OIL IN FREE FALL

Prices for the world's main fuel, petroleum, have depended on the political moods of superpowers more than economic conditions for a long time. Therefore, fluctuations in prices during a period of sharp confrontation between the world's powers, in addition to being easily explained, are to be expected. It came as no surprise to economists that prices for "black gold" began to creep downward after recent events in the Ukraine, the Middle East, and other hotspots. However, this time there is little ground for optimism - today no expert is willing to venture even an approximate timeframe for the stabilization of prices. Petroleum-producing states have already made up their budgets for the coming year with the direst market scenarios in mind. 

The administration of Azerbaijan has already lowered its per-barrel oil prices to 90 dollars, down from the 2014 price of 100 dollars. 

Conspiracy or oversaturation?

The price of petroleum futures for the oil varieties Brent and West Texas Intermediate (WTI) have already    fallen below 85 dollars a barrel. Analysts note that both varieties are 20 per cent cheaper than they were at the beginning of the year. On the whole the International Energy Agency (IEA) has lowered its 2014 forecast for global oil demand by 0.2 m barrels a day - to 92.4 m barrels. The agency explained reduction by citing weaker-than-projected economic growth world-wide. "The IEA report is simply killing Brent," declared Bob Yeager, director of the futures department of USA Inc. in New York. "The agency is lowering the prediction for oil demand for the fourth month in a row. There's an enormous risk that prices in the market will go down."

The situation at the exchangeshas entirely explainable fundamental economic causes. In the opinion of leading global analysts, the primary reason lies in the oversaturation of the world market. Objective reasons are also named: increased supply of shale oil in the United States and oil from bituminous sands in Canada, as well as possible dumping due to oil supplies from regions captured by ISIS. Moreover, the harsh economic statistics published last week in Europe, China, and Japan have further strengthened expectations for a further decline in the world economy, which has led to a fall not only in oil, but also in other raw materials.

At first blush, the reason for the fall in oil prices can be easily linked to global political instability, and today one of the most popular theories is a possible new oil conspiracy against Russia between Saudi Arabia and the United States. One version even says that the United States is now repeating the early 1980s scenario, in which prices fell to 22.85 dollars per barrel of crude oil, due to which the USSR lost 73 per cent of its revenue from oil exports in real terms and, nearly bankrupt, disintegrated. As for Saudi Arabia, it has just lowered the price of oil for its customers to the lowest level since 2008 and, according to the    available data, is ready to keep its prices at 80-90 dollars for another year or two.Kuwait, Iraq, and Iran followed suit by declaring that they would not lower production levels and are      willing to follow a similar pricing policy. This theory, however, also has a rebuttal. A significant drop in oil prices would risk hurting both the United States and Saudi Arabia: extraction of shale oilin the United States begins to become unprofitable at prices below 85 dollars, and a budget deficit in Saudi Arabia appears at 90 dollars per barrel. It is quite interesting that in an open letter to the Saudi Arabian cabinet Prince Al-Waleed bin Talal al Saud noted that 90 per cent of the kingdom's budget depends on oil revenue,     meaning that low oil prices would be a "catastrophe about which one cannot remain silent." 

As for Russia, which a number of experts believe to be the target of price-fixing, Sberbank head German Gref says that the Russian economy will withstand a decrease in oil prices to 80 dollars a barrel, although the Russian state budget plan for 2015 was drawn up with expectations of prices at 100 dollars per barrel. "It depends on how far it falls. If the price is between 80 and 90 dollars a barrel, things will be difficult, but it won't be a death knell. There's nothing serious to be worried about," he said. It should be noted that the Russian budget loses nearly 80 billion rubles (two million dollars) for every dollar of decrease in oil prices.

As well-known Russian economist Mikhail Khazin asserts, the real goal of the United States is to make oil prices as low as possible for itself and its allies and as high as possible for everyone else. The US will not allow oil to go lower than 70 dollars, because then the extraction of shale oil would becomeunprofitable in the United States. After reaching roughly that price on the US domestic market, it will be allowed to stay there, while on the world market prices will be raised by soaking up speculative dollars with oil, a process that threatens to destroy the American economy in the near future. 

