This article was first published at The McAlvany Intelligence Advisor on Friday, February 13, 2015:
Leaders of Germany, France, Lithuania, and Ukraine labored mightily into the night on Wednesday, to birth a minnow. Gathering around a table somewhere in the city of Minsk, French President Francois Hollande, German Chancellor Angela Merkel, Lithuanian President Dalia Grybauskaite, and Ukrainian President Petro Poroshenko agreed to a weak-kneed, temporary cease-fire between Russia-backed insurgents in eastern Ukraine and Poroshenko’s troops. It will begin on Sunday, and hopes are modest that it will stick this time.
Even if it doesn’t, it will cement into place Putin’s insurgents’ position. No one is reporting that John F. Kennedy’s radio address from July 25, 1961, just before the Berlin Wall was built, was played for the participants to listen to and to ponder. Said Kennedy:
So long as the communists insist that they are preparing to end by themselves unilaterally our rights in West Berlin and our commitments to its people, we must be prepared to defend those rights and those commitments. We will at times be ready to talk, if talk will help. But we must also be ready to resist with force, if force is used upon us. Either alone would fail. Together, they can serve the cause of freedom and peace….
We cannot negotiate with people who say what’s mine is mine and what’s yours is negotiable.
Nineteen days later Khrushchev ordered the building of the Berlin Wall, which stayed in place until 1992.
As the Wall Street Journal noted, “the deal calls for a cease-fire starting Sunday, with each side pulling back [its] heavy weapons, as well as steps to give greater autonomy to the Russia-backed separatist regions in eastern Ukraine….” (emphasis added)
Even demands by Ukrainian president Petro Poroshenko that his country be given control of its own borders fell on deaf ears: such discussions about that will be put off until the end of 2015. By that time, of course, the issue will long have been settled on the ground. One of the parties to the cease-fire, Lithuanian President Dalia Grybauskaite, called the agreement “absolutely weak … the main part of a solution is the control of the borders. It was not agreed upon and was not solved.”
In front of photographers, communist thug Putin grinned from ear to ear: “We’ve agreed to a lot, in my view.”
That’s why the rise in oil prices, despite the recent upsurge from lows below $45 a barrel, is merely a head-fake. People looking only at charts of supply and demand, like those at the International Energy Agency, are missing this entirely. Their estimates are that supply will come into balance with demand late in 2015, perhaps sooner, depending on seasonal factors, rig counts, cap ex cutbacks by the majors, and worldwide demand from weak economies. IEA is missing the political side of the issue, and that’s what will likely drive crude oil prices lower, perhaps much lower. To its credit, the IEA suggested an outside possibility that prices might behave similarly to 1998 when they dropped below $12 a barrel.
But it might take prices that low to so thoroughly devastate Russia’s already weak economy that it would force Putin either to soften, or to disappear permanently into the Moscow mist some cold and rainy night.
That’s what Saudi Arabia has been counting on. According to writers at the New York Times, Saudi “officials” are saying that already lower crude oil prices are giving them “some leverage over Mr. Putin.” They wrote:
Russia has been one of the Syrian president’s most steadfast supporters, selling military equipment to [Assad’s] government for years to bolster [his] forces in their battle against rebel groups, including the Islamic State, and supplying everything from spare parts and specialty fuels to sniper training and helicopter maintenance.
This is enormously expensive to Mr. Putin, whose empire’s cash flow has been negative at the rate of $100 billion a year since the drop in crude prices. He is rapidly running out of foreign reserves and time. The Saudis appear to believe that if one can starve the beast that is feeding the enemy, one can starve the enemy.
And they’re willing to wait him out. Their own cash flow has gone negative as well, to the tune of an estimated $40 billion annually. But that’s a rounding error compared to their foreign reserves, which approach three-quarters of a trillion dollars. They think they can stay in the game as long as it takes to force Putin out.
So far their strategy isn’t working. Some would say that sanctions and negative cash flow are only making the tyrant more tyrannical. But the Saudis can afford to wait. Besides, lower crude oil prices are also inflicting pain on another thorn in their side: Iran. It’s a two-fer for the Saudis.
To inflict serious pain onto Putin, crude oil prices will have to drop much further, and stay down much longer, than most prognosticators are suggesting. Charts and graphs of supply and demand aside, it’s the political side of crude that is currently driving prices lower.
The New York Times: Saudi Oil Is Seen as Lever to Pry Russian Support From Syria’s Assad
NakedCapitalism.com: Saudis employ oil price weapon…
World News Daily: Saudi Arabia in oil-price war with Iran, Russia
The Wall Street Journal: Ukraine Peace Talks Yield Cease-Fire Deal
OilPrice.com: Why We Won’t See An Oil Price Rebound Yet