Can the price of oil to fall to $ 10 per barrel? The privatization of the Russian oil assets: symptom of despair or reward the oligarchs? Why the sharp decline in oil prices and sanctions have not led to the Russian financial collapse? Can American shale oil determine the future of Russia?
These and other questions on “Radio Liberty” discussed with Gary shilling, a financial analyst, head of the American investment firm Shilling and Co., Andreas Goldthau, research fellow at the Center for science and international Affairs, Harvard University, Mikhail Bernstam, Professor of Economics, fellow of the Hoover institution and Gregory Grushko, Executive Director of the financial firm HWA.
The future price of oil became the object of increased attention and review of American experts after they jumped in three months by more than 20 percent. While the predominant tone of the comments is cautious optimism. The average price of Brent crude oil could rise this year to $ 45 20 cents, forecast of 27 analysts surveyed by news Agency Reuters. Predicting the prices of energy – task, as experts agree, are extremely difficult and thankless. Few people, for example, who could have foreseen that after the price rise to $ 52 a barrel last spring will be followed by a drop to $ 25 earlier this year. Now the future of oil prices, according to most experts, seems quite prosperous, if you consider prosperous no apparent reason for the crash and signs of slower growth in oil production, which in theory should play in favor of higher prices. However, this argument does not convince the minority to which several respected analysts. The news Agency Bloombergраспространило, for example, review Harry of Shilling under the screaming headline “Oil is moving towards $ 10 a barrel. A respectable investor and a longtime player in the oil market insists that his opponents are a victim good for the oil industry of illusions. In fact, in his opinion, the price hike was caused by momentary circumstances, but behind them all looms the same for the negative oil price reality: objective grounds to hope for their rise there. Much more likely their fall in the coming months.
In the beginning of last year I predicted the fall in oil prices up to 10-20 dollars per barrel, says Gary shilling. Oil dropped almost to this level and, in my opinion, the reduction in price of oil to 10 dollars per barrel is still very likely. The main reason is that we are able to, if I may say so, the oil trade war. In November 2014 amid a sharp growth of shale oil production in the United States, member countries of the OPEC oil cartel, concerned that manufacturers of high oil prices, including Russia, are benefiting at their expense, decided that they will no longer artificially constrain the production of hydrocarbons and refused to cut production. Since then they have increased production from 30 to 33 million barrels of oil per day. As for the lifting of sanctions increasingly prominent exporter will be Iran. In terms of trade wars, the price of oil is determined by its cost. In Texas and certain other regions of the United States it ranges from 10 to 20 dollars a barrel, producers in the Gulf region it is even lower. Based on this my prediction. Add to this that the production exceeds the demand by 1-2 million barrels per day and storage of oil, both in the United States and in Europe is almost full. What happens when they overflow? The newly extracted oil will go directly to the markets.
– Okay, but the oil war may not last indefinitely. What will prevent oil to soar to, say, $ 100 per barrel, given that not so long ago, $ 150 someone it seemed the norm?
Of course, when manufacturers are relatively costly oil will be forced to throw in the towel, prices will go up, but not above average cost of production, that is 50-60 dollars per barrel. $ 100 a barrel looks unrealistic. A major obstacle to this is the rapid development of technology that enables cheap to extract oil from the depths. This is especially true of shale deposits. Add to this the difficult position of the governments of the countries-exporters of oil with a relatively high cost, such as Russia. They have to maintain the level of exports, in spite of everything, even selling oil with loss to themselves, simply because they need foreign currency to pay for imports. Here come into force the political considerations that have little relation to economic reality.
– When you think oil could fall to $ 10?
– I’d say by the end of the year. But keep in mind that if the price of oil will fall below $ 20, financial shocks can provoke global recession, resulting in further reduced energy demand. In this scenario prices return to the level of 50-60 dollars per barrel not earlier than in two years.
– Professor Bernstein, how do you feel about the prediction about the coming collapse in oil prices?
– Now on the new York Mercantile exchange for oil sold in June 2017 for $ 50 per barrel, that is the price that we have today, ” says Mikhail bernstam. –As for the other kind of forecasts, the Energy information Agency of the United States Department of energy predicts the end of 2016 $ 43 per barrel. Other predictions are very different. But long term the price depends on the one hand from technological advances that improve the production, and on the other hand from the growth of the world economy. It is assumed in those forecasts the us Department of energy, most importantly the ratio that exists now and it exists during the year that it will continue until 2020, namely the excess of world supply over global demand. Global supply is now approximately 96 million barrels per day, and global consumption global oil demand of 95 million barrels a day, i.e. in excess of one million barrels per day. The same is expected in late 2016 and in 2020 one hundred million barrels a day global demand and 101-102 million barrels per day of global supply. In this situation, it is expected that fluctuations will be relatively small close to 50 dollars per barrel, all of this will, nor the deep recession, as suggested by Mr Shilling, nor any dramatic rise, as some suggest, is not expected.
– But, Professor, if the proposal is, as you say, will firmly exceed the demand, then it’s a classic recipe for falling prices?
