Plunging Oil Prices Set Off A Global Chess Game

  • Date: 06/11/14
  • Norm Ornstein, National Journal

The decline in oil prices has huge implications for global politics and economics—especially if, as is quite possible, the oil price stabilizes for some time at between $70 and $80 a barrel.

In the U.S., the positives of lower gas prices are obvious—more money for Americans to spend on other things, less stress in family budgets. At the same time, lower prices that reflect a global oversupply of oil and gas change the cost-benefit equations for drilling and fracking. That fact could lower the temperature a bit next year on controversies like natural-gas fracking. The downside, many analysts point out, is that many wildcatters and smaller exploration companies need oil above $80 a barrel to survive; they may be driven out of the marketplace, providing opportunities for the Saudis and other foreign producers to fill the vacuum down the road. At the same time, energy-producing areas, like North Dakota and the swath of the Northeast that includes the Marcellus Shale, will have less environmental stress but less employment, while environmentally sensitive places like California will benefit in a major way.

But the more interesting repercussions of lower oil prices come abroad. Start with Russia. Vladimir Putin’s kleptocracy has a deep dependence on oil revenues—and prices well below $100 a barrel are crippling to his needs and those of the Russian economy. Low prices and the need for revenue also complicate Putin’s use of oil and natural gas as blackmail against Ukraine, the Baltics, and other European countries that rely on Russian energy for heating. That probably explains the recent Russian deal with Ukraine over supplies of natural gas. At the same time, the declining Russian economy has been hurt by Western sanctions; the loss of oil revenue makes sanctions even more effective. But there is a complicating factor: The sagging economies in Western Europe, facing a real threat of deflation made worse by lower energy prices, make leaders there much more reluctant to ratchet up sanctions, complicating America’s policy. Offsetting the blow to Russia is that it has at least some cushion from the higher prices before the drop, but it will hurt, increasingly, as the lower prices persist.

Next comes Iran. It, too, has a sagging economy hurt deeply by American and Western sanctions. That more than anything is what brought Iran to the negotiating table over the nuclear issue. The failure to reach a deal will certainly result in more and deeper sanctions, which will hurt further. There have been some analyses suggesting that Ayatollah Ali Khamenei is willing to spurn a deal and in effect turn Iran into a self-sustaining economy. Under ideal conditions, that is pie in the sky. With shrinking revenues, it would be catastrophic.

Saudi Arabia also depends overwhelmingly on oil revenues to sustain its economy and mollify its elites and rank-and-file citizens. But Saudi Arabia has built up a huge reserve—call it a rainy-day fund, or maybe a rainy-year fund. Lower prices will hurt the Saudis’ adversaries, including Iran, and give the Saudis more leverage over its Arab neighbors. If it pumps more oil to keep prices low, it will enrage Iran, adding fuel to an already fiery relationship.

Other Arab oil-producing countries, like Oman, Bahrain, and Algeria, will also be hit hard by the loss of revenues. That may bring some internal instability—failing to pay off the governments’ cronies, or adding to the economic stresses of their middle and lower classes, could lead to crackdowns, or maybe give more traction to extreme forces. Similarly, the regime in Nigeria may face more troubles from Boko Haram.

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