The Addiction That Could Be the Ruin of Nations - OZY | A Modern Media Company


Because cheap gas is great for some countries, and ruinous for others. 

John McLaughlin

John McLaughlin

John McLaughlin is the former deputy director of the CIA. He writes a regular column on OZY called “Global Eye: Foreign Affairs Through an Intelligence Lens,” and teaches at the Johns Hopkins University’s School of Advanced International Studies (SAIS).

Much in international politics can be explained by that old saying, “Where you stand depends on where you sit.” So if you’re sitting behind the wheel of your favorite car, you are loving lower gasoline prices, which result in part from the fact that oil prices have dropped 70 percent since 2014 into the range of $30 to $40 a barrel.

But if you’re sitting atop one of the world’s many petrostates — that collection of countries whose earnings come almost entirely from black gold — then you’re not so happy. Those low oil prices are breaking your national budget, threatening your lavish lifestyle and making it harder to pump up the welfare programs that in many cases fund the contract you’ve made with your public: Stay out of politics and the government will provide. To cover all their obligations, most petrostates need oil prices closer to the norm of recent years, $90 to $120 a barrel.

So why are prices so low? And could producers push them back to where they want them — and where you don’t?

The single biggest reason for the oil-price nosedive is that the world is awash with the stuff. Oversupply from producers is currently running at 1 million to 2 million barrels a day. This is partly because U.S. output has increased dramatically, driven largely by the shale oil revolution and fracking. Shale, along with natural-gas extraction, will make the U.S. self-sufficient in energy within the next couple of decades.

When oil prices fell in the past, producers could count on them rising again, either through the normal fluctuations of supply and demand or by tightening supply. This time was different. As supply rose and prices fell, major producers such as Saudi Arabia and Russia did something that might sound counterintuitive: They pumped more oil than usual. They figured that they might offset short-term income losses by gaining a greater share of the market. The Saudis, in particular, calculated that pumping more oil and keeping the price low would knock some new U.S. producers out of business and thereby reduce supply. The strategy has hurt U.S. producers, but not as much as the Saudis had hoped. 

Falling demand has also depressed oil prices. For years, China binged on oil, but its slumping economy has reduced demand for energy and materials. Add to that more conservation in the developed world, better battery technology and more reliance on natural gas for transportation. Meanwhile, technology breakthroughs have reduced many of the costs of drilling and exploration. 

Nowadays, countries dependent on oil income can’t afford to wait. So they are casting about for some way to “stabilize” prices — that is, get them back up. Next month, 15 oil-producing countries, which together account for 73 percent of global output, are set to meet to discuss freezing supply at January levels. But it will be hard to muster a consensus, in part because members are competing for market share, and some, such as Iran and Iraq, are struggling to get back into the game. Chances are that prices are likely to remain low — in the $30 to $50 range — for the foreseeable future.

The fallout will touch nearly every aspect of international relations — particularly for those Middle Eastern, African and Latin American countries (and Russia), where oil has not only shaped economies but also has determined a way of life and pervaded the very nature of society.

Take Saudi Arabia, the world’s largest oil exporter. Oil revenues have constituted 75 to 90 percent of the budget over the last three years. Oil finances nearly all public services. Sixty percent of workers are in the public sector; oil funds their salaries. In a country where the gap between the haves (mostly the royal circle) and the have-nots (everyone else) is enormous, oil revenues have provided a kind of balm against Arab Spring–like protests. Since 2011, the royal family has pumped billions into public works and subsidies. But this is eroding Saudi currency reserves faster than they can be replaced.

For decades the Saudis have tried, with limited success, to diversify their economy. (The United Arab Emirates is one of the few Gulf countries that has managed it.) Saudi efforts usually slacken when oil prices go back up. Riyadh may finally be up against it, however, as evidence grows that it can no longer count on the old up-and-down price cycle.

Russia is in the same boat. Close to 70 percent of its GDP is oil-derived, and its economy is already slammed by sanctions that have pushed the ruble to an all-time low. Oil plays a similar role in Nigeria, Angola, Venezuela — and in Algeria, which, like Saudi Arabia, dipped deeply into its oil revenue to boost public services after the Arab Spring uprisings.

For big consumer countries, the world is also changing. Although some U.S. shale producers have been hurt, there is a catch-22 at work: If prices go back up, shale production can be resumed and scale quickly, thus undercutting other countries’ strategies to restrict supply.

The bottom line? For countries like the United States, with highly diversified economies, the benefits of this energy revolution are many: lower gas prices, potentially more robust manufacturing sectors, more competitive exports and greater economic security. But for countries hooked on oil revenue, addicted to its soothing effects on social stability and public welfare, the ride may be rough.

John McLaughlin

John McLaughlin

John McLaughlin is the former deputy director of the CIA. He writes a regular column on OZY called “Global Eye: Foreign Affairs Through an Intelligence Lens,” and teaches at the Johns Hopkins University’s School of Advanced International Studies (SAIS).

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