– After Saudi Arabia at the limit produces oil and can not increase their offer, that is the engine of world prices of steel shale producers in the United States. Center of price formation has shifted from Saudi Arabia to shale producers. It all depends on costs among shale producers in the United States. The average price for shale producers in the United States $ 36 per barrel. But shale production is significantly different from conventional oil, it can be compared with the masterpieces of architecture, from Gothic cathedrals. They are few, only now in America operates less than 500 oil rigs, there were two thousand, now the number has fallen. Each rig multiple wells, they can do a lot of drill on each tower. This is a piece production. Difference, variation of production costs is very large, so a very important closing marginal price, and it is about $ 45 per barrel. That is, to increase production, it is necessary that the price was below $ 45 per barrel. And therefore fall sharply until 10-20 dollars for a short time it could, shale producers will be at a loss, gaining debts, to produce something, but overall they couldn’t control himself. At an average price of 36 dollars per barrel, while the scatter is very large, because this is retail, we can say that prices can fluctuate between 30 and 60 in the long term. Is that technologically we are.
Gregory Grushko, are you familiar with the mechanism of action of the markets, why two years ago, the markets have determined the oil price of $ 120, a little earlier in order to $ 150, six months ago, they kept $ 30, and now the Professor tells us that according to the futures prices of oil can be $ 50 a year. And can they be $ 20 a year?
Can if the supply will so exceed the demand, so prices began to fall, ” says Gregory Grushko. – Why 150-120 dollars a couple of years ago? Because shale oil was not at the level at which it appeared a year ago. Mining of oil shale grew, technology improved, the production cost of oil fell. And therefore the price at some level reaches a certain equilibrium, which can be 36, maybe $ 40, maybe 50. The fact that different countries have different cost, in America it is naturally higher in Saudi Arabia, it ostensibly $ 10 per barrel, in Russia the average cost of oil of about $ 40. But there must be some profit margin too. Then the question arises: how much is that — 1.5 percent, is 5.5 percent? It may be completely different. But market forces will always lead the market towards a state of equilibrium.
– Professor bernstam, if my interlocutor predicted the drop in oil prices to, say, $ 20 by the end of the year will take place, it is fraught with big problems for the Kremlin or the Russian economy has adapted to survival in extremely adverse conditions?
– They can’t fall to that level, judging by all the data that is now available. The price will fluctuate due to technological features and costs of shale oil. Russia is a very changed economic policy in relation to oil, production of oil, tax oil. If earlier for many years, export duty and taxes on natural resources accounted for 80 to 90 percent of the market export prices of Russian oil and enterprises were only 10-20 percent after the fall in world oil prices, since, say, the middle of last year, the Russian government has gone from a practical point of view, a more rational policy, it has reduced the taxes on oil exports and taxes on 50 percent of export prices, however, strengthened the mandatory sale of foreign currency earnings. So, businesses are required to return foreign currency revenues to sell currency exchange, the first buyer, of course, is the Central Bank to replenish reserves and maintain the exchange rate of the national currency, the ruble. In this situation enterprises is profit and in order to develop production, and in order to pay off the taxes and loans of the banking system. That is the policy at 40, 50, 60 dollars for barrel will allow the Russian government, at least in the short term to keep the economy from any sudden shocks.
– Professor, I think you first praised the Russian government. Still you often let him address the accusations of incompetence?
– That in this matter they behave rationally. But it’s not so simple. In fact, this same problem makes them a strong enough fiscal budget trap. Because on the one hand, they stimulate production and exports, reducing taxes, but on the other hand, reducing taxes, they reduce revenues to the budget revenues. It’s a fiscal trap from which they cannot escape. And there is no question of reasonableness and rationality is their objective circumstance and the enormous strategic mistake for the last 25 years, the installation on the development of the primary sector as the main engine of the economy and the neglect of a scientific-technological process.
Andreas Goldthau, fellow at Harvard University, believes that the Russian economy finally collapsed not due to the actions of the government, and due to the circumstances:
The Kremlin just got lucky. It is no different the ability to manage the economy. First, in terms of Western sanctions on Russia remained open markets in India, Kazakhstan and some developing countries, where it continues to be exported a limited range of industrial goods that are not threatened by competition from foreign manufacturers. Second, with a drop of oil, the ruble has depreciated, which means that the decline in oil prices was reflected only slightly in the budget in ruble terms. For this you need to add a very small foreign debt. Thirdly, Russia has managed to partially replace imported goods with domestic ones. They are often of lower quality, such as food, but the Russians apparently are willing to deal with it. We can say that the Kremlin in this situation, had not the worst card, and he remains, in my opinion the reserves to survive the worst. It will not be a pleasant time for all time, but I’m not expecting the collapse, the economy will likely survive.
– Gregory Grushko, Professor Bernstein indicates how deftly the Russian government solved the problem of inflow of foreign currency into the Treasury, forcing exporters to return foreign currency revenues, and suddenly the Kremlin intends to sell shares of companies that recently were considered inviolable property of the country. It is very tempting to interpret as the gesture of despair or is it something else?
