The Price of Oil Crushed Russia Once. Is It About to Happen Again?

An oil price collapse in the 1980s spurred the downfall of the Soviet Union. Is today's Russian regime staring down the same fate?

Aug 23, 2014 at 6:03PM


Russian oil pump. Photo credit: Wikimedia Commons/Acoder

In case you hadn't heard, Russia has an oil problem. The country is heavily dependent on oil tax revenue to fill its coffers, and trouble is brewing given today's low price for Russian crude. Consider these recent headlines from Reuters and The Moscow Times:

"Russian oil prices fall below $100/barrel, straining budget"

"Struggling with Sanctions, Russia Faces Oil Price Crash"

And if you go all the way back to the end of April, BBC News gives us this gem:

"Russia experiencing recession now, says IMF"

Things sound grim, but what exactly is going on? Can the price of oil really bring down a country as big as Russia?

It can, and it has. Let's take a closer look.

Counting on oil to make ends meet
According to Reuters, Russia's budget is based on the assumption of an average oil price of $114 per barrel. It is nowhere near that high right now, however. Sitting below $100 for the first time in over a year, the price of Ural crude has fallen $15 in less than one month.

Keep in mind that 50% of Russia's budget revenue comes from oil. If the price bounces back, there is no story here. If, however, there is a sustained period of low oil prices it would be a major blow to the country's economy.

Fool me once...
An economic collapse caused by falling oil prices? What is this, 1986? Let's do what every major pop star is doing right now and revisit the 1980s. Here's Tyler Priest writing for the Journal of American History in 2012:

Facing falling demand in the early 1980s, OPEC tried to restrict output and hold individual producing nations to production quotas, but cheating and discounting could not be prevented. In the summer of 1985 Saudi Arabia decided it would no longer defend the OPEC price and turned on the taps. Other OPEC exporters followed suit, each striving for market share and ignoring the cartel's quotas. World production surged and prices collapsed, reaching a low of $14 per barrel in 1986.

So we've got the price collapse, but how did that relate to the Soviet Union specifically? Priest again:

The oil price collapse also played a lead role in ending the Cold War. It undermined the economy of the Soviet Union, which had quietly become the world's largest oil pro­ducer, dependent on oil export revenues to pay for imported manufactured goods from the West and to support the economies of East European satellites. Plummeting crude prices cost the Soviet Union an alarming $20 billion per year, causing panic in the Polit­buro.

In other words, Russia's continued dependence on oil to power its economy could make its current troubles just another case of deja vu all over again. Are things really as bad as they were in the 80s? How close is Russia to the edge?

Reuters is reporting that every $1 drop in the price of Russian crude wipes out $1.4 billion in Russian tax revenue. That said, the Russian Finance Ministry has announced it still expects a slight budget surplus, provided the average price for the year comes out to $104 per barrel. And, despite the recent decline, the average price year-to-date is about $110, according to The Moscow Times

The lesson in all of this
In all likelihood Russia will be fine, but make no mistake: The threat is a legitimate one. The country has a $2 trillion economy that could be decimated if the bottom were to fall out of the oil market, and it is not alone in that regard. Saudi Arabia is a perfect example of how hard some countries are working to diversify their economies away from oil. Though we will never face the exact same circumstances in our world markets as we did in the 1980s, the precedent remains. The price of oil can collapse, even if the world's largest oil producers don't want it to.

Do you know this energy tax "loophole"?
You already know record oil and natural gas production is changing the lives of millions of Americans. But what you probably haven't heard is that the IRS is encouraging investors to support our growing energy renaissance, offering you a tax loophole to invest in some of America's greatest energy companies. Take advantage of this profitable opportunity by grabbing your brand-new special report, "The IRS Is Daring You to Make This Investment Now!," and you'll learn about the simple strategy to take advantage of a little-known IRS rule. Don't miss out on advice that could help you cut taxes for decades to come. Click here to learn more.

Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information