Thursday, May 8, 2014


So today, through Zero Hedge, I discovered Our Finite World a blog by Gail Tverberg with the tag line "exploring how oil limits affect the economy." 

In Russia and the Ukraine – The Worrisome Connection to World Oil and Gas Problems, Ms. Tverberg posits Russians are starting to experience economic contraction cause by these factors:

  • a low revenue situation — Russians "are not receiving enough oil and gas revenue to meet their needs" 
  • Russians "are not able to collect enough taxes to provide the services they have promised to their citizens"
  • Russians are not receiving enough oil and gas revenue to pay "the amount of reinvestment that is needed to maintain production"
According to RIA Novosti, Russian politicians approved the draft budget for 2014-2016. Here is what it looks like:
  • The budget basis on the Urals oil price of US$93 per barrel in 2014 and US$95 per barrel in 2015 and 2016.
  • The 2014 budget deficit will stand at US$12.4 billion, 0.5 percent of GDP with US$428.6 billion in revenues and US$440.1 billion expenditures.
  • The 2015 is expected deficit will more than double and stand at US$25.8 billion, 1 percent of GDP, with US$459.3 billion in revenue and US$485.2 billion in expenditures.  
  • The 2016 budget deficit is expected to drop to US$15.3 billion, 0.6 percent of GDP with US$502.4 billion in revenues and US$517.7 billion in expenditures.
The current FY deficit for Americans is 4% of GDP ($680 billion FY deficit over $17 trillion GDP estimate)! That is 4 times more than the Russians in their expected worse year!

Right now, the Russian Export Blend Crude Oil (REBCO) futures end of day settlement price sits at $106.55.  The EIA claims the Russians export 2,600,307 million barrels a day. Assuming the spot REBCO price every day for a year, Russian oil sales over 365 days would be US$277.1 billion

According to Wikipedia, revenues in 2012 for Gazprom summed to US$164 billion, for Lukoil US$139 billion, for Rosneft, US$101.

Ms. Tverberg claims Russians as  "marginal producers" being pushed out. Yet, the EIA says Russians are in the top tier of producers pumping greater than 10 million barrels a day.

If prices were to fall for REBCO, for WTI, for Brent, it's likely the 204 countries producing less than a million a day would be the ones pushed out.  

The whole of trade gets governed by one, true, infrangible law and one axiom — the Law of Prices and the Axiom of Profit. The Law of Prices holds the winning bids of purchase and sale set the price. The Axiom of Profit holds the sum of sales must at least equal the cost of production otherwise a producer goes to run. 

By the Law of Prices, the price of whatever set by winning bidders dictate the expense which can get incurred to produce the last quantity of X whereby a producer does not fall to the Axiom of Profit. 

The numbers easily stack against Ms. Tverberg and her false thesis that Russians are being forced into a takeover of Ukraine because of oil and government finances in disarray. 

Ms. Tverberg believes the world is reaching limits on oil and gas production. Many fall for such fallacy.

Kent Bower doesn't believe the world is reaching its limits on oil and gas production. Bower actually works in natural gas and oil drilling and has for decades. Bower is the geologist who calculated that Texas’s Barnett Shale held more natural gas than government bureaucrats and others estimated. 

Bowker has said “It’s not as drastic as what people think. You listen to all the naysayers saying we’re running out of oil, we’re running out of gas, there’s not going to be anything left. We’re always running out of oil, we’re always running out of gas. But obviously that’s not the case.”

World oil output has grown 6% since 2009 alone. The people at the EIA say world oil output for 2013 ran to 32.97 BILLION barrels.

A far likelier reason is push back by Russians against U.S. political establishment policy of encirclement of Russia, Iran and China. Even bungling Obama has “pivoted” to Asia.

In short, U.S. leaders have pushed to get NATO forces and weapons systems as close to the border of Russia as they can. In so doing, it cuts down the distance needed to launch attack against Russians while lengthening the distance Russians must overcome to counterattack.

Putin and his team likely understand that if the U.S. and its proxies get to the Russian border, Russians get subordinated to a U.S. dollar / Euro regime.

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