Why Oil Might Keep Going Down

Today, Venezuela begged OPEC to convene a meeting to curtail production and boost oil prices. OPEC turned a deaf ear. In case you hadn’t heard, Venezuela is not doing so well. Inflation is rampant, the poor are getting poorer, basic household goods aren’t available – in short, the ‘revolution’ is failing. Things were good when oil prices were high: the big revenue allowed for handouts, public takeovers of private companies, and most importantly, luxury goods for the political elite. With revenue falling like a rock, politicians are desperate. One answer? Pump oil like mad.

Meanwhile, Russia, struggling with a recession, budget deficits, and a war, is one of the world’s largest oil producers. Oil makes up a third to a half of government revenues. Russia really needs oil to stay above $100 a barrel. But, a short term answer to falling prices is… more oil.

What about ISIS? Apparently, this terror group scrapes money from oil fields, which helps fund its operations. We have no particular confidence economic principals play much of a role in the thought process of ISIS. If you can compel workers to operate the wells, you can merely collect the revenue no matter what it cost to extract. So to keep terrorizing, you pump oil.

It will be interesting how despots react to lower oil prices. In an ironic twist, a reaction geared towards keeping revenues up will benefit the West in a big way. Probably not what they had in mind.