In the geopolitical folklore, Afghanistan is supposed to have caused the end of the Soviet Union but in reality, the war wouldn’t have been a “bleeding wound” by 1989 had it not been for the precipitous fall in the Soviet income from oil exports.
The expert opinion is today that “the Afghan conflict’s military and financial costs, though not trivial, hardly strained the capabilities of a superpower,” to borrow from a 1989 paper by former RAND policy analyst and author Tad Daley (Afghanistan And Gorbachev’s Global Foreign Policy, Asian Survey, May 1989.)
Following the deadly blow to the Soviet economy and the energy industry from the 1986 Chernobyl disaster, William Casey, then Director of the Central Intelligence Agency in the Reagan administration, negotiated secretly with Saudi King Fahd a Faustian deal whereby the Saudis stepped up their extraction by over five times and prices plummeted from $32 a barrel to $10. The USSR lost a hefty chunk of annual income, and it already had a budget deficit.
Thirty years later, it’s the turn of the US to struggle with oil prices. Its vexation stems from from the big spike in oil prices, as more vaccinated populations are brought out of coronavirus lockdowns, supporting a revival in economic activity from Asia to Europe and North America.
The prognosis is that an exceptionally severe winter lies ahead which will make further demands on fuel. The continued tightness in supply, economic recovery in key areas and regions and the ensuing external pressures on the marketplace are adding up. Major investment banks predict $100 oil. Goldman Sachs says $90 oil could be a conservative outlook. Russian President Vladimir Putin thinks $100 per barrel is “quite possible.”
For the US, this is disaster waiting to happen as the spectre of inflation haunts the economy. The Wall Street Journal reported in October that inflation as measured by the US Labor Department’s consumer-price index was 5.3% in the 12 months through August, close to the highest in 12 years.
The psychology of inflation is dubious. The New York Times reported that “Workers have seized the upper hand in the labor market, attaining the largest raises in decades and quitting their jobs at record rates.”
The inflationary pressures come at a time when the Biden Administration is under immense pressure to turn voter sentiment around after Tuesday’s abysmal election results, and is planning to be on a spending spree. The Penn Wharton Budget model estimates that Biden’s $1.75 trillion social spending plan will actually cost closer to $3.9 trillion, while the revenue increases Biden proposes to finance the spending may only regenerate closer to $1.5 trillion.
Oil prices and levels of inflation are co-related in a cause-and-effect relationship because oil is a major input in the economy. As oil prices move up, inflation—which is the measure of general price trends such as cost of living, cost of doing business, borrowing money, mortgages, corporate, and government bond yields, etc. —follows in the same direction higher.
Against the backdrop of the rise in oil prices, President Biden demanded that the OPEC+ (the condominium between Russia and Saudi Arabia) ought to boost supply. The OPEC+ ignored it. Later, an exasperated Biden told the media, “If you take a look at gas prices, and you take a look at oil prices — that is a consequence of, thus far, the refusal of Russia or the Opec nations to pump more oil.”
But OPEC+ remains nonchalant. Its statement after a virtual meeting last Thursday decided to stick to the monthly production adjustment mechanism approved at its meeting in July. Evidently, the producers are not eager to boost output too quickly, fearing new Covid outbreaks could still dampen the global economic recovery.
Higher energy prices are going to not only fuel inflation in the near-term, it will also weaken the US dollar. Meanwhile, both Russia and Saudi Arabia are racing against time to generate as much income out of their massive oil reserves before the “green revolution” resets the rules of the game in the medium term.
To be sure, this is a “Gorbachev moment” for Biden. He is at the receiving end like the former Soviet leader was. And Republicans are smelling blood. Trump’s former energy secretary Rick Perry warned, “The potential for disaster is very real, both in a national security standpoint, and whether or not we literally can keep the lights on.” A former Governor of Texas, Perry is close to Big Oil.
Perry told CNBC, “The Biden administration’s restrictive actions — no to pipelines, no to drilling, no to the financing of oil and gas projects overseas … is a stunning reversal of the energy independence achieved under the Trump administration.” Perry is a former governor of Texas with close ties to Big Oil.
Currently, crude is hovering around $82 per barrel. On Friday, Saudi Aramco raised its December selling price to Asia for its Arab light crude to $2.70 a barrel, up $1.40 from this month. It’s a sign that demand remains strong.
Biden has few options. Perhaps, he could order release of oil from the strategic petroleum reserve, which has enough crude to replace all the oil the US imports from OPEC+ for more than a year; he could ban American oil exports; or, he could try to enact legislation to sue OPEC for acting as a cartel (which is of course a long shot.) But none of these can really lower gasoline prices near term.
On the other hand, there’s the risk that if Biden were to achieve a big price drop, it could backfire and further slow the shale oil activity rebound and that in turn would lead to much higher prices next year when the midterm Congressional elections are due.
Of course, Biden’s best option may be to dial up President Putin and Saudi Crown Prince Mohammed bin Salman and request them to pump more oil. But for that to happen, Biden must get down from the high horse of exceptionalism. He’s too weak to do that. Trump could do it.
To be sure, oil market is taunting another superpower. The USSR plunged into a deep recession, which spelt doom for perestroika, fuelling in turn Boris Yeltsin’s harsh critique of the Soviet system at large. There is an eerie similarity here, since Biden also has a perestroika to carry forward and it is also existential.
Source: The Indian Punchline