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Oil and contango

April 19, 2017 Leave a comment

There are very high levels of oil storage at present are the main reason for oil prices to go below US$50. Why are the storage tanks so full reports The Economist?

1. OPEC’s agreement with non-members such a Russia to cut production from 1st January attracted a lot of demand to take advantage of future price increases. This did produce higher prices which win turn encourages more supply as American shall producers started to pump more oil. American oil rigs have increased in number from 386 in 2016 to 617 in 2017 producing 400,000 barrels of oil a day more than the low levels in September 2016. Much of the oil has gone into storage terminals.

2. Before OPEC cut production it increased output and exports. A lot of this oil went into storage in the USA as refineries there were down for maintenance reasons.

3. Futures prices of oil are closely related to the level of inventories. It was hoped that the OPEC cut in production would push the futures market into ‘backwardation’ – short-term prices are greater than long-term (futures) prices which means that purchasers will use the oil rather than storing it. However with the release of US storage levels the immediate price of oil fell in comparison to longer-term rates – referred to as “contango” which makes it worthwhile to buy oil and store it. It is estimate that the price of storing a barrel oil is 41 cents per month compared to contango of 65 cents for the same period. Therefore you make 24 cents on each barrel. See video below from EKTInteractive.

So the more oil stored the lower the short-term prices go – the challenge is to break the loop. Maybe oil output cuts beyond June may force some to release their inventory.

Source: The Economist 16th March 2017

Categories: Supply & Demand Tags:

Sub-Sahara economies hit by fall in commodity prices.

January 12, 2017 Leave a comment

Commodities have been the engine of growth for many sub-Saharan countries. Oil rich nations such as Nigeria, South Africa and Angola have accounted for over 50% of the region’s GDP whilst other resource-intensive countries such as Zambia, Ghana and Tanzania to a lesser extent.

I have mentioned the ‘resource curse’ in many postings since starting this blog. It affects economies like in sub-Sahara Africa which have a lot of natural resources – energy and minerals. The curse comes in two forms:

  • With high revenues from the sale of a resource, governments try and seek to control the assets and use the money to maintain a political monopoly.
  • This is where you find that from the sale of your important natural resource there is greater demand for your currency which in turn pushes up its value. This makes other exports less competitive so that when the natural resource runs out the economy has no other good/service to fall back on.

However it is the fall in commodity prices that is now hitting these countries that have, in the past, been plagued by the resource curse. As a lot of  commodities tend to be inelastic in demand so a drop in price means a fall in total revenue since the the proportionate drop in price is greater than the proportionate increase in quantity demanded.

The regional growth rate for 2016 is approximately 1.4% but it is not looking good for commodity driven economies:

  • Nigeria – oil – 2016 GDP = -2%
  • Angola – oil – 2016 GDP = 0%
  • South Africa – gold – 2016 GDP = 0%

In 2016 resource rich countries will only grow by 0.3% and commodity exporting countries have seen their exports to China fall by around 50% in 2015. Furthermore, public debt is mounting and exchange rates are falling adding to the cost of imports. With less export revenue the level of domestic consumption has also decreased.

It is a different story for the non-resource countries of sub-Sahara. It is estimated by the IMF that they will grow at 5.6%. By contrast they have been helped by falling oil prices which has reduced their import bill and public infrastructure spending which has increased consumption.

africa-oil-effectAs is pointed out by The Economist numbers should be read wearily as GDP figures are only ever a best guess, and the large informal economy in most African states makes the calculation even harder. Africa may have enormous natural reserves of resources, but so far most Africans haven’t felt the benefit. In Nigeria, for instance, what’s seen as a failure to spread the country’s oil wealth to the country’s poorest people has led to violent unrest. However, this economic paradox known as the resource curse has been paramount in Africa’s inability to benefit from resources. There is a gravitation towards the petroleum industry which drains other sectors of the economy, including agriculture and traditional industries, as well as increasing its reliance on imports. What is needed is diversification.

Oil prices increase – OPEC reduces supply 

December 6, 2016 Leave a comment

The Organisation of Petroleum Exporting Countries (OPEC), is a cartel of 12 countries made up of Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates, and Venezuela.

