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

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.

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  • Report this Comment On August 24, 2014, at 4:06 PM, Worldobserver wrote:

    It appears that the Russians are being stalemated again. Russia has more oil than the rest of the world put together BUT they have no ice free port to export year round. We have kept them off the world market since Afghanistan and Charlie Wilson when they wanted to annex the country and build a 6 foot pipeline to the sea. If they should find a way to export their oil then the world market would not be profitable for US companies nor the Middle East AND the price would drop. Russia would become a force to be reckoned with and a player in the economics affecting the US way of life. WE CAN'T HAVE THAT....WE MUST KEEP THEM AS ISOLATED AS POSSIBLE (facetiously said of course).....what a crock of bull the oil companies and our own government is handing us in press releases!

  • Report this Comment On August 25, 2014, at 9:32 PM, Hibiscusanole wrote:

    Your comment makes the war between Russia and Afghanistan a little clearer, if it was to protect Middle Eastern oil dominance, but not the war between the United States and Afghanistan.

    Still hoping for HyperSolar's hydrogen from water to reprise the pyramid era. Green and free of political advantage for anyone.

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