Cheap Oil and Real Opportunity

The Economist reported something totally unexpected: crude oil fell from 115 USD in mid-July to under 85 USD in October 2014.  The fact that the USA may start exporting crude oil is yet another surprise, if only because the world’s largest consumer of oil now has enough surplus to be shipped elsewhere.  While US exports will likely have zero impact on global oil prices, the upshots are that the United States is less reliant than ever on imports and can reduce its current account deficit even further.  Many countries are doubtlessly benefitting in the same way, especially ones in Europe. Meanwhile, oil-producing countries are in trouble.  Take Iran, Venezuela, and Russia for starters.  All three rely heavily on petrol dollars to fuel their budgets and, some might argue, especially in Venezuela’s case, profligate spending.  The Economist points out that in order to break even, the countries’ budgets forecast oil prices of 136, 120, and 100 USD, respectively.  The low oil prices could potentially create tremendous financial strain and, by extension, could force governments to cut back on (social) spending or increase deficit spending. The opportunity to force policy change using the wedge of low oil prices is, therefore, huge.  Russia threatens withholding its gas and oil supplies and uses it as a chip to bully its way into Ukraine and destabilize the region.  Iran sells whatever oil it can in order to soften the sanctions’ impact on its economy, and in the interim continues its nuclear program.  Venezuela continues to mismanage its economy, bleeds money through its social services and artificially valued currency, and has faced numerous protests throughout 2014.  Even ISIS will suffer, as while ISIS is not a formal state, reportedly sells oil in order to finance its mayhem. Going forward, the United States and its allies should press for the advantage.  In Iran, pushing for a deal that would permanently freeze Iran’s nuclear program would be ideal.  In Russia, the United States and its European allies should work to rollback Russian influence by securing cheap(er) gas and oil prices, in turn freeing Europe to be more aggressive with Russian sanctions.  By weakening Russian influence, Ukraine will be in a better position to reassert its influence over the Donbass oblast and resist further Russian aggression. Meanwhile, Venezuela’s delicate political situation will worsen under the strain of falling oil prices.  While the United States should respect a democratically elected system under Maduro and not intervene (as it did in 2002 by fomenting a coup), the country could descend into chaos if social services are cut and Maduro loses popularity.  All of South and North America should be prepared for that very situation. In short, cheap oil could very well drive a lot of political drama.  The United States needs to take advantage and convert this short-term advantage into long-term peace and security for those respective regions.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s