Recently OPEC countries have proved skeptics wrong by deciding to cut oil production. Previously OPEC seemed quite content maintaining oil supply levels even with low oil prices – maybe with the intention of driving prices down and putting companies with high costs of extraction out of business. But the collapse in oil prices since June 2014 – see chart –  has battered the economies of oil-producing nations as some investment projects are no longer financially feasible and this could result in a new supply shortage within a few years.

oil-2000-2015

However a deal signed in Algiers in September has seen OPEC countries will reduce production for the first time since 2008 by approximately 1.2 million barrels per day (bpd) which means its production is around 32.5 million bpd – see table below:

Agreed crude oil production adjustments and levels*

opec-production-cuts

* Reference base to crude oil production adjustment is October 2016 levels, except Angola for which September 2016 is used, and the numbers are from Secondary Sources, which do not represent a quota for each Member Country.

From the table the big cuts in production are from Saudi Arabia, Iraq, UAE and Kuwait. Iran is allowed to raise output by 90,000 barrels as they have sought special treatment as it recovers from sanctions. It is unclear whether the Opec cuts were wholly contingent on the planned 600,000bpd cuts by non-Opec members, including a 300,000bpd cut by Russia. Mr al-Sada of OPEC said the agreement would “definitely help rebalancing the market”, enabling the industry to “come back and reinvest” in new production capacity to ensure future security of supply.

supply-demand-oilIn simple economics this reduction in supply of a very inelastic product should, in theory, increase the price of oil and on the news of the cuts oil prices surged as much as 10pc to hit $52-a-barrel – see graph opposite.

 

After oil what’s next for Saudi Arabia?

August 3, 2016 Leave a comment

With oil prices being at historically low levels, oil exporting countries have been struggling to generate the revenue that was once apparent not so long ago. In Venezuela, for instance, oil accounts for 95 percent of Venezuela’s export earnings and plummeting world prices have severely hit the government’s revenue stream. The Middle Eastern countries with their abundant supply of oil and the ease at which it extracts it, are starting to look at alternative revenue streams as the rent from oil is no longer sufficient to sustain public goods and services. As noted in The Economist the Arab world can be divided into three broad categories:

  1. Resource-rich, labour-poor – Gulf sheikhdoms with lots of oil and gas but few people;
  2. Resource-rich, labour-abundant – Algeria and Iraq, that have natural resources and larger populations;
  3. Resource-poor, labour-abundant – Egypt, that have little or no oil and gas but lots of mouths to feed (see chart).

Oil Rev Mid East.pngTo a degree the whole Arab world is an oil-driven economy: all three groups tend to rise and fall with the price of oil. However although some countries have significant reserves of wealth this does not offer an alternative to weaning them off their dependence on the oil industry.  Saudi Arabia’s Vision 2030 intends to be free of oil dependence by 2020 and among the proposals is a plan to launch a new defence company, combining Saudi industries under a single company and be floated on the Saudi Stock Exchange.

The country plans to list less than 5 per cent of Aramco (Saudi Arabian Oil Co), which is worth more than US$2 trillion. The sale of Armco would be big enough to buy Apple Inc., Google parent Alphabet Inc., Microsoft Corp. and Berkshire Hathaway Inc. – the world’s four largest publicly traded companies. The plan is for the government to be a lot more prudent in its spending and making sure that the budget deficit doesn’t exceed 15% of GDP which is a very high figure. Furthermore using the private sector to provide education and health care as well as selling valuable land to developers, will reduce the burden of the State. But this will bring about significant social change that the population of Saudi Arabia may not be prepared for. As The Economist said:

A generation of men that expected to be paid for do-nothing government jobs will have to learn to work. The talents of women, who already make up the majority of new university graduates, will have to be harnessed better. But for now even the limited reforms to give women more opportunities have gone into reverse. To achieve its goals, Saudi Arabia will have to promote transparency and international norms, which will mean overcoming resistance from the powerful religious establishment and the sprawling royal family.

