Plunging Oil Prices Set Off a Global Chess Game

Workers prepare to move heavy equipment at the Centenario deep-water drilling platform off the coast of Veracruz, Mexico, on November 22, 2013.

Dario Lopez-Mills/AP

AA Font size + Print

Workers prepare to move heavy equipment at the Centenario deep-water drilling platform off the coast of Veracruz, Mexico, on November 22, 2013.

High oil prices have sustained kleptocracies in places like Russia and Venezuela. Will the fall in prices at the pump also mean more instability around the world? By Norm Ornstein

It may be hard to imagine, but other things have been going on in the world besides the election. And while I no doubt will return to the implications of Tuesday’s contests (not to mention the upcoming ones in December and January), I want to turn my attention now to another important story. First, though, I want to mention a couple of losses we have suffered in the past couple of weeks: two towering figures in the world of public policy, David Abshire and Rod Hills. David’s long public service, most notably in the Reagan administration, was accompanied by deep involvement in the world of think tanks, most recently the Center for the Study of the Presidency and Congress, with which I have strong ties. David had a sterling record of accomplishment in the national security realm. He was a Reagan Republican who believed deeply in the need for compromise and for American institutions to work, and who had a steely integrity and unparalleled energy to find solutions to real problems. Rod Hills was chairman of the Securities and Exchange Commission during the Ford administration. He was a man of piercing intellect, a leader in transparency and in fighting corruption, and a driving force behind the Foreign Corrupt Practices Act. Along with his remarkable wife, Carla, he fought to make the Republican Party a problem-solving party of the center. The Republican Party of David Abshire and Rod Hills was a party to admire, a party to govern. Both will be deeply missed.

The subject of my column this week is the striking decline in oil prices, from a long period of well over $100 a barrel to a point now, by some indices, of under $80 a barrel. Of course, Americans across the country are seeing it in plummeting gas prices—now in some places under $3 a gallon for regular. Like other good economic news, this fact has made no perceptible difference at the polls. But it 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.

Now let’s move to our hemisphere. Under its leftist regime, Venezuela has become a basket case; nationalization of much of the oil industry has led to chaos in production and serious economic stresses even with higher oil prices. Now a regime that has deep internal divisions, that has paid off the poor with virtually free gasoline and highly subsidized basic commodities, that has jailed opposition leaders, will find it cannot keep up. One would expect bloodshed, further crackdowns, and possibly strife that will spread to its friends like Ecuador. And other countries in the region, like Nicaragua, may suffer because the cheap prices and credit from Venezuela will dry up.

Of course, there are real winners from lower prices. China, a huge importer of energy, will benefit in a major way. India, also a big importer, will benefit even more, as its major agricultural industry will pay much less to increase its production. Many countries, including Egypt and Jordan, which subsidize oil for citizens, will have an easier time of it.

There is a bottom line here. All of America’s international relationships are affected by this remarkable change in oil prices, in complicated and interrelated ways. For Secretary of State John Kerry—already facing the challenges of crisis in Syria and Iraq over ISIS, the strains in Afghanistan as it faces the departure of American forces while the Taliban ratchets up its activities, the complicated negotiations with Iran, and the deeply strained relations with Israeli Prime Minister Benjamin Netanyahu and his government—it means he and his team will have to spend a lot of time figuring out moves in a multidimensional chess game, how to exploit these developments while keeping them from becoming a new set of major headaches or worse. All this as a newly empowered Republican Senate and a feisty Republican House will be demanding that he spend more and more of his time testifying about both the administration’s policy choices and things like Benghazi. My nominee for the toughest job in Washington: John Kerry, by a country mile.

Close [ x ] More from DefenseOne