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A Year of Crashes: Planes, Petrol and Putin

More than ever before, I am convinced now that Uncle Sam controls oil prices, like it does everything else in this world.

N Sundaresha Subramanian  |  New Delhi 

Two unfortunate airplanes never reached their intended destinations in 2014. Who would have believed it at the beginning of the year if they had been told these incidents would happen within matter of four months? And what were the odds that they both belonged to the same airlines? MH 370, which was the first to go in March, continues to be a mystery with theories emerging every now and then the latest being this week’s Daily Mail story quoting the chief of Proteus airlines.

But in my book, MH 17, which went down over the Russian rebel-held Ukraine was something which changed the world forever, once again.

7/17 is the 9/11 of this generation.

Though the official investigations on the crash are likely to continue well into the next year, and though nobody in the West has officially blamed Russia or its strongman Vladimir Putin, what is happening on ground, or rather on the charts on screens of traders, tell a very different story.

In the run up to the promotion of his book Breakout Nations a couple of years ago, Morgan Stanley’s Ruchir Sharma was fond of recalling a story about Putin, former US President George W Bush and their dogs.

The first meeting between Bush and Putin happened somewhere in the pre-9/11 world, when both had taken charge of their respective nations. The cold war was over a decade ago, Russia had emerged from the doomed-to-fail CIS arrangement, which did not go beyond helping in Olympics medals tally and the US was beaming with its dotcom glory. Oil was around $22-28 per barrel.

Bush himself would recall years later that he had looked in Putin’s eyes during that first term and found a man he could trust. Putin also got introduced to the Presidential Scottish Terrier Barney.

By the end of Bush’s second term oil would hit $140 a barrel, with predictions of it touching $ 200 floating around. When Putin hosted Bush around this time, he asked his Western counterpart “Would you like to meet my dog?” Out came Koni, a black Labrador which the Russian President was happy to describe, “Bigger, stronger and faster than Barney.”

That was not just a dog. It was a metaphor for the resilient Russia, which was growing in confidence led by the ambitious Putin and fuelled by gas and oil exports. Even as the West slumped into a painful recession triggered by the sub-prime mortgage led financial market collapse, Russia’s economic might was fast metamorphosing into territorial ambitions that culminated in the occupation of Crimea in March this year.

Like Bush watched Koni, a shocked world watched as Russian forces marched into Crimea and threatened to destabilize Ukraine. Russian rebels took control of the Eastern half of Ukraine and threatened to take the other. The economic sanctions came but things only got worse, peaking with the shooting down of MH 17.

Then began the spectacular collapse of oil.

Brent crude, which was hovering around the $110 mark and was threatening to go up further as a marauding army called Islamic State of Iraq and Syria was capturing Iraqi cities and oil fields, suddenly began a long journey southwards, which has still not stopped.

Confused traders, market analysts and businessmen tried different causes to explain it and offered different support levels. But each of these were shattered one by one. Now, they have settled on the theory that US shale production has suddenly gone through the roof, driving prices down. Further theories of the OPEC cartel, whose fundamental objective was to prevent oil prices from falling, losing its relevance and potential of US’s wind power have surfaced.

No wonder, everybody wants to know where oil prices are headed. Because the falling price of oil has already upset many calculations: investments are getting shelved, companies are going out of business and national budgets are going for a toss. Some producers are on the verge of going bankrupt.

I always doubted it, and have often heard people in the industry talk about it. But more than ever before, I am convinced now that Uncle Sam controls oil prices, like it does everything else in this world.

More important than anything else, falling oil is hurting Putin. The rouble faced a run. The central bank has hiked interest rates to 17% to prevent further damage. As American analysts on Russia Today television try to point out how all this is wrecking the Russian economy, the anchors rush to point out same is the case with every oil producing economy such as Venezuela.

Has Barney got the better of Koni? Not yet, it seems.

If this theory is true, how far down should oil go for the muscle-flexing Judo master to blink?

Is $22-28 of early 2000, when Putin took over, a good level? That is just a 50% fall from here, equal to the fall from peaks of 2014.

Hopefully, the New Year will give us an answer.

(N Sundaresha Subramanian is Associate Editor at Business Standard)

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First Published: Sat, December 27 2014. 14:13 IST