TIME energy

This Is Why Warren Buffet Dumped His Exxon Holding

Berkshire Hathaway Chairman and CEO Warren Buffett during an interview with Liz Claman in Omaha, Neb. on May 5, 2014.
Nati Harnik—AP Berkshire Hathaway Chairman and CEO Warren Buffett during an interview with Liz Claman in Omaha, Neb. on May 5, 2014.

The leading investor likes "buying things cheap"

America’s leading investor, Warren Buffett, gave a wide-ranging interview to CNBC in which he gave a fitting explanation of why his company, Berkshire Hathaway, sold all its stock in Exxon Mobil Corp. in the fourth quarter of 2014.

Buffett’s bottom line? “We thought we might have other uses for the money,” he said, and was quick to add, “Exxon Mobil is a wonderful company.”

The Nebraska-based entrepreneur, often referred to as the “Oracle of Omaha,” didn’t say what “other uses” he might have for the $3.7 billion that he’d invested in Exxon Mobil. But he did say why he sold the stock.

“Its current earning power, obviously, is diminished significantly from where it was a year ago, as is true with all oil companies,” Buffett said, referring to the drop in profits, and sometimes losses, suffered by energy companies because of the 8-month-old plunge in oil prices. “But Exxon Mobil has been one of the great investments of all time.”

Read more: Buffet Dumps Exxon Amid Price Slump

Berkshire had held 41.1 million shares in Exxon, worth an average of $90.86 per share in 2013, according to the oil company’s latest annual report. In fact Berkshire was one of Exxon’s largest shareholders until the stock selloff. Exxon shares sold for nearly $3 more during that period, so it’s possible that Buffett even made a profit on the sale.

This and other sales of assets, as well as various acquisitions, were not made public until a regulatory filing on Feb. 17, which is required of investors who manage more than $100 million.

So can Buffett’s reasoning be taken at face value? Was he simply looking for another place to put his money? Evidently so, according to Fadel Gheit, an analyst for Oppenheimer & Co. in New York. Despite its prowess investing in a variety of industries, Berkshire has “not really had the hot hand in energy,” he said, and the plunge in oil prices means the rules have changed dramatically.

Perhaps the best way to understand Buffet’s benign attitude to Exxon Mobil is to liken it to his feelings about IBM. Like Exxon Mobil, IBM has suffered lower sales, yet Berkshire increased its stake in the computer company during the fourth quarter of 2014 and now holds 77 million shares.

Read more: Why Oil Prices Must Go Up

Still, Buffett said, he thinks IBM will continue on a steady course, with no spikes or plunges in its earnings, and its stock price remains stable, making it easier to sell if the need arises.

“The best thing that could happen,” Buffett said, “would be if the stock did nothing for five years. … People have the conception – misconception – [that] when we [investors] buy a stock, we like it to go up. That’s the last thing we want it to do.”

Buffett, sitting in his Omaha office, added, “Look around the room. You can see I like buying things cheap.”

And that may be Buffett’s point about Exxon Mobil: The drop in oil prices can’t last forever, and a bottom will emerge eventually. And from there, logic would dictate that the only direction for Exxon Mobil’s stock would be up.

This article originally appeared on Oilprice.com.

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TIME energy

U.S. Will Never Gain Oil Market Crown, Says IEA Head

Fatih Birol of the International Energy Agency (IEA) speaks to media during World Energy Outlook 2014 in Copenhagen, Denmark, on Nov. 18, 2014.
Anadolu Agency—Getty Images Fatih Birol of the International Energy Agency (IEA) speaks to media during World Energy Outlook 2014 in Copenhagen, Denmark, on Nov. 18, 2014.

Fatih Birol predicts OPEC to "prevail over all other producers for the foreseeable future"

No matter how much oil the United States produces over the next few years, it will never become the next Saudi Arabia in the global oil market, according to Fatih Birol, the new executive director of the International Energy Agency (IEA).

What’s especially interesting about this forecast is that it directly contradicts what Birol said only three months ago, and he gave no explanation for his change of mind.

On Feb. 26, Birol told The Telegraph’s Middle East Congress in London that OPEC, particularly the Persian Gulf members, will prevail over all other producers for the foreseeable future, even though the revolution in extracting shale oil has been “excellent news” for American producers.

