Russia Could be Trigger for $200 Oil and Global Recession

By: Jennifer_Yousfi

Higher oil could lead to a worldwide economic collapse, according to a top analyst at Germany's largest bank.

"Two-hundred dollar oil would break the back of the global economy," Adam Sieminski, chief energy economist at Deutsche Bank AG ( DB ), told Bloomberg News in an interview yesterday (Wednesday) in Tokyo. "Next step after $200 would be global recession and bad news for everybody."

Just a little over a year ago, $200 oil seemed out of the question. But the Deutsche Bank prediction of oil-fueled global recession follows a Goldman Sachs Group Inc. ( GS ) forecast that oil might climb as high as $200 per barrel in two years.

Keith Fitz-Gerald, Money Morning's Investment Director - and one of the first global financial gurus to predict triple-digit oil prices - recently boosted his target price for crude oil from $187 to $225.

"The math is really simple here," Fitz-Gerald said back in May, when oil futures were trading around $123 a barrel.

"We are burning through supplies at a rate that's four times to five times faster than we're discovering new reserves," he said. "Throw in a few [surprises]… perhaps a terrorist event… and add in the accelerating use of oil and gasoline in Third World countries, and we have the recipe for far higher prices."

Since the time of Fitz-Gerald's prediction, oil has gone on to several new highs, nearly breaking through the $140 barrier on June 16, earlier this month.

Russia's Bubbling Oil Troubles

Exacerbating the high oil prices are production problems in Russia, the world's second largest oil exporter. Aging oil fields and a lack of infrastructure investment has led to the country's first annual production decline in 10 years. Output fell 0.9% to 9.76 million barrels a day in the first five months 2008, Bloomberg reported.

"Growth last quarter fell on a year-on-year basis, and this has to do with the policies implemented over the prior year to raise taxes on oil industries," Deutsche Bank's Sieminski said, speaking of Russia's oil difficulties. "This made it difficult for foreign capital to come in."

But "if Russia could reverse some of these policies and get their own oil industry back on, this will help very much" with supply concerns, he added.

Fear of government corruption and takeover of assets has dissuaded some firms from seeking investment in Russia. BP PLC (ADR: BP ) is currently in litigation over its Russian joint venture TNK-BP Ltd.

"If the conflict escalates and continues for some time, it will have a negative impact on the company operations," Stan Polovets, representative of the TNK portion of the Russia-based company, told Bloomberg . At the same time, advanced techniques aimed at improving oil recovery are "not proving to be as successful as we had hoped," he added.

Production levels of TNK-BP have dropped as the two sides continue to argue and several drilling projects have been halted in disputes over contract workers.

BP is not the only "Oil Major" to run into trouble in Russia.

Royal Dutch Shell PLC (ADR: RDS.A , RDS.B ) recently bowed to pressure to sell state-controlled Gazprom OAO (OTC ADR: OGZPY ) a majority stake in a $22 billion venture after the government threatened to halt drilling due to environmental concerns.

In a recent Reuters interview, new Russian President Dmitry Medvedev denied the government was trying to make a grab for BP-TNK assets.

Medvedev also defended his predecessor, Vladimir Putin, for tightening state control on certain economic sectors such as energy and defense, saying it was important to "guarantee the strategic interests of the economy in the years to come."

"But any additional strengthening of the role of the state, increasing its presence in the economy is not foreseen," Medvedev said. "On the contrary, we will take action to reduce the presence of the state in the economy."

News and Related Story Links:

• Bloomberg News: World Economy Would Collapse If Oil Hit $200, Deutsche Says
• Money Morning: Money Morning Boosts Oil Target Price to $225 a Barrel, Thanks to Continued Scarcity, Burgeoning Demand in China
• Reuters: Russia to cut state role in economy: Medvedev
• Bloomberg News: BP May Struggle to Boost Russian Output Amid Dispute

By Jennifer Yousfi
Managing Editor
Money Morning/The Money Map Report

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