Oiling Russia's Finances
The global oil situation is particularly interesting at the moment. At around $30 a barrel, oil prices are remaining high even though a soft global economy means that world demand is low. The previously fashionable view that the American seizure of Iraqi oil resources would break OPEC and send the price of oil plummeting has turned out to be nonsense. Even with improved security, it will take five years to get Iraq oil fully on stream. With the American economy now recovering strongly, the price of oil should stay high, or even rise further, in the foreseeable future.
So the announcement by Russian Finance Minister Alexei Kudrin that Russia will start an oil stabilization fund comes at a good moment. It means that the fund can look forward to several years of surpluses. This is both an opportunity and a danger.
An oil fund should be seen as an instrument of macroeconomic stabilization, segregated from normal revenue streams. Today most of the world's finance ministers are committed to balancing the budget over the business cycle. Government revenues are set to equal government spending when the economy is growing normally.