Opinion
How Plunging Oil Scrambles Geopolitics
The price drop deprives Putin of revenue for military moves, but Moscow will find other ways to make trouble.
By Brenda Shaffer
Oct. 30, 2014 7:53 p.m. ET
The global oil price has dropped by 25% since June, with oil traded in the U.S. hitting $79.80 a barrel this week, the lowest it has been in four years. Many Western policy makers are pleased, hoping that the price crash will rein in the ambitions of dangerous oil-dependent actors like Vladimir Putin and Iran. Yet the price drop may have negative consequences, too.
Global oil prices and geopolitics interact like a delicate kaleidoscope. When the oil price changes significantly, it sets off a chain of economic and geopolitical consequences. The price collapse is also a sign of deeper, disquieting economic trends.
Oil supply has risen thanks to astonishing U.S. crude production, which has increased by more than a million barrels a day in the past year. While that could be expected to push down prices, the price drop has been accelerated by slowing demand, the result of economic declines in major markets, including Germany and China. In the second quarter of 2014, world economic growth slowed to 2.6%. Germany estimates its growth at 1.2% this year, and the World Bank says China’s growth will slow to 7.6%.
The greatest impact of lower oil prices will be on states that derive most of their government income from oil exports—especially those that assume a certain oil price in trying to balance their budgets. When the actual price is well below the expected price, it can be alarming for oil producers with large populations that make it harder to maintain extensive social-welfare benefits and subsidies. The OPEC members rallying for a price-boosting cut in oil production are more-populous countries like Iran and Venezuela.
Although some states may be vulnerable to social instability if they are forced to trim subsidies due to the drop in oil prices, Russia is not among the most vulnerable. Its energy and other subsidies are relatively modest compared with other oil exporters and Russia also has ample reserves, estimated at $177 billion, in its revenue funds to sustain social and public services.
Iran’s regime, which faces great public dissatisfaction and has significantly smaller financial reserves, might encounter more substantial challenges. If oil prices continue to hover around $80 a barrel through this year, Iran’s revenue will drop by about 12%-15%. Tehran’s currency reserves stand at an estimated $80 billion, however, which will help the regime buy time.
Another consequence of the oil-price fall is that most oil exporters will dip into their sovereign wealth and revenue funds to fund their budgets. Since most of these investments are held outside their countries, this wealth retransfer will influence global markets as significant amounts of capital will fly back to the producers.
All of this will have mixed foreign-policy outcomes. It certainly will not prompt Russia to withdraw from Crimea. What it may do is increase Moscow’s motivation to de-escalate the crisis with Ukraine and renew the gas flows for the winter—supplies that have been suspended since June. Earlier this month, President Putin signaled his readiness to renew gas supplies to Ukraine, although an agreement still has not been reached.
While the oil-price drop will deprive Moscow of resources to expand its military interventions, Russia is likely to continue its low-profile interference in neighboring states, as seen when it threatened Moldova with economic retaliation after Moldova signed the EU Association Agreement in June.
The impact of lower oil prices on economic sanctions against Russia and Iran will also be mixed. There probably won’t be much global pressure to reduce sanctions to get more oil flowing from these two states. But the Continent’s economic slump means Europe is less likely to support additional and sustained sanctions on Russia.
There will also be consequences from worsening economic trends and the oil-price drop. In periods of austerity, there often is a switch in power generation from natural gas to coal in markets where coal is cheaper, such as Europe and Asia. This could be bad news in the short term for those hoping to conclude new contracts for U.S. natural-gas exports. It is also bad news for climate-change-prevention policy, which loses support when the economy slumps.
As oil and gas profits plummet, companies will abandon some mega projects and investment in new technologies. Many oil companies, such as Total, are already engaging in major divestment activity and many, such as Italy’s ENI and BP, reported losses in the last quarter. The drop in the oil price could also end the trend of delinking gas-supply contracts from the price of oil.
In evaluating the potential impact of the drop in the oil price on Russia, Iran and other oil-dependent states, the key thing to remember is that an economic downturn doesn’t necessarily temper foreign-policy behavior. In some cases it has the opposite effect. As with economic sanctions, austerity doesn’t always stir people’s resentment against their own governments either. It can galvanize them against foreign enemies alleged, and perceived, to be the cause of their economic misery.
Ms. Shaffer is a visiting researcher and professor at Georgetown University’s Center for Eurasian, Russian and East European Studies.
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