Trump Gives Russia Amazing Leverage Over The Oil Market

Donald Trump has given Russia's increased leverage over the world oil market. His policies towards Iran and Venezuela are putting output at risk. Iran will benefit greatly from higher oil prices as they ramp down production. As the chart below shows, Russia is not producing more oil, either. But the oil being produced is becoming ever more valuable. 

Trump has put the trade war on hold as it pertains to China. But Russia, the EU and Japan are still making trade war noise since Trump not only raised tariffs on Russian steel, but also on Japan, an ally of the United States. So, we have the uncomfortable reality that China gets a break and Japan, an ally, does not.

Russia has the power not only to impose tariffs but also the power to reduce oil production. With the China, Russia oil deal likely falling apart, Russia may find itself linked in this battle with strange bedfellows, Japan and the EU. Still, Russia supplies major contracted oil to China.

Now that Russia and OPEC seem to be getting along, the leverage that Russia has increased. It was not long ago that it was thought that the US was trying to bankrupt Russia with low oil prices. Now it seems, Russia will be the prime beneficiary of high oil prices.

(Click on image to enlarge)

Source:  Organization for Economic Co-operation and Development

Russia has the largest oil reserves in the world. Russia is the largest exporter of natural gas. Giving that nation leverage in a time of oil scarcity could weaken the economic position of the United States. High oil prices cause a slowdown for farmers, who may not be hurt because the China trade war is put on hold, but will be hurt by high oil prices. Retail in America is on shaky ground. Retail and airlines cannot tolerate massive increases in oil pricing.

But Russia has been hurt by low prices, as production has lagged, as has world economic prosperity. The chart of Russia's oil production looks like one of Jeffrey Snider's charts of US economic growth. Yes, the oil production is barely increasing, but has declined in 2018. Before the Great Recession, Russia's oil growth rate was powerful.

The interesting relationship in all this is the relationship between Russia and Saudi Arabia. Clearly, Saudi Arabia was against the Iran deal. And the Saudis oppose Russia's involvement in Syria. Yet it seems that the two nations are working together to raise oil prices, at least to the west. There is some reporting that the Saudis have given China great wholesale prices for oil, but that may be going on with many who are wanting to court favor with China.

But, how that relationship between the Russians and Saudis plays out, and how oil fluctuates in price, will say a lot about how events will unfold in a possible realignment of allies in the region and the world.

While the Saudis and the Russians seem to be on the same page regarding oil, natural gas may remain a bone of contention between the Saudis and the Russians. Since natural gas is clean, it is looked upon as an important future means of revenue for the Saudis, who would like to compete with Russia in getting the product to the EU. Syria stands in the way.

So, clearly, these relationships are complex, and they may be fleeting. There is a lot of mistrust between the nations. When that comes to oil and natural gas, that can't be a good thing.

One wonders what vision Donald Trump has about the new alignments and the new order in the world. He has heightened the mistrust between the nations. Nations are like people. They like to know where they stand.

This point is not an endorsement of traditional globalization, which sees the Anglo American Empire as central to world domination. China seems to accept that arrangement, as long as it can make money and see increased economic opportunity. But others don't trust the centers of world finance, the Square Mile and Wall Street.

But some sort of global trust has to be established, as Trump realigns interests. The relentless sanctions against Russia and attack on oil prices by the west, seem to be pushing others like Saudi Arabia into the Russian camp. The Saudis are tired of low oil prices and the game the globalists are playing. They align with the globalist desire to get rid of Assad, because of their pipeline aspirations, but they don't want to break Russia with low prices.

Yet, the American economy seems to be founded upon low energy prices. It does not do well with high energy prices, as there is so much speculation in America driving housing and commodities already. Any rise in oil just makes all that worse for the American household.

But a weak American economy can weaken oil prices and affect Russia's influence over the market. Ultimately, the American consumer is as significant as Russia's leverage over oil. Americans have shown that they have options in the face of high oil prices, like not buying discretionary items, or simply parking the car, or buying electric cars, or closing their wallets in general. 

Russian influence could make any recession come on sooner and be deeper, however. 4 dollar gasoline could cripple the US economy, says Zero Hedge.

The direction of the price of oil will indicate who is in charge of this oil game. And there will likely be ebbs and flows and temporary winners, only. But the world may become more unstable as Trump tries to limit American influence militarily while increasing that influence economically. It all depends on how the nations go along with the changes and how POTUS reacts to their behavior. 

POTUS wavers on trade, on peace talks, on just about every policy he owns. Uncertainty comes with the statements he makes and tweets, and it has stock investors on edge. As with every presidency, the ultimate question is whether pragmatism will win out over ideology, and in Trump's case, simple anger and frustration. If the latter win out, look for oil prices to increase, and possibly break the US economy.

Disclaimer: I have no financial interest in any companies or industries mentioned. I am not an investment counselor nor am I an attorney so my views are not to be considered investment advice. The ...

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