Source: The Economist – May 14th 2016

Resource Curse

For most economies that have natural endowments like oil (Saudi Arabia) or minerals, there is the risk of the economy experiencing the ‘resource curse’. This is when a natural resource begins to run out, or if there is a downturn in price, manufacturing industries that used to be competitive find it extremely difficult to return to an environment of profitability. According to Paul Collier, Nigeria has a resource curse of its own, the civil war trapin which 73% of the low income population have been affected by it, as well as a natural resource trap- where the so-called advantages of a commodity in monetary value did not eventuate – on average affecting only 30% of the low income population. It seems that in Nigeria there is a strong relationship between resource wealth and poor economic performance, poor governance and the prospect of civil conflicts. The comparative advantage of oil wealth in fact turns out to be a curse. governments and insurgent groups that determines the risk of conflict, not the ethnic or religious diversity. Others see oil as a “resource curse” due to the fact that it reduces the desire for democracy.

Click here for more on the Resource Curse from this blog

Venezuela – Cost Push to Demand Pull Inflation

May 18, 2016 Leave a comment

Zim Venez InflationBelow is an informative clip from Al Jazeera which looks at the worst performing economy in the world – Venezuela. With oil accounting for 95 percent of Venezuela’s export earnings, plummeting world prices have severely hit the government’s revenue stream. GDP is forecast to contract 5.6% and inflation to hit 700% in 2016. The Economist has likened it to Zimbabwe and produced a graph showing the similar acceleration in inflation.

With 80% of all food items being imported and most of its agricultural land abandoned there are now major food shortages in the country – decrease in supply – cost-push inflation. As a consequence of this consumers are trying to stockpile goods as the prices increase – this shifts the demand curve to the right – demand-pull inflation.

Authorities are trying to clamp down on shoppers stockpiling goods by taking fingerprints before buying their ration of price-controlled goods. However the law of supply and demand is never far away as speculators use the black market to sell goods at a higher price as people becoming desperate for the essentials. Furthermore, producers can get around price controls by adding ingredients to staple food which therefore makes it unregulated – Venezuelan firms have added garlic to rice, called it “garlic rice”

Categories: Inflation Tags: ,

Petrol prices in North Korea on the way up

April 16, 2016 Leave a comment

A HT to Kanchan Bandyopadhyay for this piece from the Associated Press. Petrol prices in North Korea since February have risen by approximately 14% as it contends with the tougher international sanctions over its nuclear programme which is potentially putting a brake on the emerging market economy. However it is difficult to say what is exactly happening as officials in North Korea don’t discuss issues like this openly

What about supply and demand?

It might be a simple matter of the market. With more vehicles on the road there is more derived demand for petrol putting the price up. It is also possible that more fuel is being used for military purposes or for government construction or development projects. Most of the supply of petrol comes from China and the impact of sanctions is limiting the supplyThe fear that prices will rise further has coNK Fuel Couponnsumers stock piling petrol coupons. In North Korea customers usually buy coupons for the equivalent amount of fuel that they wish to purchase. To purchase 15 kilograms (petrol is sold by the kilogram in North Korea) it about $12 in Pyongyang which equates to a 20% increase in price. As with most planned economies the supply of petrol is controlled by the state and it decides on who gets what – military and public transportation such as street c
ars and buses are still kings of the road.

Black market currency 

Strangely enough North Koreans usually pay for their fuel in US dollars or euros. One kilogram of gas is currently about 80 North Korean won but no one actually pays that.

80 won =  80 U.S. cents under the official exchange rate, but only about eight-tenths of a cent under the unofficial exchange rate most North Koreans use when buying and selling things among themselves – the “real economy,” in other words.

The number of passenger cars has grown rapidly and rather than the typical black limousines or blue Mercedes sedans driven by communist party officials, they are middle of the range cars imported from China.

The growth in traffic in the capital is a visible indicator of economic activity the North generally prefers to keep under wraps. Many vehicles these days are clearly being used in an entrepreneurial style, moving people and goods around for a fee.