“The United States will never be a major oil exporter. Their import needs are getting less but the US is not becoming Saudi Arabia,” Birol told the conference. “Their production growth is good to diversify the market but it will not solve the world’s oil problems.”

Read more: OPEC’s Strategy Is Working Claims Saudi Oil Minister

Certainly, Birol acknowledged, 2014 crude production by countries that are not among OPEC’s 12 members was greater than it had been in three decades, helping create an oversupply of oil that caused prices to erode and robbed OPEC producers of some of their market share.

But at least for the next 10 years, the cartel’s two top producers, Saudi Arabia and Iraq, will be the countries best equipped to meet the world’s demand for energy, especially if non-OPEC producers such as Brazil, Canada and the United States see production falter, Birol said.

Birol’s comments don’t jibe with what he said on Nov. 12, 2014, when he was still the IEA’s chief economist, when introducing the agency’s annual World Energy Outlook. He was appointed to the agency’s top position two weeks ago.

In that report, the IEA said US oil production is likely to exceed Saudi Arabia’s in the next 10 years, making the country nearly self-sufficient in energy and poising it to become a net exporter of oil.

Specifically, the IEA report said, Americans will be pumping 500,000 barrels more than Saudi Arabia in 2020 and 100,000 more than the Saudis in 2025. Riyadh will not reclaim its position as the biggest producer until 2030, when it is expected to extract 1.2 million more barrels per day than US producers.

Read more: The Easy Oil Is Gone So Where Do We Look Now?

Whether Birol’s forecast is correct now or was correct in November, he was not alone among noted economists and institutions in expecting a major surge in US oil production. The American financial services company Citigroup Inc. issued a report on March 20, 2014, predicting that the United States will overcome Saudi Arabia and Russia as the world’s largest oil producer by 2020.

And more recently, on Jan. 3, former U.S. Treasury Secretary Lawrence Summers said the growth of US oil production could perhaps displace Saudi Arabia as the world’s largest net exporter. “The United States has the chance to be to the energy economy of the next decade what Saudi Arabia has been for the last two to three decades,” he told the American Economics Association conference in Boston.

No one but Summers and the people at Citigroup know whether they’ve changed their minds since they spoke so glowingly about US oil production. And as for Birol, only he knows why he’s changed his mind. But for people whose livelihoods depend on understanding the arc of the oil market, such contradictions are confusing at best.

This article originally appeared on Oilprice.com.

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TIME energy

OPEC’s Strategy Is Working, Claims Saudi Oil Minister

Saudi Oil Minister Ali al-Naimi speaks to journalists ahead of the 166th ordinary meeting of the Organization of the Petroleum Exporting Countries (OPEC) in Vienna, Austria on Nov. 27, 2014.
Samuel Kubani—Getty Images Saudi Oil Minister Ali al-Naimi speaks to journalists ahead of the 166th ordinary meeting of the Organization of the Petroleum Exporting Countries (OPEC) in Vienna, Austria on Nov. 27, 2014.

Saudi minister had pushed through a plan to maintain oil production at 30 million barrels a day and cause a drop in the crude oil price

Saudi Oil Minister Ali al-Naimi, the architect of OPEC’s strategy to regain market share by causing the price of crude oil to plunge, says his plan is working, and data from petroleum research firms seem to back him up.

Making his first public comments in two months, al-Naimi told reporters in the southwestern Saudi city of Jazan that the markets have cooled off, and cited Brent crude, the global benchmark, as an example, noting that its price has stabilized at about $60 per barrel.

He also pointed to data that inexpensive oil is driving up demand, notably in China and the United States, which eventually could lead to price stability or to a price rebound.

But Al-Naimi warned naysayers not to upset this new balance. “Why do you want to rock the markets?” he asked. “The markets are calm. … Demand is growing.”

Read more: OPEC Considers Emergency Meeting On Oil Prices

If al-Naimi is right, then his strategy was correct, and it acted quickly. It was only three months ago at OPEC’s headquarters in Vienna that the Saudi minister pushed through a plan to maintain oil production at 30 million barrels a day, declaring a price war with US shale oil producers who rely on costly hydraulic fracturing, or fracking, to extract oil embedded tightly in underground rock.

The US shale producers had not only created a global oil glut, which was depressing the price of oil, but they also had turned their country from OPEC’s biggest customer to a nation headed towards energy independence.

