The Weak Dollar Is Putin’s Enabler

Lucky for Vladimir Putin that as he makes his push into Ukrainian territories, the price of oil is just about $100 per barrel. A price so high—five times the average of the 1990s, when the Russian Federation first came of age—helps cushion any blow from international sanctions and the like. By a big margin, Russia is the world’s largest petroleum exporter, excepting (and that barely) Saudi Arabia.

But come to think of it, oil was just $30 six years ago, in December 2008, in the depth of the financial crisis. Oil had averaged about only $50 throughout the years of the George W. Bush administration, at least before the huge run-up (to $145) and crash of its final eighteen months.

If oil had followed, say, the consumer price index, up since 1998 by 44%, oil today would sell for…$23 a barrel.

The thing about cheap oil is that Russia sells next to none of it. Russia is such a sloppy producer that it is only economical to bother with extraction in that country if the price hits $60 or so. When prices were in the $15-$20 range fifteen years ago, Russia’s production was in the throes of a 33% decline that lasted until about the time the housing bubble hit in the United States.

Coincidence? Of course not. The housing bubble that gathered in this country in the mid-2000s reflected the public’s unease with loose monetary policy from the Federal Reserve and weak dollar policy from the Treasury. Land—just like oil—is limited in supply by geology, and though inert has conceivable economic purpose if mixed with real opportunities. A stampede into these havens took place to hedge the funny business from the managers of the greenback.

Things got so bad with the rush into land and commodities that the real economy got starved of investment. Hence the Great Recession. When oil zoomed up to $145 and then fell to $30 (all in that incredible year of 2008), this reflected the peak of despair with U.S. dollar policy and then the trough of regained confidence. What should have occurred after 2008 was a moderately expansionary monetary policy in tandem with marginal tax cuts and a curbing of regulation and spending, so as to initiate real demand for the dollar and a recovery worthy of the name, with millions of new jobs in tow.

Instead, we got phony (i.e., non-marginal) tax cuts, a tidal wave of regulation (from Dodd-Frank to Obamacare), fiscal stimulus, and gigantic quantitative easings from the Fed. Instead of learning from and fearing the housing and oil bubbles of recent years, we strove to goad them into existence again.

The housing market proved too timid to retrace its steps fully, though it should be noted that the Case-Shiller index today (at 167) stands where it was partway through the bubble, in 2004. Oil felt no such constraint. It went ahead and tripled in the face of quantitative easing, tax hikes, spending, and regulatory entrenchment.

Bam—that $60 per barrel magic number for Putin’s Russia was cleared, and handsomely. Back to cranking up the production, leaks and waste and all (crony oligarchic economies like Russia’s don’t do best practices), and banking the profits. These bucks flow via Rosneft and other fronts straight into the oligarchy, which is to say the political leadership. It gets easy to be adventuresome in places like Ukraine when you’re that cash-heavy.

One can only imagine what Russia would be up to had the fracking and shale revolution that has led to a Renaissance in natural gas production not occurred. Thanks to that industry’s ingenuity—above all that of American George Mitchell—production has become so effortless that gas prices are now hovering at a secular low. The Gazprom front in Russia is not as enriched as it could have been.

Fracking bailed out the terrible U.S. monetary-fiscal policy mix of the long 2000s—but only a bit. If you want to pretend that Keynesian monetary looseness and Keynesian taxing, spending, and regulation are the route to recovery, the markets will force epic levels of capital into hedges against this fallacy.

The wage of the Keynesian mistakes of the United States in this millennium is now taking the form of Putin’s reprisal of Russian imperialism. Should this country seek to depart from its left-liberal economic policies for, say, the supply-side solution of sound money, low marginal tax rates, sparse regulation, and the winding down of spending, the rush of dollars into real investment vehicles portends to be so immense that Putin will be left exposed and bankrupt, the Ukraine to its own devices, and the American people to the bounty which for years now has been forsaken them.