Higher gas prices could put a damper on such activities, or at least cut into their profits. The rise of automobiles is focused on the capital, which remains a very special place. Most North Koreans don’t have cars, or even access to cars. In the countryside, major highways are still not very well traveled and often not even paved. And gas, when it’s available, is usually more expensive.

Categories: Economic Systems Tags: ,

Low oil prices fuel debt worries

March 27, 2016 Leave a comment

Below is a video clip from the FT outling the reasons for the debt build up in the energy industry which is making investors nervous. Fracking has been partly responsible for the increase in oil output in the US by 400m barrels a day between 2010-2015. It was encouraged by high oil prices and also meant the sector took on a lot more debt – assuming that oil prices would stay above $100 a barrel. However as oil prices collapsed to around $30 a barrel oil extraction companies are finding it increasingly difficult to service their debt. Worth a look and with some very informative graphs.

Categories: Debt Tags:

Crude problems for Nigeria and Russia

February 8, 2016 Leave a comment

oil prices downWith the fall in the price of oil to under US$30 a barrel, two oil exporting economies in particular have been adversely affected – Nigeria and Russia.

Nigeria

  • Oil accounts for 10% of GDP but 70% of government revenue and almost all of Nigeria’s foreign earnings.
  • Government revenue has fallen by 30% from this time last year
  • Foreign reserves are down by $9 billion in 18 months
  • Growth rate for 2015 was 3% which was down from 6% in 2014
  • Nigerian bank loans are exposed to ups and downs of the oil market. At present about 24% of Nigerian bank loans are to oil and gas producers and struggling power companies. This exposure could lead to a banking crisis in Nigeria.

How is Nigeria tackling the problem?

The Economist outlined 3 responses to the crisis of which the first is the only realistic measure:

  1. An expansionary fiscal policy to stimulate aggregate demand
  2. Protect its hard currency reserves by blocking imports
  3. Try to crack down on inflation by keeping the naira pegged at 197-199 to the US$.

Nigeria is fortunate to have low levels of public debt – 19% GDP – but it is not helped by high interest rates but high interest rates means that 35% of government revenue is taken up by servicing its debt. Lower oil prices would be the catalyst to a serious debt problem.

Russia

Russia’s exports and government revenue are heavily dependent on the price of oil. Since the oil peak in June 2014 GDP has shrunk by approximately by 4%. The Russian budget assumes an average oil price of $50 a barrel, which was to have produced a deficit of 3% of GDP. However the budget deficit rises by roughly 1% of GDP for every $5 drop in the oil price and with the current oil price around $30 a barrel the deficit would probably rise to 7% of GDP.

If the economy does start to run out of cash the option of printing money may be tempting. But with inflation at around 13% this would further fuel inflation and also mean a further weakening of the rouble which wold make Russian imports more expensive for firms and households. Russian economic data does not look healthy:

  • real wages fell by 9% in 2015 and 4% in 2014
  • GDP per person was $8,000 in 2015 in contrast to $15,000 in 2013
  • 2 million fell into poverty on 2015
  • the share of families that lack funds for food and clothing rose from 22% to 39%
  • retail sales have dropped by 13% last year

Opportunity

The 25% fall in the inflation adjusted exchange rate in the past year brought with the opportunity to diverse away from oil. The weaker double makes exports more competitive and now that labour is cheaper in Russia than in China there is great opportunity. However, it is not going to come from foreign investors as foreign investment has fallen from $40 billion in early 2013 to $3 billion in June quarter of 2015.

Categories: Natural Resources Tags: , ,

World oil supply on the rise

January 24, 2016 Leave a comment

Oil price supplyFollowing on from my previous post, the increase in the supply of oil is starting to cause problems with regards to storage. According to The Economist (see graphic) US petroleum stocks rose by 4m barrels last week which is an 80 year seasonal high. Add this to the anticipated increase in supply from Iran after the sanctions were lifted and you have a significant increase in supply. However with reduced demand where is the supply going to housed? At this time of year, with the Northern Hemisphere winter, oil stocks usually dwindle but supply actually increased in Q4 2015 by a record 1.8m barrels a day according to the International Energy Agency. It wasn’t so long ago that investors were buying oil and keeping it in oil tankers waiting for the price to rise.

