Oil's swift fall sends ripple effect globally

Hard hit anti-American oil producers have suggested that Washington has deliberately driven down prices

A plunge in oil prices has sent tremors through the global political and economic order, setting off an abrupt shift in fortunes that has bolstered the interests of the United States and pushed several big oil-exporting nations – particularly those hostile to the West, like Russia, Iran and Venezuela - to the brink of financial crisis.

The nearly 50 per cent decline in oil prices since June has had the most conspicuous impact on the Russian economy and President Vladimir Putin. The former finance minister Alexei L Kudrin, a longtime friend of Putin, warned this week of a “full-blown economic crisis” and called for better relations with Europe and the United States.

But the ripple effects are spreading much more broadly than that. The price plunge may also influence Iran’s deliberations over whether to agree to a deal on its nuclear programme with the West; force the oil-rich nations of West Asia to reassess their role in managing global supply; and give a boost to the economies of the biggest oil-consuming nations, notably the United States and China.

After a precipitous drop, to less than $60 a barrel from around $115 a barrel in June, oil prices settled at a low level this week. Their fall, even if partly reversed, was so sharp and so quick as to unsettle plans and assumptions in many governments. That includes Putin’s apparent hope that Russia could weather Western sanctions over its intervention in Ukraine without serious economic harm, and Venezuela’s aspirations for continuing the free-spending policies of former President Hugo Chávez.

The price drop, said Edward Luttwak, a long time Pentagon adviser and author of several books on geopolitical and economic strategy, “is knocking down America’s principal opponents without us even trying.” For Iran, which is estimated to be losing $1 billion a month because of the fall, it is as if Congress had passed the much tougher sanctions that the White House lobbied against, he said.

Iran has been hit so hard that its government, looking for ways to fill a widening hole in its budget, is offering young men the option of buying their way out of an obligatory two years of military service.

Venezuela, which has the world’s largest estimated oil reserves and has used them to position itself as a foil to American “imperialism,” received 95 per cent of its export earnings from petroleum before prices fell. It is now having trouble paying for social projects at home and for a foreign policy rooted in oil-financed largess, including shipments of reduced-price petroleum to Cuba and elsewhere. Amid worries on bond markets that Venezuela might default on its loans, President Nicolás Maduro,  has said the country will continue to pay its debts.

But the biggest casualty so far has probably been Russia, where energy revenue accounts for more than half of the government’s budget. Putin built up strong support by seeming to banish the economic turmoil that had afflicted the rule of his predecessor, Boris Yeltsin. Yet Russia was back on its heels last week, with the Ruble going into such a steep dive that panicked Russians thronged shops to spend what they had.

Russia’s troubles have rippled around the world, slashing bookings at ski resorts in Austria and spending on London real estate; spreading panic in neighbouring Belarus, a close Russian ally; and even threatening to upend Russia’s Kontinental Hockey League, which pays players in rubles. “It is a big boost for the US when three out of four of our active antagonists are seriously weakened, when their room for manoeuvre is seriously reduced,” Luttwak said, referring to Russia, Iran and Venezuela.

The only major United States antagonist not hurt by the drop in oil prices is North Korea, which imports all its petroleum. David Goldwyn, who was the State Department’s international energy coordinator during President Barack Obama’s first term, warned that an implosion of Venezuela’s economy could hurt the Caribbean and Latin America in ways that the United States would not welcome.

But “on balance, it’s positive for the US,” he said of the low price of oil, because American consumers save money, and “it harms Russia and puts pressure on Iran.”

Marwan Muasher, a former foreign minister of Jordan who is now a vice president at the Carnegie Endowment for International Peace, predicted another domino effect in Syria as Russia and Iran find it difficult to sustain their economic, military and diplomatic support for President Bashar Assad.

Muasher said the drop in oil prices could also prod West Asia oil producers toward political and economic change by challenging so-called rentier systems in which governments derive much of their income from rents paid by foreigners for resources. “Whatever the case, it is clear that the effect of the new oil price levels will not be limited to the economic sphere,” he wrote in a Carnegie report.

Hard-hit anti-American oil producers have blamed foreign machinations for their woes, suggesting that Washington, in cahoots with Saudi Arabia, has deliberately driven down prices. This view is particularly strong in Russia, where former KGB agents close to Putin have long believed that Washington engineered the collapse of the Soviet Union by getting Saudi Arabia to increase oil output, driving down prices and thus starving Moscow of revenue.

Alternative sources

In many ways, the recent price fall really is the United States’ work, flowing to a large extent from a surge in American oil production through the development of alternative sources like shale. By offsetting declines in conventional oil production, increases in shale oil output have allowed overall American crude oil production to rise to an average of about 9 million barrels a day from 5 million a day in 2008, according to the United States Energy Information Administration. That 4 million-barrel increase is more than either Iraq or Iran, the second- and third-largest OPEC producers after Saudi Arabia, produce each day, and it has put strong downward pressure on world prices.

While authoritarian oil producers like Russia are clearly suffering, China is enjoying a huge windfall thanks to the price drop. It imports nearly 60 per cent of the oil it needs to power its economy. China became the world’s largest importer of oil in 2013, surpassing the United States. Bank of America Merrill Lynch estimated that every 10 per cent decline in the price of oil could increase China’s economic growth by 0.15 per cent.

Strong growth in China would lift demand for oil and help reduce the current agonies of OPEC, which pumps around a third of the world’s oil but, largely as a result of increased American production, has lost much of its ability to dictate prices by controlling output.

In an interview with the Middle East Economic Survey this week, the Saudi energy minister, Ali al-Naimi, indicated a fundamental rethinking by OPEC, saying that it needed to focus on keeping its market share rather than trying to raise prices by slashing production. “We have entered a scary time for the oil market,” he said.