A few weeks ago, political analyst Dick Morris offered the following insights.
In Iran, the sanctions imposed by the United Nations, the aggressive efforts of the U.S. government, and the actions of states like California, Florida, and Missouri to ban pension investments in companies that do business with Iran are having a big effect.
Unable to expand its oil production for a lack of foreign investment, Iran faces the need to slash its budget drastically as energy revenues, the source of 85% of its income, crash. Iranian President Ahmadinejad is announcing harsh austerity measures.
Having based his budget on $50-$60 oil, he now must recast it for at a $40 per barrel level. He boasts of cash reserves of $23 billion, but that sum won’t last long unless he makes major cuts. (Do the math: a shortfall of $25/barrel per day x 4 million barrels a day x 365 days = $36.5 billion, more than he’s got on hand).
The question for Ahmadinejad and for the Ayatollah who stands behind him is: Can their regime survive economic collapse? Unable to buy social peace by handouts and subsidies, will the top blow off in a country that hates this regime--predominantly very young people & only 40% Farci?
Chavez, in Venezuela is not in any better shape. Because of corruption and incompetence, Venezuelan oil production has dropped from over 3 million barrels per day when Chavez took over to about 1.7 million today. As long as oil prices were quadrupling, it didn’t matter, but when they crashed, a harsh wind of reality blew in the door.
Chavez was losing popularity before the oil price dropped. He lost a constitutional referendum to give himself lifetime tenure and he just lost his municipal elections in the largest cities and states in the nation. After knocking out most of the major opposition candidates on phony charges of corruption, he managed to hang on to the governorships of the small, rural provinces, but he lost the cities – even the poor areas of the cities voted against him.
Putin’s Russia, which so recently threw its weight around by invading Georgia, faces perhaps the biggest hit of all to its economy. Producing 10 million barrels per day, Russia will be hit the hardest by the collapse of prices. (Again, do the math: Assume Russia budgeted at $60 oil prices and the price drops to $40. $20/barrel x 10 million barrels per day x 365 = a $73 billion annual shortfall).
With a GDP of only about $1.4 trillion, Russia faces the loss of about 5% of its economy. And Russian oil production has dropped by one million barrels per day for each of the past two years. With prices at rock bottom and nationalization an ever-present threat, who is going to invest in increasing Russian production?
This week we learned that a seven-year economic boom in Russia fueled by cheap credit and soaring commodity prices has come to an abrupt end, plunging the country into the worst financial crisis since its 1998 debt default.
Russia's economy is expected to contract by at least 2% in 2009 after growing at an average rate of 7% in recent years.
This vast nation with 142 million people owes its past success, and its current woes, to this decade's wild ride in commodities. Its economy depends on revenue from oil, natural gas and metals.
The commodities collapse is starting to hurt ordinary Russians. The unemployment rate jumped to 8.1% last month, with 6.1 million Russians currently out of work.
In these oil-producing nations the ruler buys social peace with oil money. The pressure to stay in power will be so intense that these leaders will force production as high as they can to offset the shortfall. The result is that there will be constant deflationary pressure on oil prices--and a potential "peace dividend" to freedom-loving countries because these rulers will not have the means nor perhaps the inclination to make war at this time.
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