Why Oil Prices may Keep Falling

Russia faces a dilemma shared by many oil producing countries. They simply do not have a plan "B" when prices decline. They never seem to invest or save enough in good times.

Rising prices tempt them all to greater spending, grandiose projects and over-consumption. When the price falls, as it always does, the cartel attempts to hold the price, but their combined need for money and in the present case, desperate need for money, will force them to cheat the production quotas.

Domestic unrest and rising unemployment will not allow a country like Russia to cut back production. Russia would be happy to have everyone else cut back to force prices back up, but she simply cannot resist the domestic economic demand for more immediate sources of revenue. That can only come from pumping more oil.

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Russians fear financial gain has vanished
From oil woes, a familiar crisis

By Alex Rodriguez | Tribune correspondent
December 5, 2008

NIZHNY TAGIL, Russia — In this city of smokestacks, where a sooty haze enshrouds avenues of metallurgical plants and factories, signs are piling up that Russia's economic crisis has metastasized, chipping away at the eight-year resurgence that has buoyed the Kremlin's swagger.

At a sprawling metalworking enterprise, management has announced it will lay off all but 33 of its 1,225 workers. Other Nizhny Tagil factories have shortened workweeks, trimmed wages by a third, and in some cases put workers on unpaid leave.

Banks, brokerages and the country's stock market are no longer Russia's principal victims of a worldwide downturn. Here in the Ural Mountains, the diesel engine of Russian industry, foundries and factories are planning to lay off thousands of workers.

Once a rising star among world economies, Russia is facing the reality that its oil-driven economic boom has sputtered to a dead stop. Sky-high oil prices that made Russia a force the world had to reckon with have slid from a July high of $147 a barrel to well under $50. Many Russians say it's not just that they worry about a return to the economic chaos of the 1990s—they fear it could be worse.

"At least we had some hope back in the 1990s," said Tatiana Kuznetsova, 45, one of 1,192 workers being laid off at the Nikom-Ogneupor metallurgical and brickmaking plant in Nizhny Tagil. "Now it's hopeless. We probably will have to survive on potatoes and cabbages. Thank God we have a summer cottage where we can grow vegetables."

Experts say the fear of a return to the doldrums of the 1990s, when the country's economic collapse cost millions of Russians their life savings, is real and justified. The same reliance on energy prices that scaffolded Russia's resurgence economically and geopolitically now threatens to send the country into a prolonged, painful tumble.

Prime Minister Vladimir Putin acknowledged the crisis Thursday when he was asked about it in a three-hour nationally televised call-in program. He argued that the U.S. downturn had "infected" other world economies and vowed to increase government spending to help average Russians.

"I still hope that we don't have mass unemployment, but the number of people temporarily losing their jobs will definitely rise," Putin said.

Before becoming prime minister, Putin in his eight years as president never did enough to wean Russia off its dependence on oil prices as the dynamo of the country's economy, analysts say. That overdependence on energy could make matters much worse for Russia if oil prices continue to stagnate.

It's not just an economic price that Putin and his team could pay, experts say. As the crisis drags on and infects other sectors of the economy, Putin may find himself in the unusual position of seeing his popularity diminish.

"There's no doubt that the popularity of a leader, especially a prime minister, is absolutely dependent on how the economy is doing," said Nikolai Petrov, an analyst at the Carnegie Moscow Center. "Putin isn't immune from upheaval."

That doesn't mean Putin and his protege, Russian President Dmitry Medvedev, will back away from their penchant for tough talk aimed at pro-Western neighbors and the U.S., experts say. What may change, though, is the Kremlin's willingness to spend the money needed to turn that tough talk into action.

"The tone will remain the same, because it's important to maintain this feeling of being inside a fortress surrounded by enemies," said Yevgeny Gontmakher, one of Russia's top economists. "But there will be no real aggressive steps taken, for the mere fact that we will have no money for this."

The queue for government help probably will only get longer. A November survey of leading Russian companies by PricewaterhouseCoopers and the Russian Managers Association showed that 44 percent were planning layoffs. In Nizhny Tagil, a population of 400,000 is bracing for bleak times. In October, scores of Russians lined up at city banks to pull their money out. With unemployment up and more Russians keeping their money at home, apartment burglaries are on the rise.

Dmitry Arakcheyev, editor and talk show host for a local radio station, says a pall of angst is seizing the city: "It's not very cheerful here right now. I went to lunch the other day and saw lots of people outside drunk at midday. People are sinking their grief into alcohol."

Virtually the entire workforce at Nikom-Ogneupor has been told they will lose their jobs by Jan. 23. Workers like Galina Shubina, a 52-year-old electrical equipment technician making $461 a month, aren't sure how they'll get by.

"It's very hard finding a job, no matter how hard you walk around, no matter how hard you try," Shubina said. "What I feel now is fear, real fear."