Plunging Oil Prices Set Off a Global Chess Game

Huge implications of a lower cost per barrel will make John Kerry’s job even tougher.

US Secretary of State John Kerry pauses as he delivers a speech on climate change in Jakarta on February 16, 2014. Kerry will on February 16 issue a clarion call for the world to do to more to combat climate change, warning the planet is being pushed to 'a tipping point of no return'. 
National Journal
Nov. 5, 2014, 4:51 p.m.

It may be hard to ima­gine, but oth­er things have been go­ing on in the world be­sides the elec­tion. And while I no doubt will re­turn to the im­plic­a­tions of Tues­day’s con­tests (not to men­tion the up­com­ing ones in Decem­ber and Janu­ary), I want to turn my at­ten­tion now to an­oth­er im­port­ant story. First, though, I want to men­tion a couple of losses we have suffered in the past couple of weeks: two tower­ing fig­ures in the world of pub­lic policy, Dav­id Ab­shire and Rod Hills. Dav­id’s long pub­lic ser­vice, most not­ably in the Re­agan ad­min­is­tra­tion, was ac­com­pan­ied by deep in­volve­ment in the world of think tanks, most re­cently the Cen­ter for the Study of the Pres­id­ency and Con­gress, with which I have strong ties. Dav­id had a ster­ling re­cord of ac­com­plish­ment in the na­tion­al se­cur­ity realm. He was a Re­agan Re­pub­lic­an who be­lieved deeply in the need for com­prom­ise and for Amer­ic­an in­sti­tu­tions to work, and who had a steely in­teg­rity and un­par­alleled en­ergy to find solu­tions to real prob­lems. Rod Hills was chair­man of the Se­cur­it­ies and Ex­change Com­mis­sion dur­ing the Ford ad­min­is­tra­tion. He was a man of pier­cing in­tel­lect, a lead­er in trans­par­ency and in fight­ing cor­rup­tion, and a driv­ing force be­hind the For­eign Cor­rupt Prac­tices Act. Along with his re­mark­able wife, Carla, he fought to make the Re­pub­lic­an Party a prob­lem-solv­ing party of the cen­ter. The Re­pub­lic­an Party of Dav­id Ab­shire and Rod Hills was a party to ad­mire, a party to gov­ern. Both will be deeply missed.

The sub­ject of my column this week is the strik­ing de­cline in oil prices, from a long peri­od of well over $100 a bar­rel to a point now, by some in­dices, of un­der $80 a bar­rel. Of course, Amer­ic­ans across the coun­try are see­ing it in plum­met­ing gas prices—now in some places un­der $3 a gal­lon for reg­u­lar. Like oth­er good eco­nom­ic news, this fact has made no per­cept­ible dif­fer­ence at the polls. But it has huge im­plic­a­tions for glob­al polit­ics and eco­nom­ics—es­pe­cially if, as is quite pos­sible, the oil price sta­bil­izes for some time at between $70 and $80 a bar­rel.

In the U.S., the pos­it­ives of lower gas prices are ob­vi­ous—more money for Amer­ic­ans to spend on oth­er things, less stress in fam­ily budgets. At the same time, lower prices that re­flect a glob­al over­sup­ply of oil and gas change the cost-be­ne­fit equa­tions for drilling and frack­ing. That fact could lower the tem­per­at­ure a bit next year on con­tro­ver­sies like nat­ur­al-gas frack­ing. The down­side, many ana­lysts point out, is that many wild­cat­ters and smal­ler ex­plor­a­tion com­pan­ies need oil above $80 a bar­rel to sur­vive; they may be driv­en out of the mar­ket­place, provid­ing op­por­tun­it­ies for the Saudis and oth­er for­eign pro­du­cers to fill the va­cu­um down the road. At the same time, en­ergy-pro­du­cing areas, like North Dakota and the swath of the North­east that in­cludes the Mar­cel­lus Shale, will have less en­vir­on­ment­al stress but less em­ploy­ment, while en­vir­on­ment­ally sens­it­ive places like Cali­for­nia will be­ne­fit in a ma­jor way.

But the more in­ter­est­ing re­per­cus­sions of lower oil prices come abroad. Start with Rus­sia. Vladi­mir Putin’s klepto­cracy has a deep de­pend­ence on oil rev­en­ues—and prices well be­low $100 a bar­rel are crip­pling to his needs and those of the Rus­si­an eco­nomy. Low prices and the need for rev­en­ue also com­plic­ate Putin’s use of oil and nat­ur­al gas as black­mail against Ukraine, the Balt­ics, and oth­er European coun­tries that rely on Rus­si­an en­ergy for heat­ing. That prob­ably ex­plains the re­cent Rus­si­an deal with Ukraine over sup­plies of nat­ur­al gas. At the same time, the de­clin­ing Rus­si­an eco­nomy has been hurt by West­ern sanc­tions; the loss of oil rev­en­ue makes sanc­tions even more ef­fect­ive. But there is a com­plic­at­ing factor: The sag­ging eco­nom­ies in West­ern Europe, fa­cing a real threat of de­fla­tion made worse by lower en­ergy prices, make lead­ers there much more re­luct­ant to ratchet up sanc­tions, com­plic­at­ing Amer­ica’s policy. Off­set­ting the blow to Rus­sia is that it has at least some cush­ion from the high­er prices be­fore the drop, but it will hurt, in­creas­ingly, as the lower prices per­sist.

