The commentariat is currently having a field day with its pontification over the consequences of the recent fall in the price of crude oil- down roughly 40% from recent peaks, and volatile again after a period of stability. However, it is worth pointing out that the current angst arises in the context of price declines that are relatively modest in comparison with historical volatility. The Awbury team remembers USD 10 oil and the bankruptcy of Dome Petroleum (fondly remembered as “Doomed Petroleum”) and the perils of take-or-pay contracts.
So, frankly, we are somewhat less concerned about is general economic impact, given that it is of clear benefit to many oil importing economies (including the US, on balance), than we are about the potential geopolitical consequences.
It is a statement of the obvious that the combination of lower oil (and natural gas) prices and financial and economic sanctions will place increasing pressure of the Putin regime. One only has to look at what it took to bring Iran to the negotiating table on its “nuclear conundrum”. However, stressed and brittle regimes with nuclear weapons are rather more dangerous than a middle-ranking regional power, which has yet to “break out”. We are, therefore, somewhat concerned about the Russian government’s likely need somehow to continue to distract a general population which, for all its overt patriotism, is less likely simply to accept the consequences of its political class’ revanchism and military adventures once it begins to lose the previous level of benefits that the Russian petro-state enjoyed.
A key question to consider more generally is the assumptions that oil-exporting states have used for oil prices when setting their fiscal budgets. Many, if not most outside Europe, have endemic problems of underemployment; inefficient and distorted allocations of capital; malinvestment; and a wealthy elite or citizenry which depends upon an underclass to keep services functioning. States such as Saudi Arabia and Kuwait have significant resources to tap in the form of externally-invested sovereign wealth funds (SWFs), but economic basket cases such as Venezuela, or autarkic states such as Argentina, have little if anything in the form of investment reserves. As such, an unexpected fall in actual revenues, coupled with a budget assumptions that border on the delusional, will only increase the strains and potential for economic and social disruption in societies where many are already barely getting by.
In such circumstances, regimes that are kleptocratic, paranoid, corrupt and incompetent do not bode well for a stable international environment, even if they do not pose the existential threat that a state such as Russia would should its regime miscalculate its reach and capabilities.
Of course, with disruption and fear comes opportunity; and we continue to monitor the scope for providing our economic and financial risk management capacity through our E-CAT business model to our broad client-base.
-The Awbury Team