OPEC’s recent decision to keep production at its current levels lead to the realization by many investors that the current oil price may become the new norm. The recent price drop in oil may rebound, but if oil continues to drop it will have a lasting effect on the international political status quo. Oil prices have hit its lowest rate in many years and it will create a situation where governments and countries that depend on this one commodity may have shortfalls in their national reserves or become insolvent if their economies depend solely on oil.
Countries with diverse economies and sound economic planning might take a small hit, but stay productive in the long run. Countries like Canada that have large oil reserves but also have access to other commodities and a large manufacturing base will likely weather the storm if balanced economic decisions are taken. Countries like Iran and Venezuela, where the political leadership depends on oil revenue to implement their national political strategies, will have a problem. The nationalization of many different industries in places like Iran and Venezuela removed the wealth and know-how from indigenous companies and acted as a shield against foreign investment. When oil became the source of national revenue and other industries were co-opted by the government or dismantled, oil and state became one entity. With a severe and sudden drop in oil prices, their economic model will directly affect politics in every oil dependent country.
Venezuela was having internal political issues since the election of Nicolas Maduro as the successor to Hugo Chavez. With Venezuela’s economy in trouble before the price drop, it will be a difficult run for Maduro as oil is as much of a political tool as a national resource for his government.
Iran, with its negotiations with the US and Europe over its nuclear program, depends on oil more than any other OPEC nation. Saudi Arabia, also a member of OPEC, is currently in a Cold War with Iran in Syria and Iraq and is better managed to weather a low oil price over the long run than Iran. Iran is heavily dependent for its economic and political stability on oil. Sanctions would likely follow a failure of an agreement on Iran’s nuclear program in an economic climate that is very dangerous for Iran’s leaders. If the US and its allies decided to not extend negotiations, Iran would face its toughest struggle since after the 1979 revolution as internal pressures and external diplomatic moves would leave Iran in an economic quagmire.
The price drop in oil came from recent information that showed that the US will start producing large quantities of its own oil and gas, reducing the dependency on oil from OPEC for the US economy. Russian aggression in Ukraine and the fears in Central and Western Europe that political restrictions on Russian oil and gas will leave Europe in the cold left the Europeans in a tough position. Defending the independence of Ukraine may have a negative effect on Europe, but with suspected Russian incursions into Eastern Ukraine having a negative economic impact on Russia, the recent drop in oil prices has hurt the Russian economy two fold. Conflict and the plummeting value of Russia’s main commodity have weakened Russia at a time where Russia would prefer to look very strong. The question remains, will the US take advantage of its unexpected position of strength? Perhaps not.
US foreign policy has been pushed into helping minority groups facing extermination in Iraq and Syria. While the US was pulled into a limited response to counter genocide committed by ISIS on almost every small group in the region, the reaction has been mishandled when Assad’s Syria became the focus of US policy in line with combat against ISIS. The Syrian Army is the only force on the ground challenging ISIS that meets US goals. Assad’s help with Russian weapons and Iranian soldiers has left Syria in a stalemate with ISIS. Assad has not been able to claim a victory with all the help he has received, and this gives the US an opportunity to create some links with anti-ISIS forces in the region and become a valued player in Syrian negotiations.
US economic power can be used to ensure the security of the US and its allies. US and Canadian oil and gas could supplement any flows restricted from Russia, and put Putin at the negotiating table in order to salvage Russia’s economy. Iran is one of the most oil dependent countries and governments in the world, and negotiations that came from a desire to reduce sanctions will have an exponential effect with low oil revenues, allowing the US and its allies a strong bargaining position against Iran’s nuclear program and their role in Iraq and Syria.
The largest effect, allowing the US to grow its economy without dependence on oil and gas from abroad will release the traditional shackles of fuel dependence by the US on foreign energy. A strong US economy and the ability to make policy without dependency on OPEC’s control over oil prices leaves the US in a good economic position, and with the opportunity to make productive international policy if good decisions can be the result of recent fortunes.
The first victim of a long term low oil price will likely be Venezuela; US responses to Venezuela’s economic shortfall will likely become the standard policy until the end of the Obama administration.
