I dont think its possible for anyone to say that they haven’t heard or read about either of the following two headlines ‘Russia’ and ‘Oil’ over the last few weeks. We are facing an economic situation that is taking the financial world by storm and its impact on both personal and national wealth has been staggering. In order to fully evaluate the situation there are three areas that we need to look at;

1. What is behind the fall in the price of oil?
2. Why is Russia being so badly affected?
3. What’s the future hold in store?

What is behind the fall in the price of oil?

Unfortunately there isn’t just one single root cause behind the decline, it is a combination of factors that so happened to take place simultaneously. So what are these factors;

• The appreciating USD: 

As we are all aware oil is priced in USD, so it is highly sensitive to fluctuations in the USD currency. Over the last couple of months we have seen the USD strengthened against all major currencies. In turn making oil more expensive in real money terms for importing nations.

• Law of demand and supply

We can go right the way back to the classroom with this one, and there isn’t anything different or complex its the old fashioned law of demand and supply. As we all know when supply outweighs demand prices fall. The emerging markets have been large oil consumers over the last decade as they find themselves in a highly intensive development phase. However growth has not met expectations as of late and the outlook for emerging markets is not as bright as once envisaged. Couple this with a slowdown in Europe and reduced demand from our friends in Asia and you have part of the problem.

While there has been a slowdown in demand, you would expect an obvious reaction to be a reduction in supply however this is not the case, it is quite the opposite. Oil production has continued to grow strongly over the last decade. latest figures estimate that there approximately 2m barrels per day of spare production globally. Naturally enough you would expect OPEC to set in and balance the books forcing OPEC member nations to reduce supply and calm the market but this hasn’t happened. We are now facing a situation where the current oil price has fallen well below government budget break-even points.

Why is Russia being so badly affected?

Let’s not forget we have experienced a $55 per barrel drop in the price of oil so no matter how big an economy you might have you are going to feel a pinch. (let alone when it is your primary resource!). However some countries welcome the decline in oil prices with open arms, and who are they? countries who are oil-importing countries in which oil is used by companies and households.  The Russian economy is so heavily dependant on oil it represents 20% of GDP. Not only are they suffering a collapse in oil prices they are seeing capital flow out of the country as investors become worried, and the sanction list continues to get longer by the day. It doesn’t take a rocket scientist to explain what happens next, the people in Russia begin to see the decline in the value of their Rubles and decide to invest if foreign assets through a safe haven currency in this case the USD.

What does the future hold in store?

If the current trend prevails which it looks extremely likely to do so, Russia is going to go through hell for the next couple of years.  There is a glimmer of hope coming from Moscow that the weakened currency may attract foreign buyers to the Russian market and increase exports but that has failed to happen. The big danger presented by these low oil price levels involves the other oil producers who so happen to be US allies (Saudi Arabia and the Gulf Cooperation council). these countries have very strong balance sheets and have the ability to produce and absorb lower prices for lengthy periods of time.

All  I can say is that for once we are not the victims and we can sit back and watch this one pan out. The big question on everyone’s minds is ‘When are we going to see this reflected at the pump?’. Unfortunately we are not going to be seeing a 60% decrease in petrol prices as the majority of petrol prices are made up of tax and excise not necessarily oil itself. Also lets not forget as mentioned earlier on oil is priced in USD so our euros are not getting us as many USD as they did back in the summer, and if the ECB decide to jump on the printing train this trend will only but get worse.