Oil price collapse wreaks havoc on forecasts and budgeting

The global economic slowdown which unfolded in the second half of 2008, hit Russia hardest through the collapse in oil prices. They have made a mockery of earlier predictions and undermined the Russian economy.

After rising steadily over the past five years, 2008 saw oil start the year by powering through the $100 dollar per barrel mark. It continued to climb through the first half, reaching $147 dollars per barrel in the second week of July, amidst claims of speculation and ‘peak oil’ driving prices, and Gazprom CEO Aleksey Miller, speaking in June, tipping even higher prices to come.

“We believe speculation is influencing the oil price, but isn’t a determining factor. We are facing a large jump in hydrocarbon prices and they are approaching a new high level. We expect the price to reach $250 per barrel in the foreseeable future.”

That “foreseeable future” didn’t arrive with crude prices crashing in the second half of the year – to $35 in late December – as oil exporters were forced to manage a dramatically changed outlook. Russian President Dmitry Medvedev, flagging an increasingly close relationship with OPEC, said the move was needed to protect Russia.

“We must protect ourselves. This is our income base in both oil and gas. These protective measures may be associated with decreasing oil production, as well as with the participation as well as with the participation of certain suppliers in certain organizations, and with participation with new organizations if we manage to come to an agreement.”

To stem the slide, OPEC has unveiled 3 production cuts since September, with Russian announcing it will join in. OPEC President, Chakhib Khelil, said he is expecting the cuts to put a floor under prices in the short term, and then enable a moderate rebound.

“The OPEC decision was made at the right time, and we think also that as soon as the cuts will be effective in January then the market will stabilize around $45 to $55.”

Oil managed to edge higher on Middle East tensions in late December. In the longer term prices are hesitantly forecast to rise, although a deepening global economic crisis will continue to play havoc with short term demand.

This leaves Russia – about to face its first budget deficit in a decade – and other producers, preparing for the worst, while trying to finance the capital expenditure needed for the longer term.