Trends in the Oil Market

For John, BLUF:  Yes, turning seawater into energy is the goal, but in the mean time, cheap oil is a blessing and a curse.  Nothing to see here; just move along.

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From Project Syndicate we have a discussion of the geopolitical impact of the international oil market.  Oil is what is sometimes referred to as a fungible product.  That means that when the price goes up availability of the product increases in one location there will a price drop across the board, and visa versa.  This issue is tackled by Professor Martin Feldstein, (Economics Professor at Harvard University and President Emeritus of the National Bureau of Economic Research).  His OpEd is The Geopolitical Impact of Cheap Oil.  Cutting to the bottom line, here is the conclusion:

The big losers from falling oil prices include several countries that are not friends of the US and its allies, such as Venezuela, Iran, and Russia.  These countries are heavily dependent on their oil revenue to support their governments’ spending – especially massive transfer programs.  Even at $75 or $80 a barrel, these governments will have a difficult time financing the populist programs that they need to maintain public support.

Although Saudi Arabia and several of the Gulf states are also major oil exporters, they differ from other producers in two important ways.  First, their cost of extracting oil is extremely low, which means that they will be able to produce profitably at the current price – or even at a much lower price.  Second, their enormous financial reserves allow them to finance their domestic and international activities for an extended period of time, as they seek to transform their economies to reduce their dependence on oil revenue.

A further decline in the price of oil could have major geopolitical repercussions.  A price of $60 a barrel would create severe problems for Russia in particular. President Vladimir Putin would no longer be able to maintain the transfer programs that currently sustain his popular support.  There would be similar consequences in Iran and Venezuela.

It is not clear whether these countries’ current regimes could survive a substantial and sustained future decline in oil prices.  By contrast, it is obvious that oil-importing countries would benefit greatly – as they already are.

If you read the article, there is a lot of initial discussion of interest rates, which is important, but I think the big hand/little map version is the paragraphs above.  Low oil prices will help American consumers, but it will put the pinch on certain nations, including Russia, Iran and Venezuela.  One or more of them could react badly.  Including in the area of foreign relations.

Regards  —  Cliff