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Crude Economics
Breakevens, Brents, and Bear Markets, Oh My!

We’ve been talking a lot this week about the precipitous decline of crude oil prices, in part because of how swiftly this drop-off has come on, but also because of the widespread impact this is having on both producers and consumers. While Americans are enjoying cheaper gas prices, petrostates are starting to feel the pinch, as you can see in the chart above. Those horizontal lines express a number of important breakeven prices—the lowest price at which a supplier must sell its crude in order to stay in the black. For petrostates that rely on oil sales as key components of budget revenues, this can act as a constraint against all sorts of state strategies. For U.S. shale producers, this could constrain what has been to this point a relatively unchecked production renaissance.

Brent crude, Europe’s benchmark, is trading around $85 per barrel, high enough to sustain American shale production, but low enough to unbalance the budgets of states like Russia, Saudi Arabia, Iran, and Venezuela. Vladimir Putin recently rebuffed such concerns, and said the recent drop in prices was no tragedy for the Kremlin. The chart below tells a different story:

This chart, sourced from Bloomberg data, illustrates the outsized effect oil prices have on Russia’s budget. Below $104 per barrel, Moscow starts to run in the red. At $90 per barrel, it runs a budget deficit equivalent to 1.2 percent of GDP, and at $80 per barrel, that deficit rises to 2.3 percent of GDP. Putin can spin this however he likes, but a bearish oil market is not in Russia’s best interests.

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  • Andrew Allison

    All well and good, but history tells us that the usual way to distract the populace from internal problems is expansionism. We should, perhaps, be careful what we wish for.

    • Sibir_RUS

      In December 2008 rates ICE.Brent, USD/barrel fell to 43$ and again rose to 123$.
      Russia has used reserve funds and relatively calmly met the first wave of the international financial crisis. If prices fall below 43 dollars and stay at this level for a long time, probably in Russia will be signs of unrest, but not before.

  • Anthony

    Off specific subject but market related long term and tangentially affecting petrostate (Nigeria). No time for half-measures:–sense-says-infectious-disease-doctor

    Also, ripple effects…:

  • Lorenzo from Oz

    In which case, what matters is Russia’s borrowing capacity.

    • Andrew Allison
      • Lorenzo from Oz

        So, the sanctions and falling oil prices are putting Putin under pressure but, as you say, it depends on how he reacts.

        • Sibir_RUS

          Ratings Moody’s is politically biased. The SCO countries and the BRICS create their own development banks, analogues of the IMF. Attempts to put pressure on Russia or China through some ratings will only accelerate the move away from the dollar into other currencies.

          • Nathaniel Greene

            Like most Russian apologists you have absolutely no idea how the markets and capitalism work. Lowering a bond rating is not a political act, but an economic act. It raises the price of borrowing so it has an economic effect, not political effect.
            Russian reserves are insufficient to defend the Russian ruble and provide financing for Russia’s economy. Russia’s budget assumes a price of $104 per barrel of oil. For every drop of $10 in the price of oil, Russia loses about 5% of its budget revenue every year. It also reduces GDP growth of 3 to 4 percent. Do the math.
            And if you really think that Brazil and China are coming to Russia’s rescue through very small, yet to be funded development bank, you’re living in a fantasy world.

  • Sibir_RUS

    Actually, Putin said that Russia has accumulated enough reserves in the period of high oil prices. He reported about 2 funds 100 billion dollars each, which without much risk would be involved in the case, if the oil price will continue to fall. Putin also expressed confidence that in the future prices energoresurs again will grow and Russia replenish the funds.

  • Jacksonian_Libertarian

    It’s a shame that you couldn’t show how these break even points have been changing over the last few years, so everyone could see the US break even point falling even as all the State owned oil monopolies break even point has been raising. Such a graph would illustrate who was clearly going to win market share in the future, and who the losers will be.

  • John Tyler

    Get ready; Putin will ignite some sort of crisis to scare oil prices higher.

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