Categories: Supply & Demand Tags:

Winners and Losers of lower oil prices

January 22, 2016 Leave a comment

With lower oil prices below is a table looking at the winners and losers.

Oil - Winners Losers

Categories: Deflation, Supply & Demand Tags:

Oil prices and the global economy

January 4, 2016 Leave a comment

oil prices downKen Rogoff (Harvard University) recently wrote a very informative piece on the Project Syndicate website. He discussed the relationship between the drop in oil prices and its impact on economic growth. The price of oil has dropped from US$114 in June 2014 to $45 in December 2015 but the global GDP increase has only been around 0.5%. Over the last 20 years there have been a number of rapid fall in oil prices.

1985-86 – OPEC members decided to ignore quotas in the hope of regaining market share

2008-09 – The GFC saw a demand shock which shouldn’t have a significant impact as in the past the supply has adjusted to the reduced demand.

2014-2015 – the reduction in the price of oil has both demand and supply factors. A slowing Chinese economy has seen a downward movement in commodity prices – less demand for oil. This has been accompanied by increasing oil supply mainly from the fracking industry in the USA:

2008 – 5 million barrels a day.

2015 – 9.3 million barrels a day

Lower prices = more disposable income.

With lower prices consumers should have greater disposable income but it hasn’t stimulated a significant amount of extra demand. However Rogoff does mention that the emerging-market importers have a much larger global economic footprint than they did in the 1980’s, and their approach to oil markets is much more interventionist than the advanced countries.

China and India subsidise retail energy markets to keep prices lower for consumers but the drop in oil prices has meant that lower subsidies are now required and what government’s have saved has gone towards other areas of spending.

Oil is now seen to be less of a driver of global business cycles and even with investment in exploration falling by $150 billion in 2015 futures market have oil prices rising to $60 a barrel only by 2020.

2016 brings its challenges to oil producers with a forecast of tightening monetary conditions.

Categories: Growth Tags:

Venezuela suffering from low oil prices

April 1, 2015 Leave a comment

Below is a very good video from the FT about how the fall in oil prices poses big problems for the Venezuela government already trying to cope with a shortage of basic goods. Some key points from the video:

* Venezuela has the largest oil reserves in the world
* 95% of Venezuela’s export revenue is from oil
* For every $1 fall in the oil price Venezuela loses almost $700m. A $20 drop in oil prices would result in a $14bn loss in gross revenues for the country.
* With falling oil revenue and therefore foreign currency the government has less money to buy imports. The reduction in imports includes: toilet paper, maize flour, sugar, powdered milk, medical supplies.
* People have been queuing for 2 to 3 hours for three weeks trying to get basic provisions. The further the oil price drops the longer the queues become.
* The Government have introduced mandatory finger printing in some supermarkets so people don’t try and hoard basic foodstuffs.
* The government, in trying to rally support, are slashing the prices of Chinese imported goods like fridges.
* At the heart of the problem are Venezuela’s price and currency controls
* Printing local currency (Bolivar) will keep widening the government deficit and fuel further inflation – see graph below.
* Oil exports aren’t enough to subsidise everything else


Venezuela

Categories: Inflation Tags: ,

Saudi Arabia’s plan to gain market share of oil industry

March 10, 2015 Leave a comment

Oil StocksThe recent drop in oil prices from $115 per barrel in June last year to $58 per barrel today (10th March) has asked the question why don’t oil producers cut back on supply? This would seem to be the logical policy to pursue as the revenue of oil producers has been cut significantly. However Saudi Arabia has allowed big oil surpluses to grow and as a result the price has fallen. As Saudi Arabia can extract the oil from the ground at a much lower cost than its oil producing counterparts they have a greater ability to absorb the lower oil price. Those that have a high cost of extraction – US shale producers, the tarsands of Canada, Russia, Venezuela – are now finding the return from oil is much lower. Therefore, the plan being to force high costs producers out of the market leading to an increase in the market share of the Gulf states.