OPEC’s decision led to even lower oil prices, meaning lower revenues, and sometimes even losses, for many oil companies. The financial services concern Cowen & Co. estimates that as a result, total capital expenditures for both production and exploration will plunge by more than $116 billion this year.

As for US shale producers, some folded under the Saudi strategy. Baker Hughes Inc., one of the world’s largest oilfield services companies in the world, reports that the number of oil rigs operating in the United Stated declined by fully 35 percent since as recently as Dec. 5, leaving the country with the fewest rigs in four years.

Still, lower fuel prices are attractive at the retail market, whether on an industrial scale or for the motorist who simply needs to fuel his or her car. On the large scale, Chinese manufacturing has expanded, if only slightly, this month, according to the HSBC/Markit Purchasing Managers’ Index. It climbed to a four-month high of 50.1, where an even 50 separates economic growth from contraction.

Read more: Could This Be Saudi Arabia’s Best Kept Secret?

There’s more optimistic news, particularly on the smaller retail level. The research group JBC Energy says US demand for gasoline grew by nearly a half-million barrels a day in January. In India, it says, the demand was 18 percent higher in January than in the same month the previous year.

The JBC report said the allure of cheap fuel can alter driving habits, including what car a customer buys next. And that’s supported by Autodata Publications Inc., which reports that consumers again are opting for cars that are more fuel-hungry: Sales of SUVs and light trucks grew by 19.3 percent from January 2014 to January 2015, while more economical passenger cars grew by only 7.7 percent.

Despite this good news for al-Naimi, if the price of oil has finally bottomed out and begins to rise again, won’t the US shale producers get back into the act with a vengeance?

This article originally appeared on Oilprice.com.

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TIME energy

Russian Gas Flows to Eastern Ukraine in ‘Humanitarian’ Gesture

eastern-europe
Getty Images

Ukraine’s state gas company cut off gas to the rebel-held region as of Feb. 18

Russia says it has begun supplying gas to the war-ravaged area of eastern Ukraine, now that the government in Kiev says it can no longer deliver fuel there because of heavy fighting and damage to fuel-supply networks.

Ukraine’s state gas company, Naftogaz, said Feb. 19 that it cut off gas to the rebel-held region the day before “[d]ue to the extensive damage of the gas transport networks, the supply of gas … [and] the ongoing hostilities in the region.” It includes the self-described republics of Donetsk and Luhansk.

Within hours in Moscow, Prime Minister Dmitry Medvedev told a meeting of his cabinet that he had directed the Energy Ministry and the Russian gas giant Gazprom to draw up “proposals of humanitarian aid in delivering gas for the needs of these regions, unless of course [Kiev] doesn’t take any action to supplying gas according to the normal schedule.”

Read more: As IMF Extends $17.5 Billion Credit To Kiev, Gazprom Demands Debt Repayment

Gazprom said it immediately began supplying gas to eastern Ukraine through two pumping stations on the two countries’ shared border. Gazprom CEO Alexei Miller said his company was pumping the fuel at a rate of 12 million cubic meters per day. This was in addition to the 30 million cubic meters of gas per day that Ukraine already was receiving, according to Sergei Kupriyanov, a Gazprom spokesman.

Gazprom’s fuel deliveries to Ukraine – and their occasional interruptions – have been just one sore spot in the sour relations between Moscow and Kiev. Ukraine receives most of its gas from Russia, and at the same time pipelines transiting Ukraine provide Western Europe with about 30 percent of its gas, which comes from Russia.

In February 2014, Ukrainian President Viktor Yanukovich, who favored continued cordial relations with Russia, was confronted by a popular uprising of citizens demanding closer ties with the European Union. He fled to Moscow, and Russian President Vladimir Putin responded by annexing Ukraine’s Crimean peninsula.

Russia is now suspected of providing weapons and even manpower to a heavily armed pro-Russian separatist movement in Ukraine. In response, the EU, the United States and, most recently, Canada have imposed strict economic sanctions on Russia.

Because of its reliance on Russian gas, Ukraine’s prime minister, Arseny Yatsenyuk says he’s ready to find other sources of energy by getting more gas from its European neighbors and increasing oil and gas exploration in his own country.

Read more: Could Turkey Become the New Ukraine?

