Recently statements in the media that Russia supposedly could make money from an increase in oil prices as a result of a U.S. war against Syria have become more frequent. They say that for that reason it is more profitable for Russia to be on the side of the West, which is preparing for the military operation, rather than on the side of the lawful government of Bashar al-Asad. For now, let us leave aside the moral and political aspects of this unpleasant and nearsighted line of reasoning. We shall look at the economic side of the issue…
The topic of oil and its connection with events in Syria came to the top of the news feed and became the subject of serious analytical studies in August of this year. At that time the crisis surrounding Syria went into an active phase, and Russia took a firm and principled position on the Syrian issue. Analysts from the French bank Societe Generale published the results of a study according to which the price of Brent Crude oil may shoot up to $150 a barrel (approximately $40 higher than the average for the past several months) as a result of the situation surrounding Syria. Then the Belgian newspaper Echo broadcast this forecast, and then all the media started spreading it, including the Russian media. Some excitedly began writing that the «new Middle Eastern conflict» (read: the U.S. attack on Syria and the spread of the war beyond its borders) would be a real windfall for Russia, half of whose budget comes from oil and gas revenue. It's hard to say what there is more of in this line of reasoning – the economic ignorance typical of journalists, appalling cynicism or signs of ideological sabotage. Probably all three are present, if as one Moscow newspaper enthusiastically reported, «the Higher School of Economics has already calculated that in the 'worst case' scenario – the spread of the conflict to the entire oil-producing Middle East – around $100 billion in additional revenue (per year) will pour into the budget. That is, a quarter of the entire budget».
In order that these «revelations» might not perturb the uninitiated reader, I propose that we examine this problem a bit more closely.
Price Increases: If They Happen, Then Not Much and Not for Long
To begin with, let us note that Syria produces very modest volumes of oil; it accounts for only 0.2% of the world's production of black gold. Now it has stopped providing oil to the external market altogether. That is, if things go well, if the war does not spread far beyond the borders of Syria, the influence of the Syrian factor on the state of the world energy markets will be infinitesimally small. Let us examine, however, an unfavorable scenario in which events in Syria destabilize the situation throughout the Middle East. That would make itself felt; the region accounts for around a third of the world's production. It is this scenario in which the war escalates which formed the basis for the forecast by Societe Generale.
In the assessment of serious analysts, world oil prices could indeed rise. However, the effect on prices will be minimal and relatively short-lived. It will be minimal because oil prices, in the opinion of analysts, are already high. They will rise, but not much. And they are unlikely to reach $150. And most importantly, they will not remain high for long. We have experience of military operations against Iraq and Libya and destabilization of the situation in Egypt. The story was one and the same: a brief rise in prices and a subsequent return to the original levels. Today there are large enough reserves to compensate for possible reductions in energy resource supply volumes. The OPEC countries have already stated that if prices begin to rise they will «regulate» the world energy market. They do not need exorbitantly high prices. They have significant oil reserves which they are prepared to use to stabilize prices. Abrupt rises in prices are not at all advantageous to the OPEC countries, as they create a powerful stimulus for the development of alternative energy sources and increased energy efficiency. For that reason oil producing countries prefer a «golden mean», and the current price level is even a bit higher than this «golden mean».
«In our opinion», says the director of the analytics department of Alpari, Alexander Razuvaev, «on the raw materials market there will be a repetition of the situation seen in 2003, during the U.S. and allied military operation against Iraq. Oil will get a war premium, the price per barrel could reach $120 or even $130 a barrel for Brent, but is unlikely to break the historic records of 2008. If, as is very unlikely, the current government of Syria falls quickly, like in Iraq in 2003, oil will go down. In such a scenario Brent can be expected to go down to $100-105 a barrel.»
