oc on t!e HS econo.y !as )eco.e dee+ly rooted in t!e A.erican +syc!e, and in

turn t!e Hnited States !as .ade ensuring t!e s.oot! Mo o crude ro. t!e $iddle East a central tenet o itsoreign +olicy "il security is one o t!e +ri.ary reasons A.erica !as a long-ter. .ilitary +resence in t!e regionE5en aside ro. t!e raG and Ag!an ars, e !a5e eGui+.ent and orces +ositioned in ".an, Saudi Ara)ia,

Fuait, and Xatar\ t!e HS (a5yLs #it! #leet is +er.anently stationed in 'a!rain <ut a growing bo#y o&economic research suggests that this conventional view o& oil shocks is

wrong) .he U$ economy is &ar less susceptible to interruptions in the oil

supply than previously assume#3 accor#ing to these stu#ies) $cholarse%amining the recent history o& oil #isruptions have &oun# the worl#wi#e

oil market to be remarkably a#aptable an# surprisingly quick at

compensating &or short&alls) conomists have &oun# that much o& the#amage once attribute# to oil shocks can more persuasively be lai# at the

&eet o& ba# government policies) .he U$ economy3 meanwhile3 has become

less #epen#ent on Persian Gul& oil an# less sensitive to changes in cru#eprices overall than it was in !("+

U)$) economy can absorb price increases — there will be no

shock

uskin !! — >onald uskin, :!ie n5est.ent "Zcer or rend $acrolytics :, a

consulting 9r. +ro5iding in5est.ent strategy and .acroecono.ics orecasting andresearc! or institutional in5estors, colu.nist )ot! or (ational Oe5ie "nline andS.art$oneyco., “"il Prices Wont Fill t!e Oeco5ery*, Wall Street Yournal 2011,!tt+%//onlinesco./article/S'100014240274C704CBN047N200B2B72N200N!t.lI.od]googlenesRsCill the spike in oil prices emanating &rom instability in the i##le ast be

enough to #erail the U)$) economic recovery, ust !en its 9nally )uilding u+ a !ead o

stea.I Surely its not !el+ul 'ut while our collective memory and intuition about oil

shocks may cause us to &ear the worst3 a clear1eye# look at the #atasuggests that oil prices may have to rise consi#erably higher to trigger a

U)$) recession .he oil shocks o& the !("7s an# early BL7s3 which cause#

#eep recessions3 were so epochal that weBre con#itione# to assume that

http://www.boston.com/bostonglobe/ideas/articles/2011/02/13/crude_reality/

http://online.wsj.com/article/SB10001424052748704893604576200392973262006.html?mod=googlenews_wsj







any rise in oil prices is ba# &or growth and any all is good et historical #ata tellsus that most oil1price changes are not correlate# with &uture changes in

real output growth) For e%ample3 oil prices rose stea#ily throughout the

mi#12777s while growth remaine# strong) Chere oil prices #o matter togrowth is in e%tremis, in t!ose rare cases !en an etraordinary and ra+id oil-+rice c!ange creates an

econo.ic s!ock 'ut itBs #i9cult to come up with a simple rule that tells us whenan oil shock is enough to cause a recession—or not 4ru#e oil prices as highas '!-" a barrel in the summer o& 277L, or instance, arenBt seen as the cause

o& the Jreat Jecession $ost o)ser5ers ould cite instead t!e all o e!.an 'rot!ers and t!e )anking

crisis t!at i..ediately olloed, e5ents t!at occurred at roug!ly t!e sa.e ti.e etBs ust accept thatoil shocks matter) >s to#ayBs oil price o& a)out 6104 a )arrel in t!e HS and 6!!=

globally@ a shockX .o be a shock3 it has to be big And Q)igQ is a .atter o contet es3

to#ayBs oil prices are more than +7Q higher than they were a year ago)

.hat soun#s big) <ut at the same time3 they are more than +7Q lower thanthey were less than three years ago) !ats )ig, too, )ut in t!e o++osite direction W!ic!

contet countsI Jesearch by economist Ya.es Hamilton o t!e Hni5ersity o :aliornia, San >iego

suggests that oil prices imperil the economy when they reach a new three1year high Ste5en Fo+its, .anaging director o t!e energy consulting 9r. >ouglas-Westood, says t!e o5erall

econo.y is t!reatened !en t!e 12-.ont! a5erage oil +rice eceeds t!e year-ago 12-.ont! a5erage +rice )y .oret!an !al 'elo t!ose le5els consu.er and in5estor e+ectations arent suZciently disru+ted to .ake a di=erence

<oth con#itions are very &ar &rom being triggere# at to#ayBs prices) .o be a

shock3 it has to be a surprise, and in one sense t!e current situation is% >es+ite all t!e +essi.istic

narrati5es t!at !a5e o5er!ung t!e econo.y during t!e last si Guarters o reco5ery—!ousing dou)le-di+, insol5entstates and .unici+alities, colla+se o t!e euro Kone, real estate )u))le in :!ina, and so on—5irtually no)ody as+redicting t!at t!e $iddle East ould )e e+t it! contagious regi.e c!ange s+read 5ia #ace)ook and itter !at

said, shoul# anyone really be surprise# to learn that the i##le ast is

politically volatileX Io3 an# things there might get cra/ier) 'ut i t!e !istory o t!e

region !as taug!t us anyt!ing, it is t!at !oe5er controls t!e oil alays e5entually ends u+ selling it to t!e

de5elo+ed orld, oten des+ite t!eir ra5ings a)out t!e de5elo+ed orlds i.+erialist e5ils >n the

meantime3 $au#i Arabia has committe# to make up &or any transitoryshort&alls) Pumping an a##itional one million barrels a #ay woul# not be astretch &or the $au#is—doing so ould .erely )ring t!e Fingdo.s +roduction le5els )ack u+ to .id-