“We have proved that we are able to get rid of Russian gas dependence,”Yatsenyuk said on the Ukrainian 1+1 channel on Sunday. He noted that in 2013 Ukraine bought 95 percent of its gas from Russia, but reduced that to only 33 percent in 2014, with the balance provided by Europe.

The state-run gas supply and transit company Ukrtransgaz reports that Ukraine imported 5.1 billion cubic meters of gas from Europe in 2014, a 59 percent increase over 2013. It said that is attributable to the new Voyany-Uzhgorod pipeline.

Since the pipeline opened in September 2014, it has accepted 0.6 billion cubic meters of gas from Hungary and 3.6 billion cubic meters from Slovakia, while imports from Russia plunged by 80 percent to 14.5 billion cubic meters. As a result, Ukraine saved about $1.5 billion in 2014 by buying less costly fuel from its neighbors.

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New Petrobras CEO Facing Widespread Disapproval

Aldemir Bendine, former chief executive officer of Banco do Brasil SA, speaks at a news conference in Sao Paulo, Brazil, on Feb. 17, 2011.
Bloomberg via Getty Images Aldemir Bendine, former chief executive officer of Banco do Brasil SA, speaks at a news conference in Sao Paulo, Brazil, on Feb. 17, 2011.

Many believe that the former banker's success doesn’t translate into an ability to run an oil company

The choice of banker Aldemir Bendine, a confidant of Brazilian President Dilma Rousseff, to take over as CEO of Petroleo Brasileiro (Petrobras) disappointed many who would have preferred a more independent leader of the government-owned company as it fights to emerge from a corruption scandal.

No one actually accused Rousseff of cronyism because Bendine’s new job is largely political, as the nation’s president has always named the majority of Petrobras’ board members, who choose their CEO.

Yet observers said it was time not for a banker, but for a CEO with deep roots in the energy sector to steady the company.

Nevertheless, on Feb. 6 Rousseff chose Bendine, the CEO of the government-owned Banco do Brasil, who has no experience in the oil business, to replace Maria Silva Foster, who resigned Feb. 4 as Petrobras CEO along with five other senior executives in the face of a broad investigation of graft that has cost Petrobras about $100 billion since September.

Read more: Oil Majors’ Profits Take A Beating

Investors’ outrage came on Feb. 6 hours before Bendine’s appointment was formally announced when the company’s stock plunged 8 percent at the opening of trading. Later that day the company’s board members confirmed him despite objections of fellow board members whom Rousseff hadn’t appointed.

Bendine is far from incompetent, having led Banco do Brazil to ever higher profits and an increase in its stock value of about 90 percent. He promoted the Rousseff government’s leftist economic policies, yet simultaneously pleased private shareholders by managing the bank deftly.

But many believe that doesn’t mean he can run an oil company, particularly one that is both privately and publicly managed, one that must emerge from a deep corruption scandal, and one that has suffered from the country’s sluggish economy.

Reaction was virtually unanimous from energy industry observers. One, Auro Rozenbaum of Bradesco BBI analysts, wrote in a note to a client, “We see no managerial improvement compared to the previous administration.”

Adriano Pires, an energy specialist at the Brazilian Center of Infrastructure in Rio de Janeiro, agreed. “Bendine’s appointment shows that Dilma will be the one at the helm of Petrobras,” he said. “The market wanted change and autonomy. The message she sent was it is more of the same.”

And Silvio Sinedino, a board member who represents Petrobras’ employees, posted on Facebook that he had voted against Bendine because “political appointments … end up costing a high price in corruption and wrongdoing.”

Read more: Drought Forcing Brazil To Turn To Gas

Forbes magazine sought to emphasize the inappropriateness of Bendine’s appointment by listing the credentials of men and women it called his “peers” in the global energy industry. For example, it said, Eulogio del Pino, the president of Petroleos de Venezuela, is a geophysicist with a master’s degree in oil exploration from Stanford University. He is a 36-year veteran of the oil and gas industry.

It also cited Miguel Galuccio, the CEO of Argentina’s state-owned YPF. He’s an oil engineer and a 19-year veteran of the industry. In China, there’s Zhou Jiping, the president of Petrochina. Zhou is a petrochemical engineer with 40 years’ experience. Igor Sechin, the president of Russia’s oil giant Rosneft, may have formal credentials only as a politician, but his 11 years in the energy industry has given him a strong grasp of oil.