The West Doesn't Need Price Increases Either
The U.S. has also hinted that there will not be an abrupt rise in oil prices. Ed Crooks and Gregory Meyer emphasize in their article in The Financial Times (September 4, 2013) that if the price of oil rises significantly above $120 a barrel after the beginning of a military operation against Syria, the U.S. will release oil from its strategic reserves onto the market. The International Energy Agency (IEA), which coordinates the joint release of oil reserves by Western countries, also declared its position. Several days ago an IEA representative stated, «While the IEA, as always, stands ready to respond in the event of a major supply disruption, the current situation does not call for an IEA response.» If the U.S. (possibly along with other countries) releases oil from its reserves, that will stop a rise in prices.
«There is not a hard and fast trigger. But if we see prices up around $125, that is an indicator that there is tightness in the market, and possibly a problem caused by temporary disruption that could be eased by a release from strategic reserves», says Jason Bordoff, a former White House energy official who now runs the Center on Global Energy Policy. The White House should become more vocal about the possibility of an oil reserves release to help reassure the market, believes David Goldwyn, a former U.S. State Department and Energy Department official . «It is almost more important what they say and when they say it, than what they actually do», he asserts. This would be the first sale of oil from strategic reserves since 2011. At that time the leaders of developed countries used strategic reserves to ease tightness in the market caused by lower production in Libya during the war. The question is, why is Washington so concerned about the pricing consequences of possible military aggression against Syria? Because any abrupt changes in any market (not only the oil market) today could act as a detonator which would set off a world crisis. The world securities market today is literally hanging by a thread. It's impossible to say which factors have a more negative effect on this market: the events surrounding Syria or Ben Bernanke's ominous hints that the Federal Reserve could curtail the quantitative easing program. «For the Russian stock market, a decline in the world stock market will outweigh a rise in oil prices», says Alexander Razuvaev.
Events in Syria Could Become the Detonator for a World Crisis
The fact that events in Syria could set off a world economic and financial crisis has been mentioned by many. And it is nearly impossible to predict exactly who will reap dividends and who will take a loss. Most likely, everyone will lose. Including Russia. Let us recall 2008. In July, before the crisis, prices hit record highs; a barrel cost $147.3. But by the end of 2008 oil prices went and fell to the $35 mark. All the budget projects connected with increased oil revenues collapsed. Russia entered a crisis from which it has not fully recovered to this day.
The serious destabilization of the Middle East could mean big losses for Russia which could be many times greater than the short-term gain from a rise in oil prices. In particular, a reduction (or even a total discontinuation) in Russian military exports to the region can be expected. The investment climate in a number of countries will change for the worse. The effect of this deterioration will impact Russia as well, since investors understand perfectly that Syria as just an intermediate link in the military venture. Thus it is almost inevitable that foreign capital will leave Russia; the flight of domestic capital from the country will be accelerated as well.
And in the worst case scenario, if after Syria it will be Iran's turn and the West is able to bring the main energy producing and exporting region in the world under its control, Russia will simply lose its «oil weapon» And most likely its «gas weapon» as well. If, for example, the current government in Syria falls, Qatar, the faithful ally of the West, has every chance of challenging Gazprom's positions in Europe for a long time.
Note also that Russian oil companies don't need a rise in the price of black gold today either; they are perfectly happy with the existing prices, as they currently have benefits for the financing and implementation of investment projects which are linked with oil prices. They spent a lot of energy in winning these benefits, and a rise in prices will deprive them of said benefits. It will be much more difficult to regain them later.
Incidentally, the budget economy measures announced by the President of Russia will not be cancelled, even if oil prices begin to rise in connection with the events surrounding Syria. In connection with this, Minister of Finance Anton Siluanov deliberately stated in an interview with Russia Today during the G20 summit, «For Russia, any change in (oil) prices will mean that any additional oil and gas revenues will come out of the Reserve Fund».
So what are the conclusions? First, events surrounding Syria will have no substantial direct influence on the world oil market; we should not count on significant additional revenues from a rise in prices for black gold. Second, these events could spark the beginning of a new world economic crisis which threatens truly enormous losses for the Russian economy which are difficult to estimate. For that reason, not only for moral and political reasons, but also based on economic interests, Russia will do everything possible to prevent aggression and the escalation of the crisis.
