2 Mar 2016 11:04am

The geopolitical implications of falling oil prices

The price of oil is often regarded as a sort of thermometer to measure the health of the world economy. What is less often noted is that it can also serve as a barometer – warning of approaching geopolitical storms. Indeed, the dramatic plunge in the price of a barrel of crude – from nearly $150 in June 2008 to around $30 today – is likely to fuel continued upheaval far beyond the world’s energy and commodity markets, with worrying implications for the European Union

Furthermore, oil prices today are subject to a powerful source of downward pressure: the expectation that the world economy will be restructured in response to worries about climate change. Current efforts to curb global warming may not have much bite, but in the long term, the fact that fossil fuels are major contributors to the rise in atmospheric carbon dioxide and thus climate change is likely to prompt policymakers – and investors – to take serious action.

This leads to what German economist Hans-Werner Sinn has called the “Green Paradox”. The possibility that the use of fossil fuels will one day be restricted creates an incentive for oil producers to sell as much as they can before the limitations take effect. This logic might be behind Saudi Arabia’s response to plummeting oil prices: rejecting calls by OPEC to cut production. The result is a further decline in the price of oil and larger incentives for consumers to buy gas-guzzlers and drive more.

In the industrial world – even in the US, an increasingly important producer of petroleum – low oil prices are unambiguously good for the economy in the short term. Indeed, plummeting prices are one of the few forces helping to stabilise the fragile eurozone. Worries that falling commodity prices will lead to damaging, 1930s-style deflation are almost certainly overblown.

And yet, the forecast is far from rosy. History is replete with examples of technological advances interacting with resource availability, with enormous geopolitical impact. Rapidly changing commodity prices can upend the geopolitical landscape as well, sparking political instability – or worse. And today, oil seems to be going the way of timber and steel, losing its strategic importance. Large amounts of energy will still be needed for the basics of modern life, including data processing and storage, but will more often come from other sources.

This is likely to have epochal consequences, as weakening oil prices undermine the authoritarian regimes that control the main producers

Scholarly evidence links dependence on natural resources with poor governance – the “resource curse”. Whatever the many differences among Nigeria, Venezuela, Saudi Arabia, Russia, Iran and Iraq, all have one thing in common: oil revenues have corrupted the political system, turning it into a deadly struggle for the spoils. As prices fall, the bandits in charge will quarrel more among themselves – and with their neighbours.

Venezuela’s President Nicolás Maduro has taken up the Latin American left’s old, populist slogans and pointed his finger at the US. Similarly, Russian officials are drawing parallels between today’s events and the falling oil prices that undermined the Soviet Union. In both cases, the US is to blame; hydraulic fracturing in Oklahoma or Pennsylvania, according to this narrative, is the latest example of America’s projection of power abroad.

In other words, the security challenges implied by dropping oil prices are likely to be more significant than the economic risks. But security challenges can be costly. For example, the difficulties the EU faced in 2015 are likely only to grow in scale and severity. So there is a strong case to be made for rich countries using the economic windfall from dropping oil prices to fund efforts to deal with the geopolitical consequences. In this light, German finance minister Wolfgang Schäuble’s recent proposal to pay for accommodation for refugees with a European petrol tax makes perfect sense.

Policymakers in industrialised countries need to stop thinking about falling oil prices as representing risks to the economy and start considering their geopolitical implications. Given the scale of the challenges likely to come, policy co-ordination will be necessary. The blowback from ever-cheaper oil is a problem that no country is likely to be able to deal with on its own.

Harold James is professor of history and international affairs at Princeton University and a senior fellow at the Center for International Governance Innovation

Copyright: Project Syndicate 2016, project-syndicate.org



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