As for Bendine, he has an MBA from the Catholic University of Sao Paulo and has spent his entire career at Banco do Brasil, where he’s excelled. But Forbes asks whether he can abruptly switch to an entirely different industry, especially at a $42 billion oil company struggling with a corruption scandal.

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Strikes the Latest Threat Facing US Oil Industry

Shell logo.
Anna Gowthorpe—AP Shell logo.

Members of the United Steelworkers union struck the nine facilities on Feb. 1 after negotiations with several oil companies failed

Workers are on strike at nine oil refineries and chemical plants around the United States in the largest such job action in 35 years.

Members of the United Steelworkers union (USW) who are employed by more than 200 US oil terminals and pipelines as well as refineries and chemical plants struck the nine facilities on Feb. 1 after negotiations with several oil companies failed to end in an agreement on wages, safety and benefits. The contract covers 30,000 hourly workers.

The negotiations had begun Jan. 21 with a settlement deadline at midnight, Jan. 31. The USW had rejected five offers by the companies lead negotiator, Royal Dutch Shell, the Anglo-Dutch oil giant representing several large oil companies operating in the United States, including Chevron Corp. and Exxon Mobil Corp.

Read more: Chevron Responds To Eight Week Drop In Rig Count By Slashing Jobs

“Shell refused to provide us with a counter-offer and left the bargaining table,”USW International President Leo Gerard said. “We had no choice but to give notice of a work stoppage.”

From Shell headquarters in The Hague, Netherlands, company spokesman Ray Fisher said Shell was eager to resume negotiations. “We remain committed to resolving our differences with USW at the negotiating table and hope to resume negotiations as early as possible,” he said.

Although picket lines were set up at nine of the companies’ facilities, only one has restricted production. But a walkout affecting all 200-plus facilities would stall up to 64 percent of American fuel production.

The USW issued a statement saying the refineries directly affected by the strike have optimum production levels of 1.82 million barrels of fuel per day. They include Tesoro Corp.’s plants in California and Washington state, Marathon Petroleum’s facilities in Kentucky and Texas, and complexes owned by Shell and LyondellBassell Industries in Texas.

Read more: Future Of $14 Billion GTL Plant In Louisiana Uncertain

The last time the union had called a strike was in 1980, a three-month work stoppage in which the companies used salaried workers to do the jobs of striking USW members. This one comes as oil companies around the world already are reeling because of the steep plunge in the price of oil, which has lost nearly 60 percent of its value since June 2014.

Despite Shell’s stated eagerness to resolve the outstanding issues, the company turned to a strike contingency plan at its huge refinery and chemical plant in Deer Park, Texas, to keep it productive. Other companies were doing likewise, including Tesoro, which said managers were operating its refinery in Carson, Calif., and planned similar substitutions at its other affected facilities.

The USW said all other refineries where its members work would continue operating under rolling 24-hour contract extensions, just as in 1980. These facilities including Exxon Mobil’s refinery in Beaumont, Texas.

This article originally appeared on Oilprice.com.

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Is Fusion Power Closer Than We Thought?

The UW reactor’s size means it needs fewer ingredients to create fusion

This post originally appeared on OilPrice.com.

The promise of generating energy with nuclear fusion is tantalizing because it would be free of toxic emissions and nuclear waste, and would have a virtually infinite fuel supply. On the downside, though, it is extremely costly compared with fossil fuels like natural gas and coal.

Now engineers at the University of Washington (UW) have developed a design for a fusion reactor that could be even less expensive than a coal-fired plant but boast similar generating capacity. The current design is for a reactor too small to generate much electricity, but the team is confident it can be scaled up to the size of a large power plant.

“Right now, this design has the greatest potential of producing economical fusion power of any current concept,” Thomas Jarboe, professor of aeronautics and astronautics and an adjunct professor in physics, told the UW news department.

Related: Breakthrough in Fusion Research Brings New Nuclear Power Source Closer

The engineers already have published the design, along with a cost-analysis study, in the journal Fusion Engineering and Design, and are scheduled present their findings at the International Atomic Energy Agency’s 25th Fusion Energy Conference in St. Petersburg, Russia, on Oct. 17.

The dynomak, as the reactor is called, began in 2012 as a mere student project for a class taught by Jarboe. Later Jarboe and a doctoral student, Derek Sutherland, worked to refine the concept.

