The “victory budget” may fall under the electric car: oil prices are increasingly at odds with the government’s optimistic forecasts

The Russian budget in 2024 will burst at the seams if the negative scenario for oil prices continues to materialize. Global demand is falling further behind forecasts due to the weakness of the global economy. Demand is also being pressured by improved energy efficiency and rising sales of electric cars. At the same time, oil production is also growing faster than forecasts, despite the fact that Saudi Arabia and Russia continue to reduce production in an attempt to level out prices. At the same time, the increase in production in the United States and a number of other countries has led to the fact that OPEC+’s share in the world market is declining. Cutting production as a tool for manipulating prices is working increasingly worse. In the event that export revenues deviate from the optimistic forecast on which the budget was drawn up, the Russian authorities are preparing a plan to increase taxes for business. The problem is that in conditions of high interest rates and reduced borrowing opportunities, the main sources of investment for an entrepreneur are the enterprise’s own funds and the budget. Raising taxes, that is, redistributing money between business profits and the budget, will not become a significant factor in economic growth.

Global oil demand is falling further behind forecasts. Just a month ago, the International Energy Agency (IEA) assumed that by the end of the year it would exceed 102 million barrels per day. In the December forecast, the estimate was reduced to 101.7 million. The main reason for the revision is the weakness of the global economy. More than half of the decline in projected demand occurs in Europe, where this year, according to the European Commission , ten economies will go into negative territory, including the largest, Germany. Also, IEA experts note, demand is being pressured by increased energy efficiency and increased sales of electric cars. Oil production is also growing faster than expected. For the United States, the world's largest oil producer and consumer, the forecast has been raised to 20 million barrels per day. Brazil and Guyana supplied record volumes. Supplies from Iran are rapidly increasing. As a result, global production this year could rise by 1.8 million, to 101.9 million barrels per day.

In order to deprive Russia of excess income from the sale of oil, which allows it to wage a war with Ukraine, it is not at all necessary to cut it off from the world market - this will only lead to rising prices and a global crisis. It is enough for the oil market to turn from a seller's market into a buyer's market. That is, so that the increase in prices due to a reduction in supplies does not compensate Russia and Saudi Arabia for losses from the reduction in volumes. In this case, prices will go down, and the price ceiling for Russian oil will work more efficiently.

As Re: Russia wrote earlier , an increase in oil production outside OPEC+ (primarily in the USA) can lead to exactly this effect. The fact that OPEC+’s efforts are having less and less effect became evident at the end of November, when the organization announced an additional production reduction in the first quarter by 2.2 barrels per day: 1 million - Saudi Arabia, 0.5 million - Russia, the rest - other countries . In response, oil did not rise in price, but fell in price - from $84 to $83 per barrel of Brent. Since then the price has dropped another $5. By the end of the year, OPEC+'s share of the global market is likely to fall to 51%, the lowest level since the creation of the expanded cartel in 2016.

The Russian budget for 2024, which Finance Minister Anton Siluanov calls the “victory budget,” was drawn up based on the price of a barrel of Brent at $85, which, in fact, corresponded to the price of oil at the time the budget was adopted. Current dynamics make the government's forecast less realistic. In early December, the price of a barrel of Brent fell below $75. A barrel of Urals costs less than $60. In November, low prices and a decrease in supply volumes by 200 thousand barrels per day led to a 17% decrease in revenue from the export of oil and petroleum products compared to the previous month. It ultimately amounted to $15.2 billion, the lowest value since July. This will no longer have a significant impact on the 2023 budget. The government expects that it will be executed with a deficit of 2% - thanks to the growth of non-oil and gas revenues. At the end of ten months, they grew by 28% year on year. But next year problems may arise.

If production cuts are working increasingly poorly as a price lever while demand is still - albeit slowly - growing, what happens if demand stalls? “Exactly what happened in 1985: Saudi Arabia admits that the auction of unprecedented generosity on its part was inappropriate, and will begin to regain market share,” predicts the MMI Telegram channel . “Plans for sequestering budget expenditures must begin to be developed now, otherwise there will be either double-digit inflation and a stable decline in the ruble for a long time, or a rate increase of 20%,” MMI continues to push. MMI analysts believe such a scenario is almost inevitable due to the slowdown in the global economy and the boom in electric car sales.

Indeed, the global economy in 2024 may show worse dynamics than expected. For example, the Organization for Economic Cooperation and Development (OECD) lowered its forecasts in a recent report . After +2.9% this year (+3% expected), growth could reach 2.7% in 2024, which would be the lowest result since the global financial crisis, not counting the first year of the pandemic. The growth in demand, according to the IEA forecast, may slow down by half, to 1.1 million barrels per day. As for sales of electric cars, their growth rate has slowed slightly this year (in particular, due to a reduction in effective demand in Europe), but continues to be impressive. Most experts expect that by 2030 they will occupy half of the global automobile market.

If the negative scenario comes true, the “victory budget” will burst at the seams. In this case, the Russian authorities are probably preparing a plan to increase the tax burden on business, which has been discussed since the beginning of the year. The head of the Russian Union of Industrialists and Entrepreneurs (RSPP), Alexander Shokhin, said in early December that raising the income tax would be a better solution than unpredictable seizures through emergency measures, such as an excess profit tax or exchange rate export duties, which the government applied before. However, this operation will not be painless for the economy. As Re: Russia wrote , in conditions of high rates and reduced borrowing opportunities, the two main sources of investment were enterprises’ own funds and the budget. Therefore, the redistribution of money between the budget and company profits will not have a significant impact on the economic growth potential.