Excess Oil Supply
There has been a growing amount of oil in storage which is absorbing the glut. World stocks have increased by approximately 265m barrels last year and is suggested to increase by a further 1.6m-1.8m barrels a day in the first six months of 2015 which adds about 300m barrels to the total. Oil producers are hoping that the demand for oil will increase next year and that the accumulated stock will satisfy that demand. However the restocking cannot continue for long as storage facilities in Europe and Asia are already at 80-85% capacity. Companies are going as far as renting oil tankers to store the excess oil. And what happens if storage facilities start to reach full capacity, then producers will be forced to dump supply onto the market dropping the price even further. There is the belief that oil prices will drop in the long run which will mean a restructuring of the industry.

Source: The Economist February 21st 2015

Categories: Growth Tags: ,

How much does China benefit from lower oil prices?

February 20, 2015 Leave a comment

Over the last year oil prices have fallen by 55% with the price of a barrel of oil around the US$48 – see graph. China is the world’s second largest oil consumer (behind the United States) and largest net importer and is set to benefit from lower oil prices as consumers have more disposable income. Firms can also take advantage by reducing costs and boosting profits.
Oil Price

Since 1995 China’s oil consumption has been driven by the country’s rapid rate of growth especially in the manufacturing sector. By 2002 China had overtaken Japan as the second largest oil consumer. However oil’s share of China’s primary energy consumption has declined since this time – from 23% in 2002 to 18% in 2013 – as other energy sources have grown more rapidly. For most developed economies oil makes up approximately 37% of energy needs. China is still quite reliant on coal for around 70% of the country’s energy needs – see graph.

Last year China imported oil to the value of US$228bn which equates to 19% of total imports and 2.5% of GDP. With the lower oil prices there will be a reduction in money leaving the Chinese economy which should boost more domestic consumption.

China Primary Energy

Source: National Australia Bank

Categories: Development Economics Tags: , ,

Oil producers struggle to balance budgets with low oil prices

January 11, 2015 Leave a comment

A widely used measure of the impact of oil prices on major producers’ governments is the fiscal breakeven price. That’s “the average price at which the budget of an oil-exporting country is balanced in a given year,” according to Standard & Poor’s. Estimates of fiscal breakeven prices can vary considerably based on a variety of factors including actual budget expenditures, and differences in oil production forecasts.

For most countries oil needs to be above $100 a barrel to balance the budgets of major oil producing countries. Venezula which has major deficit problems and accelerating inflation needs oil at $151 a barrel in 2015 to balance its budget. For Iran, which has yet to agree to curb development of nuclear weapons and heavily subsidizes gasoline for its citizens, needs oil at $131 a barrel. And Russia needs oil at $107 for a chance of getting its finances in order. As for Libya a whooping $317 per barrel is required for them to start to improve their fiscal position. See graphic below.

Oil - B even Price

Categories: Fiscal Policy Tags:

Link between oil prices and world growth

January 4, 2015 Leave a comment

oil prices downBack on deck after a good two week break. One issue that has been prevalent has been the drop in oil prices. The benchmark Brent crude oil price has fallen from US$115.65 on 19th June 2014 to US$56.42 today (4th January 2015) – that is a 51.2% drop. Why have prices dropped so much in such a short period of time?

The main reason for this is the increase in fracking where energy companies go deep into the ground and blast the shale rock with a mixture of water and chemicals which releases oil and gas to the surface. This technique has been particularly prevalent in US where production has increased from 5 million b/d in 2008 to nearly 9 million today. Ultimately the price has dropped because supply has outstripped demand. Of world production OPEC produces 30.3 million b/d and the rest of the world 61.8 million b/d. With this over supply you would expect OPEC countries to agree to reduce the volume of oil they pump everyday. However, according to Brian Gaynor in the NZ Herald, they are unwilling to reduce production for various reasons:

1. Most member countries are heavily dependent on oil export revenue
2. They have to meet interest costs on large government deficits
3. They believe that lower oil prices in the short term will discourage further investment in fracking and ultimately lead to higher long-term price for conventional oil.

