What Cheaper Oil Could Mean
Oil prices have remained abnormally high for an uncharacteristically long time. Earlier this year they hit a succession of record highs, topping out at 55 dollars a barrel. Currently oil hovers around 48$. Many factors impact how much a barrel of oil costs, and how that costs translates to how much we pay at the pump. Time of year, political/security stability in oil producing regions, how much a particular government subsidizes gasoline etc. Regardless, prices have stayed high for a while and it appears a safe assumption they will not plummet soon. But, in the words of a former Nixon adviser (remember those oil prices?) “things that can’t go on forever, usually don’t.” So what will happen when oil falls back down to earthly prices?
I don’t know. But here are two large scale oil exporting countries that are sure to see radical impact when it does.
Iran. The Islamic Republic is a true energy heavy weight, ranking third among oil exporters and second only to Russia in proven natural gas reserves. The Iranians have exploited their abundance of resources to see them through the bloodiest war in the history of the Middle East and endured decades worth of isolation from the outside world. Iranian society is anything but stable. However, most Iran watchers agree that popular discontent reached its peak in the summer of 1999. July saw a rash of dramatic large scale protests, but the moment for true change at the top came and went. Voter turnout has decreased since then and a public once enthused to create change has lost much of its reformist zeal. The spike in oil has allowed the regime to pursue what some call the “China model”; loosen some social restrictions and use oil wealth to make immediate if moderate economic improvements, use these two prongs to stall and stymie true political reform. For the moment this strategy seems to be working. Iranians may not have fallen back in love with the Islamic revolution, but they are finding things more livable and they have accepted it. Success via the China model requires a next step. The time bought by relaxing social control must be used to restructure the economy so that it is viable and sustainable in the long term. Thus far there has been little evidence of this kind of action. It is also worth noting that China, the model’s namesake, does not have an economy centered on the export of two natural resources, and subject to the capriciousness of their world markets.
So what will happen in Iran when the price of oil falls? It is impossible to predict, but it seems reasonable to think that as the carrots provided by oil exports dry up dissent in the Iranian street will gather strength. It may not be an accident that the height of the public reform movement in summer of 1999 coincided with extremely low prices in oil. The Iranians protesting that summer had at least a tepid ally in President Mohammad Khatami to counterweight the hard-liners in the religious establishment. Without a significant moderate candidate for next month’s presidential election, it is entirely possible that the social unrest that will rise up to meet the drop in oil will be exacerbated by the lack of a voice friendly to reform within the government. This may create an explosive situation.
The nuclear factor adds another dimension to the issue. Some have suggested that Iran’s pursuit of nuclear power may indeed be for peaceful purposes. While a welcome thought, riding this argument out to its conclusion brings up other concerns. It holds that Iran wants nuclear power for domestic use, that way it will be free to export 100% of its natural energy resources. This would indicate that Tehran has no intention of diversifying its economy. The other nuclear concern is of course that in the event of massive price drop in oil, nuclear weapons and missile technology make a formidable bargaining chip when it comes to economic aid.
Switching continents, there is an equally worrisome prospect in Venezuela. The South American nation relies on oil for 85% of its exports. High prices have given the Chavez government boosted revenue which it has in turn used to fund popular public works geared toward its working class power base. The argument of whether this is an example of a democratic government properly using state resources to help its citizens or a strongman keeping his people quiet is a valid one, but not what I want to address in this post. What is clear about Chavez’s oil fueled public works spending is that it has been done with little fiscal prudence.
True, many people in poor areas around Venezuela have improved social services and many lower income Venezuelans own their own homes thanks to low/no interest loans from the government. But consider this; Caracas borrows 13 times more today than it did when Chavez took office, when the price of oil was slightly less than half what it is today. The Chavez regime deposits the profits of Venezuela’s state run oil company in Caracas banks, reportedly at 9%. In order to finance its penchant for enormous public works it then turns around and borrows from those same banks at as high a rate as 15%! This behavior borders on sheer lunacy.
Although Chavez doesn’t have many fans in Washington or the middle and upper classes in his own country, the ugly days of spring 2002 have passed. For now, the high price of oil has given him a pass. It allows him to satisfy his base and shore up domestic political support. At the same time the US has accepted his presence and is quietly content with stability in one of the hemisphere’s largest oil producers because as long as that stability permits the oil to get to market, it prevents further escalation in price. In an ironic twist, some ultra wealthy bankers in Caracas are okay with the situation because of the killing they make lending to Chavez.
So things are stable now, but what happens when prices drop? The gargantuan debt being compiled by the government will be very difficult to service. Imagine if this amount of debt had to be paid with oil profits at half what they are today. I am not familiar enough with the internal finances of the government but common sense tells you Caracas may have to default on its loans from domestic banks. What happens to Chavez’s relation with his base of support in blue collar circles if he is no longer able to provide expanded social services at low cost? Some may stick by him out of loyalty but it is far easier to be a populist with resources to placate the people than without. Then what happens as he begins to lose control? Does he let democracy works itself out or does he curtail civic freedoms and political criticism while trotting out his paramilitaries to quell unrest in the streets? All of this is hypothetical for now but Venezuela may be faced with this reality when the price of oil comes back down to earth.
No one is excited about paying more than two dollars a gallon for gasoline. And we are all familiar with the dirty little truth that a few cents of every dollar spent on gas find their way to very seedy characters not that crazy about the United States. The complexities of global politics mean that with a fall of oil prices we may be trading in those problems for another set of headaches. These are just two examples, the list of countries that have been able to ride oil revenues in order to push back problems also includes Saudi Arabia, Russia, and Colombia.