– There may be several reasons. The most obvious is the need to improve budget revenues. Officially, the Russian government claims that if they manage to privatize the company “Rosneft”, “Bashneft”, VTB, in such proportions that suggest they will be able to get from this privatization about one and a half trillion rubles, in order to fulfil all budget obligations and to give the opportunity to wait until the oil rises again. There are other explanations of the operation, as, for example, another redistribution of property. The government sells its owned assets and through some front companies, whether Russian or foreign, these assets are bought by the new Russian oligarchs.
Of course, at a convenient price.
– At the market price, which in any case at this stage is very low because, first, the global economic situation is not conducive to investment in the emerging markets, the Russian market requires its own specific discounts to market price.
– And if you take at face value what they say representatives of the Russian authorities regarding the sale, who can buy into, from your point of view on this proposal who may be interested in buying Russian companies, despite the fact that investments in Russia have not once burned on this one even the leading Western and American firms?
– Back in March of this year, Mr. Ulyukayev argued that there is quite a large list of Western institutions that are interested in buying Russian assets. During the International economic forum in St. Petersburg it was said that they are, but we call them can’t, we can’t say who, in fact, is a consultant for this privatization. Does it have to be investment advisers, who correctly assess the assets and which then help to sell these assets to its customers around the world
And what does this fact tell you?
– It tells me that the demand of the West for Russian assets is very low. It is possible that there is a demand from China or India, but that’s another conversation.
– But you are in no way interpret this desire of re-privatization as an act of desperation on the part of the government? Do you think that, in principle, the Russian authorities live relatively well, despite sanctions and pressure from the West?
– The Russian authorities always live well. Quite another question how the lives of the population of Russia, but it does not bother the Russian government. Hence there is no desperate, they are taking maneuvers that can help to improve the situation, but if the situation does not improve, well, let’s move on.
Andreas Goldthau, too, points to the strange circumstances surrounding the re-privatization of oil companies and other firms now state, though sees this as a sign of potential financial trouble, faced by the Russian authorities:
–By and large, this is not the time for the sale of state assets. You are trying to sell shares of mining companies when the price of oil is low, accordingly, you will be able to sell them relatively inexpensive. It is also important that the oil sector of Russia is subject to sanctions. Because of this, interest in these companies will be much lower by Western investors, as the risk of investment in them is too large. It is unlikely buyers will be companies whose shares are traded, for example, on U.S. exchanges. It can be assumed that as a result of the main contenders for the purchase of these assets will be Russian, Chinese and Indian investors. Most likely look a Chinese state-owned firms that continue to try to amass the assets of companies in different sectors of the energy production chain: extraction, production, delivery. The number of buyers will be by definition a limited state revenue. The decision on privatization can be seen as a sign of desperation.
– Professor Bernstein, I remember you immediately after the introduction of sanctions in Russia have insisted that they will not lead to apocalyptic consequences for the Kremlin, to the quiet long rot. Looks like you were right. How great this stock is rotting, years, decades?
– It may be even decades, with the exception of one factor. In the long run, of course, economic growth is determined by technological progress. The world Bank recently published data on expenditure on research and development of new technologies in different countries, in Russia it is 1 percent. In the Soviet Union, where it was very ineffective technological development, were spending a lot of 3.5 percent of gross domestic product. Russia took the bet to backwardness, and she took the bet at the backwardness since the early 90-ies. Do not support the technological advances, I expect that on imported technology, and selling raw materials, they will be able to exist. Decay, retardation, talented and educated people are leaving and looking for something to use in more advanced countries. It is a country without a future.
– By the way, just American analytical firm Stratforreleased a report about the successful export to Russia: exports of minds. According to her, Russia last year left 350 thousand people, the year before 300 thousand, in 2013 – 200 thousand. This is significantly higher than in the worst years of the troubled nineties.
Is the export not just of people — is the export of human capital. Because it is the export of people are not migrant workers, who come for agricultural work, is the export of people-educated, technologically trained, working in the computer industry and other advanced sectors of the economy. That is, in Russia live performances before the First world war, ideas of the nineteenth century. They are fighting for some territory, and they lose human capital. They still believe that wealth in the ground, in the territories, as it was in agrarian agricultural economies. Of course, the wealth of the country in human capital, not pieces of land. This setting of the Russian leadership just dooms Russia to a deep and prolonged backwardness.
– Professor, hopeless the future you promise Russia
– It is necessary to keep in mind that Eastern Russia, that is, Russia East of the Urals, Siberia and other territories, subsidizes approximately 20 percent of the gross domestic product in the West. That is ultimately going to happen with the situation sooner or later, which has now happened with great Britain in the European Union. Part of some economic Union will come to the conclusion that it would be better to live separately. And here it is foreseeable that in some situations simply because of such technological, economic development may occur some separation of Russia East of the Ural mountains Western Russia, but otherwise it’s just a country without a future.
Gregory Grushko, from your point of view, what are the chances that in the future Russia will be economic recovery and economic revival?
– Economic recovery — it is a relative concept. I would say: the entire Russian political and economic system is so corrupt that some potential growth is still very limited. Because today the Russian leadership is interested primarily in his own personal gain. There will be some UPS, there will be some downs, but the long-term strategy for fundamental changes in Russian economy and its revival and development, such a strategy is not and can not be, how long the current regime remains in power.
