The Depression -- let’s call it what it is -- leaves us, well,
depressed. But there is very good news from around the world. Our
enemies are collapsing under the strain of dropping oil and gas prices.
What we had all hoped conservation and off-shore drilling would
achieve, the global economic collapse is accomplishing: the defeat of
OPEC, Iran, Chavez, Putin and the weakening of the financial
underpinnings of Islamist terrorism. In each of these nations, the hold
of the dictator is weakening as, one after the other, they face the
consequences of dropping oil prices.
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 an
country that hates the regime, is predominantly very young, and is 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 vote d against him.
Now, beset already by food shortages and galloping inflation, Venezuela
has to make do with less subsidization and drastic cuts. Feeling cold
times ahead, Chavez is desperately pressing ahead with a new attempt to
abolish term limits in a vote set for the end of February, but, if he
falls short – which we think he will – he could be out in a
matter of months.
Chavez’ client-states -- Ecuador, Nicaragua, and Bolivia –-
have to face life without subsidies. Evo Morales, the head of Bolivia
who got elected pledging to allow cocoa cultivation again, already
faces a virtual civil war as the energy-rich half of his country wants
autonomy and, possibly, independence. Argentina, whose corrupt regime
has held onto power by massive borrowing from Chavez, must now seek
sustenance from the global markets, only recently burned by its default
on its foreign debt. Fat chance.
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?
And what of OPEC and the economic base of the Islamist terrorists?
Countries like the United Arab Emirates, Qatar, and Kuwait will be OK
because they have small populations among whom to divide their oil
earnings. Saudi Arabia will make it because of its massive production
and relatively small population. But every other OPEC nation has a
large population where the ruler, usually a dictator, 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, a vicious cycle that will impoverish all the
right people.