Next comes Ir­an. It, too, has a sag­ging eco­nomy hurt deeply by Amer­ic­an and West­ern sanc­tions. That more than any­thing is what brought Ir­an to the ne­go­ti­at­ing table over the nuc­le­ar is­sue. The fail­ure to reach a deal will cer­tainly res­ult in more and deep­er sanc­tions, which will hurt fur­ther. There have been some ana­lyses sug­gest­ing that Ayatol­lah Ali Khame­nei is will­ing to spurn a deal and in ef­fect turn Ir­an in­to a self-sus­tain­ing eco­nomy. Un­der ideal con­di­tions, that is pie in the sky. With shrink­ing rev­en­ues, it would be cata­stroph­ic.

Saudi Ar­a­bia also de­pends over­whelm­ingly on oil rev­en­ues to sus­tain its eco­nomy and mol­li­fy its elites and rank-and-file cit­izens. But Saudi Ar­a­bia has built up a huge re­serve—call it a rainy-day fund, or maybe a rainy-year fund. Lower prices will hurt the Saudis’ ad­versar­ies, in­clud­ing Ir­an, and give the Saudis more lever­age over its Ar­ab neigh­bors. If it pumps more oil to keep prices low, it will en­rage Ir­an, adding fuel to an already fiery re­la­tion­ship.

Oth­er Ar­ab oil-pro­du­cing coun­tries, like Oman, Bahrain, and Al­ger­ia, will also be hit hard by the loss of rev­en­ues. That may bring some in­tern­al in­stabil­ity—fail­ing to pay off the gov­ern­ments’ cronies, or adding to the eco­nom­ic stresses of their middle and lower classes, could lead to crack­downs, or maybe give more trac­tion to ex­treme forces. Sim­il­arly, the re­gime in Ni­ger­ia may face more troubles from Boko Haram.

Now let’s move to our hemi­sphere. Un­der its left­ist re­gime, Venezuela has be­come a bas­ket case; na­tion­al­iz­a­tion of much of the oil in­dustry has led to chaos in pro­duc­tion and ser­i­ous eco­nom­ic stresses even with high­er oil prices. Now a re­gime that has deep in­tern­al di­vi­sions, that has paid off the poor with vir­tu­ally free gas­ol­ine and highly sub­sid­ized ba­sic com­mod­it­ies, that has jailed op­pos­i­tion lead­ers, will find it can­not keep up. One would ex­pect blood­shed, fur­ther crack­downs, and pos­sibly strife that will spread to its friends like Ecuador. And oth­er coun­tries in the re­gion, like Nicaragua, may suf­fer be­cause the cheap prices and cred­it from Venezuela will dry up.

Of course, there are real win­ners from lower prices. China, a huge im­port­er of en­ergy, will be­ne­fit in a ma­jor way. In­dia, also a big im­port­er, will be­ne­fit even more, as its ma­jor ag­ri­cul­tur­al in­dustry will pay much less to in­crease its pro­duc­tion. Many coun­tries, in­clud­ing Egypt and Jordan, which sub­sid­ize oil for cit­izens, will have an easi­er time of it.

There is a bot­tom line here. All of Amer­ica’s in­ter­na­tion­al re­la­tion­ships are af­fected by this re­mark­able change in oil prices, in com­plic­ated and in­ter­re­lated ways. For Sec­ret­ary of State John Kerry—already fa­cing the chal­lenges of crisis in Syr­ia and Ir­aq over IS­IS, the strains in Afgh­anistan as it faces the de­par­ture of Amer­ic­an forces while the Taliban ratchets up its activ­it­ies, the com­plic­ated ne­go­ti­ations with Ir­an, and the deeply strained re­la­tions with Is­raeli Prime Min­is­ter Ben­jamin Net­an­yahu and his gov­ern­ment—it means he and his team will have to spend a lot of time fig­ur­ing out moves in a mul­ti­di­men­sion­al chess game, how to ex­ploit these de­vel­op­ments while keep­ing them from be­com­ing a new set of ma­jor head­aches or worse. All this as a newly em­powered Re­pub­lic­an Sen­ate and a feisty Re­pub­lic­an House will be de­mand­ing that he spend more and more of his time testi­fy­ing about both the ad­min­is­tra­tion’s policy choices and things like Benghazi. My nom­in­ee for the toughest job in Wash­ing­ton: John Kerry, by a coun­try mile.

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