Friday, December 16, 2016

Trump's "Full Throttle" Energy Policy Could Devastate Putin's Petrostate (Tillerson to Deliver the Message?)

Putin’s regime is based on Russia’s oil and gas resources, which, despite his pledge to diversify, account for a quarter of the economy and half of state revenues (two thirds if other minerals are included). Putin can live with a stagnant economy and popular unrest, but he cannot survive a large and irreversible loss of Russia’s oil and gas earnings.

Basic economics explains how a Trump “high resource case” would undermine Putin’s petrostate: The first US fracking revolution made the US energy industry the “swing” or “marginal producer” on the world market. No matter what OPEC or Russia produces, the long-run price of oil will be set by the break-even cost of US unconventional oil and gas. The break-even is currently between $50 and $60 a barrel, but it is headed to lows of $40 or below.  We should not underestimate the technological ingenuity of the fracking industry.


But wait! Will not President Trump, known admirer of Putin, and Secretary of State, Rex Tillerson, Order of Friendship recipient, use their immense political clout to cash in on lucrative Russian deals. Will not Trump and Tillerson throw money at their “bromance” partners, Putin and his Rosneft sidekick Igor Sechin, and save Russia’s failing petrostate?

What deals are we talking about? Over the near term, oil prices rule out large international investments in Russia, even if sanctions were lifted. At best, the Shells and BPs will try to salvage what they can from past mega-investments at $100 oil. No one is standing in line to throw their money away on loss-making Russian mega-deals, least among them an ExxonMobil headed by Tillerson’s successor.


go to Forbes.com

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