Tuesday, August 19, 2008

Russia's Oil Punch

Just as oil starts it fall from a high of $147/barrel, all the sudden Russia wields its power against Georgia. This is a successful democracy on its doorstep that wants to align itself to the West. Georgia wants to be in the EU and NATO. It is a country that has a pipeline that does not start at Russia. It gives Russian citizen in a territory that apparently would rather be in Russia than a democrat and economically successful. Of course, these folks need to be protected, so of course they need peacekeepers.

Back to our story. Oil has quickly fallen from $147 to $115. Traders and pension funds that bought oil to hedge and speculate are dumping their positions. In the face of massive subsidies, demand is actually dropping. US drivers cut miles driven for the first time in 20 years. Each country is investing in alternatives and efficiency.

But Russia has no other exports. It's massive foreign exchange surplus is based completely on oil. Not enough people are buying its vodka to make much of a difference. Now, they do have arms to sell.

So show some naked power. Take on your troublesome neighbor. Tell other neighbors that either align or feel the pain. As the largest oil producer, make sure you raise the price to keep the funds flowing. While showing this power, nationalize oil company and joint ventures. Make sure your pockets are filled because the time to cash in is now. The population is declining, industrialized countries are investing in alternatives, people are using less. I could see the Prime Minister pointing his finger at his general with a stern voice, "Attack now! Get those prices up!"

Oil prices should be dropping to $80/barrel. It's still amazing given it was just $20 a short time ago, however a huge drop from $140. When the cash flows in, the eyes light up. So many things to spend on, so many luxuries to buy. When it drops the whole game changes. You deserved that money, now the market is walking away from you.

So you will see more of these blow-ups and disruptions. It will come from those that like the status quo - those that benefit from high oil. Market spikes eventually turn. This one will if we let it happen. It won't if we decide to get into a tit for tat battle and respond excessively to this provocation. The forces of change are in our favor if we push for energy independence.

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