Oil prices and world growth

The link between oil prices and the economic conditions of the global economy are well documented.

Low oil prices = booms periods in the global economy from 1948-1973 and 1993-2007
High oil prices = recessions – 1974-75, 1981-82, 1990-91, 2008-09

Low prices do stimulate growth – it means more spending power for consumers and it cuts cost for business. However the lower price will affect countries like Russia, Venezuela and Iran as they can only balance their books if the oil price is at US$100 a barrel or more. The US would be particularly affected by this lower oil price as much of the investment in fracking has been financed by high yielding but risky junk bonds. As the credit risk becomes greater with lower oil prices this could lead to sales by investors which would lead to illiquidity. According to The Observer newspaper “fracking could become the new sub-prime”.

Categories: Economic History, Growth Tags:

Russian economy – Priests to halt slide of Rouble?

December 12, 2014 Leave a comment

Russia OilWith oil prices heading to below $60 per barrel and inflation on the rise the Russian economy is bracing itself for some difficult times ahead. Oil is imperative to Russian growth rates and The Economist reported that in 2007, when oil was $72 a barrel, the economy managed to grow at 8.5%. Additionally between 2010 – 2013, when oil prices were high, the country’s net outflow of capital was $232bn – 20 times what it was between 2004 and 2008. See graph from The Economist.

But as oil prices drop so does the currency which mean imports become more expensive – the bigger the drop the more expensive they are. Russia imports a lot of goods – the value in 2000 was $45bn compared to in 2013 $341bn. This lower value of the Rouble fuels inflation and it is expected to reach 9% by the end of the year. To maintain peoples spending power the government will need to intervene in the economy and run bigger deficits.

But there is another problem a weaker Rouble makes debt servicing more expensive so in the long-term more money needs to be found. When there was a high oil price instead of increasing their reserves, money was spent on salaries and pensions and especially the armed forces where spending increased by 30% since 2008. One wonders why they spent so much on the Sochi Winter Olympics. However drastic steps are being taken to reduce the decline of the Rouble with priests blessing the servers at the Central Bank with holy water.

Russia CB

OPEC to maintain daily quota for oil.

November 28, 2014 Leave a comment

Here is a useful clip from Al Jazeera which discusses the recent decision of the Organisation of the Petroleum Exporting Countries (OPEC) members to maintain the volume of oil pumped everyday even with the price of a barrel of oil falling from $110 to just over $80 this year. For Russia’s budget this can be a loss of revenue up $40bn – Russia, which is not an OPEC member, wants oil prices to go up but current EU sanctions over its role in Ukraine are hurting their request. OPEC members are attempting to find a solution regarding the slump as big oil producers like Saudi Arabia, Iran and Venezuela are continuing to see a loss in money.

Categories: Growth Tags:

Petrol Tax in New Zealand

August 17, 2014 Leave a comment

The New Zealand Parliamentary Library “Monthly Economic Review” published a feature on taxes and levies on petrol.

Taxes and levies on a litre of petrol in New Zealand account for approximately 43 percent of the overall price.

July 2014 – Retail price = 223.9 cents per litre

A forecast $1,702 million is expected to be raised through the excise duty on petroleum in the year ended June 2015. This includes:

– $936 million in petroleum excise duty on domestic production
– $766 million on petroleum imports.

The following diagram shows the taxes and levies on a litre of petrol (including GST).

Petrol Tax NZ

Categories: Transport Tags: ,

Global Oil Production and Price Levels

July 24, 2014 Leave a comment

Here is a useful image from The Economist and some comments that accompanied it:

Last 3 years has seen the lowest levels of price volatility in oil markets since the supply shocks of 1973 – (400% increase – 1979 – 200% increase. Partly due to stable production.
The reductions in oil supply with the sanctions against Iran and unrest in the Arab world have been offset by the increases in output from the shale boom in the USA.
Even with the take over off the largest oil refinery in Iraq by Islamist militants the price went to $114 a barrel compared to $147 during the financial crisis.
Oil Prod

Categories: Inflation, Supply & Demand Tags:
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