Azerbaijan: quality, not quantity 

It is obvious that governments whose budgets depend on oil revenues will suffer due to the current price collapse. It was with these trends in mind that the Azerbaijani state budget for 2015 was drawn up, as ordered by President Ilham Aliyev. "Part of our budget consists of transfers from the Oil Fund. Oil prices have decreased, which is why the government should make a correct estimate of oil prices in the budget. Overall, I believe Azerbaijan has such great economic and financial potential that decreased oil prices will not affect us. Nevertheless, we should prepared for them and build our plans with them in mind, since the world economy still has not recovered from the crisis," declared the head of state at the latest meeting of the Azerbaijani Cabinet of Ministers, held to discuss the past nine months of socio-economic development. 

According to the published plan for the 2015 state budget, the government of Azerbaijan has lowered the oil forecast to 90 dollars a barrel from 100 dollars in 2014. The share of the oil sector in the 2015 GDP is predicted to be 34.9 per cent, compared with 40.4 per cent this year.

The plan indicates that one of the factors lowering prices on the global market is increased production of hydrocarbons by the United States (11.5m barrels every day), which since January has lowered its oil imports. "Since last year the US has ceased importing natural gas, and is now trying to decrease oil deliveries," the document states. 

Aside from this the plan notes that the weak economies of EU countries have caused decreased oil demand in the region. The export of energy resources to East Asian countries such as China and India has increased. However, recently the rate of economic growth in these countries has fallen. "At the same time geopolitical instability in the Middle East and a number of other oil-producing countries, as well as the lifting of sanctions against Iran, have caused high oil prices, while the gradual stabilizing of these processes has lowered oil prices," the state budget plan states.

The average sale price of Azeri Light petroleum from January to June of 2014 on world markets was 108.20 dollars, which is 2.90 dollars lower than last year. This year the peak price was recorded in June, when oil sold for 113.20 dollars a barrel, though prices once again began to fall, reaching 98.30 dollars in September.

Meanwhile SOCAR (State Oil Company of the Azerbaijan Republic) President Rovnaq Abdullayev, commenting on the state of world oil markets, admitted that decreased oil prices are not good for Azerbaijan, or for SOCAR, as with any other oil company. At the same time he noted that the situation is not too critical. "While planning the budget we took into account possible decreases in oil prices. We looked at various scenarios in which the company's expenditures and its investment programme changed to match oil prices," said Abdullayev. 

As regards the overall effect on the economy, some adjustments will be made, but, in any case, as President Aliyev has said, "social issues, social security, military spending and infrastructure-building projects will be given first priority." Moreover, this state of affairs will stimulate development of the country's non-petroleum  sector, lowering the economy's dependence on the sale of hydrocarbons. It is worth noting that next year the share of the petroleum sectorin general budgetary receipts is expected to decrease to 65.3 per cent, compared with an expected 66 per cent in 2014. In 2013 the figure was 73.1 per cent.

However, experts are generally of the opinion that there is no reason to over-dramatize the state of the oil markets. They also believe that November's OPEC meeting may change things somewhat. Meanwhile, analysts at the American banking giant Morgan Stanley suggest that in the mid-term oil prices will stay at around 90 dollars per barrel (plus or minus 10 dollars). As the Morgan Stanley report states, analysts at Invest bank expect to with hold its answer until the end of the year: "Quotas may be lowered in 2015 and 2016. According to our estimates, OPEC should lower oil deliveries to approximately 500,000 barrels a day for 2015 and 2016 to balance the market. To strongly motivate OPEC the price of oil would need to be at low levels." 

In other words, experts believe that the longer oil prices are lower, then the stronger the future deficit, and the sharper the future price surge. So we need only deal with these "hardtimes".