200C le5els $o even i& we now &ace a shock3 it will be transitory3 an# it will be

buere#) .hatBs why3 &or all the uncertainty3 oil is now '!7- a barrel3 not'!3777 a barrel) ore importantly3 the U)$) economy is to#ay well1

positione# to absorb an oil spike without e%periencing it as an oil shock)

First3 weBre nowhere near peak oil consumption, !ic! e !it in August 200 at 217

.illion )arrels +er day CeBre now (Q below that3 even though consumption has

recovere# substantially since its orst le5els o t!e Jreat Oecession in Se+te.)er 200C .he last

three recessions—t!ose t!at started in 1BB0, 2001 and 200C—began only a&ter oil

consumption reache# new peak levels) conomies in the early stages o&recovery, like ours today, are less vulnerable to oil shocks than those in the late

stages o& e%pansion As a )usiness cycle .atures, t!e econo.y e+eriences di.inis!ing returns ro.

any gi5en actor o +roduction—la)or, credit, oil or anyt!ing else W!en a reco5ery is still ne, large gains can )ele5ered ro. relati5ely .odest increases in in+uts, so t!e econo.y can a=ord to +ay .ore or t!ose in+uts

CeBve also grown much more e9cient when it comes to energyconsumption) >t may come as a surprise to many3 but to#ay in the U)$)

weBre consuming the same amount o& cru#e oil that we #i# !2 years ago

an# real output is more than 2=Q higher #or all t!e talk o our )eing t!e +lanets .ost



5illainous energy !og, weBve become remarkably oil e9cient) Finally3 this oil spikeis coming at a &ortuitous moment in American politics President Obama, tacking to

t!e +olitical center ater !is +artys sel-descri)ed Qs!ellackingQ in last years .idter. elections, sai# earlier

this month that he wants to Dincrease #omestic oil pro#uction in the shortan# me#ium termQ !at .ay )e t!e .ost s!ocking t!ing a)out t!is oil s+ike

$hocks are e%aggerate# — consensus o& economists

6ahn !! — Yere.y Fa!n, $aster o Science in O ro. t!e ondon Sc!ool o

Econo.ics, or.er .anaging editor at !e (e Oe+u)lic, 'oston Jlo)e 2/1/2011,“:rude Oeality,*!tt+%//)ostonco./)ostonglo)e/ideas/articles/2011/02/1/crudeRreality/3.here is no #enying that the !("+ oil shock was ba# — t!e stock .arket cras!ed in

res+onse to t!e sudden s+ike in oil +rices, inMation u.+ed, and une.+loy.ent !it le5els not seen since t!e Jreat

>e+ression .he !("( oil shock also ha# #eep an# lasting economic eects)

conomists now argue3 however3 that the economic #amage was more#irectly attributable to ba# government policy than to the actual supply

shortage) Among those who have stu#ie# past oil shocks is 'en <ernanke, t!e

current c!air.an o t!e #ederal Oeser5e n 1BB7, <ernanke analy/e# the eects o& a sharprise in &uel prices #uring three #ierent oil shocks — 1B7-7, 1BC0-C2, and 1BB0-B1

He conclu#e# that the maor economic #amage was cause# not by the oil

price increases but by the Fe#eral Jeserve overreacting an# sharplyincreasing interest rates to hea# o what it wrongly &eare# woul# be a

wave o& ination) .o#ay3 his view is accepte# by most mainstream

economists) Ghol/ an# Press are har#ly the only researchers who haveconclu#e# that we are &ar too worrie# about oil shocks !e econo.y also aced a

large increase in +rices in t!e .id-2000s, largely as t!e result o surging de.and ro. e.erging .arkets, it! no ill

e=ects “>& you take any economics te%tbook written be&ore 27773 it woul#

talk about what a calamitous eect a #oubling in oil prices woul# have,* saidP!ili+ Auerald, an associate +roessor at Jeorge $ason Hni5ersityLs Sc!ool o Pu)lic Policy !o !as ritten a)out oil

s!ocks and t!eir i.+lications or HS oreign +olicy “Cell3 we ha# a price qua#rupling &rom277+ an# 277" an# nothing ba# happene#); !e recession o 200C-B as triggered )y

actors unrelated to oil +rices3 Aueral# also points out that when Hurricane 6atrina

slamme# into the Gul& 4oast in 277=3 it #i# tremen#ous #amage tooshore oil rigs3 re5neries3 an# pipelines3 as well as the rail lines an#

roa#s that transport petroleum to the rest o& the country) .he Unite#

$tates gets about !2 percent o& its oil &rom the Gul& o& e%ico region3 an#3

more signi5cantly3 -7 percent o& its re5ning capacity is locate# there) :AlNae#a times !3777 coul# not #eliver this sort o& blow to the oil in#ustry8s

physical in&rastructure,* Auerald said An# yet the only impact was about 5ve#ays o& gas lines in Georgia3 an# unusually high prices at the pump &or a&ew weeks

Io impact to shocks — every empiric proves

6ahn !! — Yere.y Fa!n, $aster o Science in O ro. t!e ondon Sc!ool o

Econo.ics, or.er .anaging editor at !e (e Oe+u)lic, 'oston Jlo)e 2/1/2011,



oil prices core georgetown

Documents