Why Oil Prices Are Falling

Even if Russia wants to pay, it can’t.

Russia has recently fallen into default on its debt.

Default means that a country has borrowed money from other countries and is now unable to repay it.

It’s not that Russia is literally out of money, but economic sanctions have blocked the channels through which it could make payments.

Without economic sanctions, Russia would have been able to pay interest on its debt, but default is default, regardless of the reason.

But did you know?

The situation eight years ago was strikingly similar to what we see now. Almost like déjà vu.

Where do things stand now?

Let’s first整理 the current situation.

#1. The Russia–Ukraine war

Russia’s invasion, triggered by Ukraine’s intention to join NATO, is still ongoing and has created a huge number of “anti-Russia” voices around the world.

#2. Western pressure pushes Russia into default

Western countries cut off Russia’s access to the international financial network—the channels through which it could make payments—so Russia failed to service its debt and slipped into default.

#3. Crude oil prices are very high

When the war broke out, WTI crude was about $108 a barrel; now it’s around $115.

Considering that during COVID we even saw negative oil prices, this is extremely expensive by comparison.

What about eight years ago?

What happened in 2014 that makes it so similar to today?

As Russia intervened in Ukraine’s internal conflict between pro-Russian separatists and the government in order to seize Crimea,

the Donbas War broke out.

It was the same Russia–Ukraine confrontation we see today.

So what happened back then?

Just like now, Western countries imposed economic sanctions on Russia.

The US government banned American companies from doing business with the Russian government or Russian firms.

And Standard & Poor’s, one of the major global credit rating agencies that assess whether a country or company is trustworthy enough to lend to, downgraded Russia’s sovereign rating to junk status.

Russia then faced a shortage of dollars. With US companies barred from dealing with it, the country effectively lost key channels for obtaining dollars.

For Russia to trade like a normal country and import essential goods—such as automotive chips and various petrochemical products—it needs dollars. But as access to the financial network was cut off, trade became impossible, just as it is now.

On top of that, crude oil prices were also high.

At the time, WTI traded between $100 and $110 a barrel—the range marked by the red arrow in the chart.

The blue arrow marks the period when the current Russia–Ukraine war broke out.

A war between two opposing countries, economic pressure, and a desperate need for dollars—

it’s almost a carbon copy.

Russia may not need dollars urgently right this moment. This default is not because it literally ran out of cash.

But just as it’s hard for you or me to get a bank loan if our credit score is poor, even if we have money in our account,

Russia’s credit rating will fall because of the default, and that will make it much harder to raise dollars.

So now we know Russia needs dollars, and we also know it is the world’s third-largest crude oil supplier.

Why, then, is oil so crucial?

For Russia, crude oil plays a role similar to

semiconductors for South Korea.

If we list Russia’s 2020 exports from first to third place,

fuel products including crude oil account for $141.92 billion (about 180 trillion won),

precious metals and iron ore make up $30.36 billion,

and alloys made using iron ore account for $16.01 billion.

That’s how the export mix looks.

There is also a category worth $39.32 billion in exports, but that’s classified as “other unclassified raw materials,” so we’ll leave it out of the ranking.

In short, without oil, Russia’s export earnings would be cut in half.

Oil is Russia’s main source of dollars,

and if it becomes a pariah in the international financial network, oil effectively becomes its only reliable source of dollars.

The more Russia’s need for dollars grows, the more it will be forced to sell additional oil.

Right now, US crude inventories are scraping bottom, and Saudi Arabia is struggling to ramp up production.

Against this backdrop, the world’s dominant power, the United States, has even said, “If things get really tight, we can use Russian oil.” In other words, all the conditions are in place for additional Russian supply to hit the market.

It may not be long before we can stop breaking into a cold sweat every time we fill up our cars.