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Power Politics and the Price of Oil

by | published December 5th, 2011

Over the past three days, two events at different ends of the globe have reminded us that political developments can directly influence global oil prices.

First, on December 2, just as I was departing the United States, the Senate gave notice that it was prepared to tighten sanctions against Iran over its nuclear program.

And yesterday, the parliamentary elections here in Moscow didn't quite provide the results Prime Minister Vladimir Putin and his party had expected.

The catalysts of each event were quite distinct, and each event was not directly the result of energy policy or related costs. However, both events will likely influence the international oil market in similar ways.

Both will likely restrict the flow of oil. And this constriction should be a sign to investors that crude prices will be going up.

The End of an Era in Russia?

As I sit in Moscow this morning, I can't help but notice the enormity of what has occurred here. All conversations today center on the final vote tallies from yesterday.

Some are calling this the end of an era; others are saying a new age of power sharing in Moscow is about to begin.

My initial take is less dramatic than either viewpoint. But, I do agree with one widely accepted conclusion about yesterday…

These election results were highly unanticipated.

United Russia, the dominant political party in this unsettled new democracy, is the vehicle of both Putin and President Dmitry Medvedev. The two men plan to swap jobs after next year's presidential election.

It was to be the guarantor of a parliamentary majority to their liking. After all, the party controls more than 64% of the current Duma (the more powerful lower house of the parliament). The next largest… the long-in-the-tooth Communist Party, with barely 11.5%.

United Russia was expected to provide a solid legislative base for whatever the Putin-Medvedev tag team wanted to introduce. But there was just one wrinkle in their plans: Russian voters had other ideas and decided not to grant free permission to the ruling party.

In a remarkable sign of popular unrest, United Russia is now hanging on to a bare majority in the vote totals.

Putin's Next Step

Many now believe Putin's party will need to forge connections with at least one of the other three parties. This would allow United Russia to generate enough votes to have seats awarded in the Russian style of proportional representation.

The Communist Party now has approximately 20% of the seats sewn up. Just Russia (a newly structured social-democratic coalition) has 13%; and 12% of the vote has gone to the Liberal Democrats (there's nothing “liberal” here; these are actually the intense nationalists of Vladimir Zhirinovsky, a man who once promised free vodka to everyone in Russia if he were put in power).

The remaining seats are too close to call.

In perspective, Russian power remains in the same hands. However, political leverage will now be spread more broadly.

Real opposition now exists. However, the three parties occupying that side of the chamber have very little in common. So Putin still has little to worry about…

Except for One Major Issue

And it's the one issue on which all opposition parties and much of United Russia can agree.

Putin and Medvedev's government has been unable to cut prices for oil products, which have been higher than those in the U.S. for some time.

As the world's largest oil producer (Russia displaced Saudi Arabia over a year ago, although the Saudis still have larger reserves), the average person on the streets of any city here cannot understand why the government is powerless to prevent gasoline shortages or price spikes.

And voters are calling for answers…

As a result, Russia will likely increase its emphasis on retaining more of its production to service domestic needs.

Which brings me back to how the election will influence the global marketplace…

Should Russia now retain more production to appease its populace, a reduction in volume going to the international market would naturally follow.

And what follows a reduction in oil supply when demand remains constant or increases? An increase in global oil prices, of course.

I suppose that elections really do have consequences…

Meanwhile, Back in Washington

Overwhelming majorities in both the House and Senate (on a 100-0 vote, no less) are using the annual defense budget authorization bill (in an election year) to put an additional squeeze on Iran.

The bill now contains a new round of sanctions again Iran, despite the threat of a presidential veto.

It's not that the Obama administration is indifferent to Iran's nuclear ambitions. Rather, they are hoping that Brussels and its members will help lead on this matter.

That, and the administration probably recognizes one other troubling prospect…

Such sanctions would further impede Iran's ability to sell crude oil internationally. That would, once again, limit available supply…and lean to an increase in oil prices.

Of course, this could also be part of a balancing act. The West now has to decide the price it is willing to pay in the hopes of making Iranian nuclear ambitions too expensive for the country to continue.

Yet, as with what is unfolding here in Russia, it is another reminder that we are in a fully integrated international oil market. The U.S. need not import oil from Russia or Iran to feel the effects of reduced export volume from either.

Neither does any other country.

Crude oil supply and demand play out on a truly global stage. These days, politics in Moscow or Washington, Brussels, or Beijing will determine prices just about everywhere.

Volatility is not just about how markets perceive producers and users.

On a fundamental level, it is also about availability.