Their plan was to create a magnetic field within a closed space to contain plasma – hydrogen gas rich in electrically-charged atoms – long enough to heat the plasma to the extreme temperatures needed to maintain thermonuclear conditions. This intense heat then would be transferred to a coolant fluid that would spin a turbine to generate electricity.

The UW power generator’s design, called a spheromak, also generates most of its magnetic fields by impelling electrical currents into the plasma itself, reducing the amounts of materials needed to generate and maintain thermonuclear fusion and thereby reducing the size of the reactor altogether.

Jarboe’s team says their reactor is an improvement on previous designs for fusion reactors, including one called Iter that’s now being built in Cadarache, France. Iter needs to be larger than the UW reactor because it needs superconducting conduits that coil around the exterior of the reactor to generate its magnetic field.

Related: The Ten Reasons Why Intermittency is a Problem for Renewable Energy

And because of the UW reactor’s size and its need for fewer ingredients to create fusion, it would cost one-tenth as much as the French reactor, yet produce five times more energy.

As for cost analysis, the UW team compared the amount of money needed to build a coal-fired plant and a fusion power plant based on their design, each capable of the same electrical output. The coal plant would cost $2.8 billion, and the fusion plant would cost a little less, $2.7 billion.

“If we do invest in this type of fusion, we could be rewarded because the commercial reactor unit already looks economical,” Sutherland said. “It’s very exciting.”

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Dropping Oil Prices Threaten Moscow’s Budget

Oil refinery in Ufa, Russia, seen in April 2014.
Andrey Rudakov—Bloomberg/Getty Images Oil refinery in Ufa, Russia, seen in April 2014.

Russia has seen its economy boom with the price of oil. But if the cost of crude falls, Moscow could struggle to make ends meet

This article originally appeared on OilPrice.com

Oil and gas are at the heart of the Russian economy and are largely responsible for keeping Moscow’s government budget in balance. But the recent decline in the price of oil from the North Sea and Texas has now spread to Urals crude, giving President Vladimir Putin one more economic headache.

The price of Urals crude fell just below $100 per barrel on Aug. 18, an 18-month low. On Aug. 19, it dropped to less than $97 per barrel. These declines coincided with similar drops in the price of Brent crude from the North Sea and U.S. oil.

The reasons are fairly easy to recognize. First, the United States has been on a drilling tear, extracting oil at record levels to increase its supply at a time when demand is waning. Second, though more tentative, is that conflicts in North Africa and the Middle East are so far not interfering with oil production in these regions.

This oil production boom raises problems for Moscow. Two-thirds of Russia’s exports are oil and gas, accounting for fully half of the central government’s revenues. That means that so far this year, every dollar drop in the price of Russian oil means a cut of about $1.4 billion in revenues.

This comes as Russia’s oil industry joins its defense and finance sectors as targets of sanctions by the European Union and the United States over Moscow’s unilateral annexation of the Crimean peninsula in Ukraine and its suspected role in the fighting between Ukrainian forces and pro-Russian separatists.

Some analysts say the effects of the lower oil prices may not be lasting unless the drop in oil prices fall further in coming years. Vladimir Kolychev, the chief economist at VTB Capital, a global investment firm with headquarters in Moscow, says brief dips have less of an impact on Russia’s budget than the average cost of oil over an entire year.

“The first thing to remember is that the oil price projected by the finance ministry is … $104 average for the year – that still looks conservative,” Kolychev told Reuters. “Even if the oil price falls to $90, we’ll still have $105 average.”

As an example, Kolychev calculates that Russia’s budget would balance if oil’s average price fell to $103 per barrel.

Even if Moscow can tame its budget, it seems clear that Russia’s oil sector will feel the pain from the one-two punch of Western sanctions and lower prices. Vedomosti, a Russian financial journal, reported Aug. 14 that government-owned Rosneft, Russia’s largest oil company, has asked Moscow for more than $40 billion in debt relief because of the sanctions.

That’s a sharp reversal from just a month ago. Western sanctions were imposed on July 15, and three days later, Rosneft officials shrugged them off, saying the company would continue to pursue its plans and reap profits. In fact, a week after that statement, Rosneft CEO Igor Sechin boasted that the company’s revenues were soaring.

 

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