Cheaper oil’s winners & losers
The recent drop in world oil prices — from more than $100 a barrel in June to about $80 a barrel now — will benefit the global economy, American consumers and a beleaguered U.S. foreign policy. And there are reasons to think oil could remain in the $75-to-$95 range for the next two years.
But it’s important to understand why oil is suddenly cheaper and to consider what international ramifications the price drop will have.
One reason for the plunge is the global economic slowdown. Another factor is the surge in U.S. production from the “shale revolution.” But the biggest force driving it is that OPEC’s largest producer, Saudi Arabia, which pumps 9.7 million barrels a day, has made it clear that it can live with lower prices.
What are the Saudis up to?
The International Energy Agency recently lowered its estimate of world oil demand for 2014 by 250,000 barrels per day. Lower demand means that if the Saudis and other gulf oil producers want to maintain or increase their market share, they will have to provide incentives, which is why they started discounting oil.
Another Saudi aim appears to be to slow the North American shale boom. Shale extraction has helped boost U.S. oil production. But getting oil from shale is expensive and the Saudis know that a big drop in oil prices could de-incentivize investment in U.S. shale projects.
The picture gets even more complicated when you consider the effect of lower oil prices elsewhere in the world. Russia and Iran both need oil prices to be at roughly $110 a barrel in order to balance their budgets. If oil prices remain at $80 a barrel, the strategic ambitions of Tehran and Moscow could be severely undermined.
But lower prices are also likely to cause internal disruptions, particularly in Russia. Russia’s expected growth for 2014 is an anemic 0.5 percent and similar growth has been projected at least through 2016. With sharply diminished oil revenue, Russian President Vladimir Putin would be hard pressed to find money to spend on boosting pensions and government salaries or to fund other measures to keep Russians happy.
Low oil prices are likely to put additional pressure on the communist regime in Cuba. The island nation has been kept afloat in recent years by oil subsidies from Venezuela. It’s unclear what a cutoff in cheap oil from Caracas would mean. The Castro regime might decide to live with serious economic stagnation, but it might also move toward more Chinese-type market-oriented reforms.
Venezuela’s horrendously mismanaged socialist regime must be very nervous about facing the Venezuelan public without the cushion of $110 oil and it may have to rethink its gift to Havana.
Here at home, the news is mostly good. Americans will see an immediate benefit, with gasoline at $3 a gallon or less. Lower prices are likely to spur both consumer spending and the overall economy.
The oil crisis of the 1970s brought long lines at gas stations and high prices. Today we have a new oil crisis, but its negative effects are being felt primarily in other parts of the world. This time, the U.S. is largely a winner, both at home and abroad.
Robert A. Manning, a former State Department official, is a senior fellow at the Brent Scowcroft Center for International Security at the Atlantic Council.