That's why political decisions continue to have a major influence…even when the primary purpose of an action, an election, or a sanction has nothing directly to do with the global price of oil.

It's an important thing to keep in mind with major elections approaching in the United States, Mexico, Venezuela, France, Russia, and China in 2012.

Sincerely,

Kent

P.S.: My next Oil & Energy Investor will be coming to you Friday morning, as I return from meetings in Russia.

But today I want to share some additional exciting news.

As you know from joining me on my travels, we are in one of the most exciting times to be an investor in this sector. Energy remainsthe single most lucrative segmentin today's investment markets.

Yet many investors are hesitant because they don't understand how to invest in times of price volatility.

Well, fear not. On Wednesday, you're going to learn about one of the most powerful ways to capture profits during times of volatility. This is something that I have been quietly working on for nearly 18 months.

And it's big…

I'll send you the details on Wednesday, in addition to regular weekly commentary from our new senior analyst, James Baldwin.

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  1. Gordan Finch
    December 5th, 2011 at 13:13 | #1

    Whilst I think your comments on the price of petrol and diesel in the US will rise, I am not that convinced the price of crude will increase in the long term. The reason beind this is simply that any further increases in fuel will be like shutting up shop to all business.

    Transport and by that I mean lorries Vans and cars. Without the lorry and its driver nothing, and I mean nothing will be delivered. This means no food no fuel no nothing full stop. Fuel price increases will destroy what we have now, and it has already destroyed most of the western World. Gordan Finch.

  2. Tim Simon
    December 11th, 2011 at 14:05 | #2

    I would respectfully have to disagree with mr Finch , reason in being that the idea or Philosophy the good doctor makes in the article in that global politics has very much to do with the price of oil is I believe very much on the mark….
    Especially when you consider all the recent events which have occurred in the “middle east “…….and the fact that a destabilized country ( iraq ) is going to lose its peace keeping forces come the first of the year when troop withdrawal deadlines are satisfied, How confident are you that the sunnis ( saudi arabia ) are going to be able to defend 3,400 miles of pipeline which crosses 90% shia occupied lands….how many dictaters or defunct governments have been overthrown recently?……How about this question was saddam hussein referring to a greater picture when he said ” if the us invades Iraq it will begin the Mother of all Wars” , what if he was actually referring to destabilization of a region which without adequate balances of power it eventually leads to war between Saudia Arabia and Iran , and we know who their respective allies are….
    Also consider that Iran is shia and is interested in promoting their shia interests in Iraq……when Lybia oil went offline the u.s. stepped up and temporarily influenced the market values for what a month…which was only a drop in the bucket if that, I believe the greed is growing and those behind the Greed machines will incite Armegeddon if necessary to push prices to where they want them…one explosive device placed strategically within the 3400 mile of pipeline takes one fourth of the worlds oil supply offline, too easily in my book , and also,too easily a religious civil war that has existed since the death of Muhammad in 6 hundred whatever could ignite the fuse of Armageddon! What will the price of oil be then, Russia has already told the U.S. to leave Iran alone, and are they listening?….or are they hiding behind the U.N. with an impotent drunken captain at the helm…My friend across the big pond your lorries will either grind to a halt or pay the price which comes with hyperinflation, and we will also pay the price in the U.S. if we dont get some leaders elected who are not incompetent.

  3. Tim Simon
    December 11th, 2011 at 14:09 | #3

    Also , dont forget 1973 and the 4x price increase and the shortages.

  4. Gordan Finch
    December 17th, 2011 at 18:19 | #4

    Mr Simon,

    I agree with your comments they are correct and well researched, and the added comment regarding the 1973 crisis is also correct but in part only. During the period in question I ran one of the largest transport operations in the UK. However little of the truth came out regarding the lorry drivers that crippled Britain.

    Involved I was party to the proceedings that settled the strikes, which put the country in 3 week on the brink of complete collapse. Had the incident not been settled no fuel or food would have reached the public. The crisis ended because there was no reserves’ being transported. And it soon became clear no Government could win without alternate means of transporting goods, and there is not one.

    Everything at some stage has to be transported by lorry; this includes the pipelines, drill strings and the oil itself? — Everything made grown or used.

    Any major future increases in fuel will ultimately end in the same manner, that’s why increases are kept small and over longer periods.

    My own opinion is that should fuel costs be reduced significantly it would be like lighting a rocket under the rear end of Industry (a very large BOOM).

    Your last sentence, I agree, but it needs someone to stop the black plastic bags stuffed with money being paid to career Politicians.

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