War and Oil: a Russian Tale
For over 10 years the world has been heading towards a major war and it would take a major changes in multinational organisations, several sovereign nations including the United States to save us.
In 2007 at the 43rd Munich Conference on Security Policy, Russian president Vladmir Putin said uncontained hyper use of force – military force – in international relations, force that is plunging the world into an abyss of permanent conflicts. His strong comments condemned the United States and their uni polar grip on the world. Such power granted to the United States he deems “unacceptable” and as a result may spark a nuclear arms race between Russia and the US and intensify extremism in the Middle East.
Fast Forward 10 years to 2017 and those words seem prophetic, a return to the cold war where the two of the major world powers are grappling for supremacy. Lately we have seen headlines of Russian interference in the 2016 US elections in which Senator John McCain hungrily labelled “act of war.” This came at a boiling point after Russia and the US hand wrestled for respective sides in the Syrian civil war and disputed strongly on Russia’s annexation of Crimea.
While we see Russia’s contempt of America’s control in world politics, we also see America’s great envy of Russia’s rising influence and wealth. Russia has achieved this rise largely by becoming the worlds largest oil producer and as the world is becoming aware, war follows oil.
The Syrian conflict has led to the realisation of three natural allies. Ensuing Peace talks in Syria were led by Russia and involved Turkey and Iran, rapidly increasing Russia’s newfound influence in the Middle East. This coupled with the UK’s exit from the European Union and President Trump referring to NATO as “obsolete” the world is indeed in the midst of a power struggle of epic proportions.
The election of Donald Trump has in no uncertain terms opened a new era of US international diplomacy. An America first approach will see the US cutting down on illegal immigrants, developing only bi-lateral trade agreements and a return to pro-Israeli relations. Iran, Russia’s new found ally in the Middle East hit out at the new president for implementing a temporary Iranian-US travel ban by dropping the US dollar for foreign exchange reporting. The governor of the Central Bank of Iran, Valiollah Seif, added that the country would switch to another common foreign currency or a basket with a ‘high degree of stability” for all financial and foreign exchange reports. Iran’s most important export which is Oil will still be sold in US dollars and the move is largely seen as a complication to Iranian book-keepers but one of great symbolic confidence non the less. On Jan 29 2017, Iran launched a new type of medium-range ballistic missile prompting an emergency meeting of the U.N. Security Council on the 31st of the same month. The now former US National Security Adviser Mike Flynn put Iran "on notice" in a strong damnation from Washington. Days later Fox News reported that Iran has removed a similar missile from a launch pad, this came at the same time Iranian Supreme Leader issued a new warning to the White House about the coming 38th anniversary of Iran's Revolution, "No enemy can paralyze the Iranian nation."
Turkey’s President Erdogan sees President Trump’s appointment as a chance to reset relations with the United States, which Turkish officials say had nearly collapsed in the last years of the Obama administration. Relations were at a low point when Turkey believed the US were involved in a failed coup against President Erdogan and also a long-running feud concerning American support for the leading Kurdish militia in northern Syria, which Turkey regards as a terrorist group.
Turkey is one of six countries recognised as a candidate for EU membership however it faces many large hurdles in the stringent process and may even go to referendum debating to enter or not. Turkey has been seen as unreliable in controlling its emigrants into Greece, it also does not recognise the Republic of Cyprus as a sovereign nation, a nation that it shares a border with and is indeed a current member of the European Union. Russian and Turkish relations have strengthened since Putin accused Turkey of smuggling oil exported by ISIS through the Syrian border in December 2015. Putin and Erdogan have since agreed to a big gas pipeline deal, agreed to resume work on a nuclear plant in southern Turkey and pledged to increase bilateral trade by more than fivefold, to $100bn a year. The speed in which these two historical foes have come together as new allies has been startling to the EU and the US it wasn’t even deterred by the Russian ambassador to Turkey has being shot dead by a Turkish police officer in December 2016. It’s in Turkey’s best interest to have the great Russian bear as a close friend because having Russia as a foe is much more painful. After Turkey shot down that Russian plane in 2015, Putin cut Turkey off from the Middle East. Russia implemented sanctions cost Turkey at least $10bn in tourism and trade revenue. Putin’s fighter jets bombed Turkey’s proxies inside Syria and Russia’s missile defence shield denied Turkey access to the airspace over Syria. Turkey is looking less likely to ally with the West should conflict arise as they debate entry into the European union and NATO.
Thanks to the amazing drilling success of American oil companies the States have increased output up to around 9.4 million barrels per day. Less than a decade ago the U.S. imported more than 55% of it’s oil needs a figure that fell to 24% in 2016, the lowest level since 1970. This gave the US much greater leverage when dealing with Saudi Arabia once a major exporter of oil to the US, in particularly in relation to forming the Iran nuclear deal framework, which was heavily criticised by the Saudi Arabia.
In 2016 OPEC called on the Saudis to cut their oil output to help stabilise prices. However the Saudis knew this tactic wouldn't work. If they cut production, they would simply loose market share to American and also Iranian oil companies who ramped up production in this period. It is America’s best interest to keep oil prices low to keep the pressure on Russia, the world largest producer. So the Saudis too decided to boost production, defending market share and being the world's lowest-cost oil producer they'll be able to withstand low prices longer than their competitors and push them out of the market. As a result the market experienced a massive glut and the price of oil bottomed out at around $27 per barrel in late 2015. Coupled with US and European sanctions after the annexation of Crimea, Russia’s economy fell into back-to-back years of economic recession. Russia stood strong and called the bluff of the Saudi’s, Russia's Finance Ministry announced in December 2016 that it is drawing up plans based on the price of oil as low as $30 a barrel until 2022. That scenario would have devastating implications for OPEC, according to Russia's Deputy Finance Minister Maxim Oreshkin. With the possibility that Saudi Arabia only has 5 years of oil left and these levels of production.
NATO has capitalised on the weakness pushing 10,000 plus soldiers into Russia’s Baltic and Northern neighbours. In March 2017 a total of 8,000 NATO soldiers have been deployed to the Finnmark region of northern Norway, 160-300 km from the Russian border, for a series of joint military exercises. Disguised in an attempt to curb Russian aggression in Crimea however is the real reason to curb Russia’s oil production and in turn renewed world power. With all this pending tension one must ask Russia, why Crimea? In one word – oil.
On the edge of collapse Putin doubled down strengthening positions with neighbours investing 1.5 billion in Indian power and infrastructure. The Russian bear received 2.4 billion from China for the extraction and processing of natural resources, agriculture, and the development of port and logistics infrastructure in the far east. In the early months of 2017 the global oil price has recovered somewhat giving the Russian economy a much-needed boost pushing up around 40 percent in dollar terms from the beginning of the year. Kirill Dmitriev told CNBC in Moscow, "The Russian economy really went through some difficult times but as of the beginning of the year it really reached a floor and is coming up and we expect growth to resume at the end of this year or early next year."
As tensions increase world wide 2017 is a year that will be remembered in history and the only thing that is inevitable is change. World prices of oil, gold and other commodities are predicated to fluctuate widely and if this indeed is a year that war breaks out the opportunity to make money presents itself. Through trading world markets you can Buy and Sell currencies and commodities to make profits online. myFXplan is a Melbourne based company that helps clients from beginners to advanced make money in the financial markets. Knowing how the markets react and being ahead of the game is the asset you need to become financially free.
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