The Mint: The Bank of Russia Dwarfed in Oil Price War

12/3/2014 Portland, Oregon - Pop in your mints…

In case you haven't been following our key indicators lately, the price of oil has taken a nosedive over the past three months, falling nearly 30% from late September. If you drive an SUV or run an airline, this is great news. If you are Russian or in some way invested in or employed by US based shale oil operations or work extracting oil from the Alberta Tar Sands, this is bad news.

First, let's take a look at the effects on Russia, which have dominated the headlines. The Russian economy is heavily reliant on oil and has one of the largest petroleum industries in the world. It has the world's eighth largest oil reserves and is the largest exporter of oil in the world in absolute numbers. Since the chart below, which highlights the rise of Russia's productive capacity and post cold war era export capacity, was produced in by Plazak back in 2013, Russian production has continued its study rise through 2014, posting a post-Soviet record of 10.61 million barrels per day in September.

Russian Oil Production Chart By Plazak (Own work) [CC-BY-SA-3.0 (http://creativecommons.org/licenses/by-sa/3.0)], via Wikimedia Commons

Further, Russia produces approximately 73 barrels of oil per day per 1,000 inhabitants, compared with approximately 37 barrels of oil per day produced in the US per 1,000 people.

Oh yes, and it has been reported that the 2015-2017 budget forecast of the Russian Government was based on the assumption of oil being priced at $100 per barrel (they are now revising it to around $85, $20 some dollars ago in the real world). Unlike the most of us in the US, that is a revenue assumption for them.

Financial markets are watching this and licking their chops, Russia is a short no matter how you slice it. Their oil industry and economy live in a world that ceased to exist about the time the price of oil spiked and drove the world's largest consumers, the US, to search for alternatives.

The Bank of Russia: to the Rescue or Miscue?

The Russian Central Bank has spent at least $82 Billion in its foreign exchange reserves through October of 2014 in what has proven a feeble effort to prop up the Ruble. It spent $700 million on Monday alone, and it is not working. Were the heads of the Russian Central Bank thinking a bit more clearly, they may have been wise to carefully intervene in the oil markets before their currency got lashed. Alas, the Central Bankers of the World are seldom blessed with the gift of clairvoyance.

But what about the US? As the world's largest oil producer at nearly 12 million barrels a day, won't the United States economy fall victim to the latest drop in oil prices as well? That is the premise of Michael Snyder, writing over at The Economic Collapse blog:

Guess What Happened The Last Time The Price of Oil Crashed Like This?...

While Snyder does make some compelling points about the 1.7 million jobs that the fracking boom has produced, the US is nowhere near Russia in terms of oil price dependency for its economic health.

We have three concrete reasons that we place forward for your inspection, fellow taxpayer, as to why the impact on the US will be minimal or even positive:

1) While the US produces 12 million barrels per day, it consumes 18.8 million barrels. As such, the higher price of oil still works as a quasi tax on the US as opposed to a concrete revenue source.

2) The US economy is the most dynamic on the planet. As long as credit is available, it will create jobs.

3) The Fed is still in a mode of underpinning the economy and has maintained its unconditional guarantee of the post financial crisis stock and bond markets. They would quickly contain the oil based junk bond issue that Snyder brings up.

The US economy is eternally susceptible to one thing and one thing only, a sustained decrease in consumer credit and government debt, neither of which is likely in the near term. While the Fed has hinted at raising rates, the current crisis in Russia, if anything, gives them sway to keep their various stimuli in place or on the ready as the crisis is feeding dollar strength, so the Fed doesn't have to.

It will not always be so, as the Fed itself will one day implode on its own merits (or lack thereof). For the moment, it is the Bank of Russia playing the jester in this play.

Stay tuned and Trust Jesus.

Stay Fresh!

David Mint

Key Indicators for December 3, 2014

Copper Price per Lb: $2.92
Oil Price per Barrel (WTI): $67.10