1. Oil’s swift fall raises fortunes of US abroad

Oil’s swift fall raises fortunes of US abroad

Anti-US oil exporters Russia, Iran, Venezula pushed towards financial crisis; talks rife that US, Saudi delibrately drove down prices

By: | Published: December 26, 2014 12:29 AM

A plunge in oil prices has sent tremors through the global political and economic order, setting off an abrupt shift in fortunes that has bolstered US interests and pushed several big oil-exporting nations — particularly those hostile to the West, like Russia, Iran and Venezuela — to the brink of financial crisis.

The nearly 50% decline in oil prices since June has had the most conspicuous impact on the Russian economy and President Vladimir Putin. The former finance minister Aleksei Kudrin, a long-time friend of Putin’s, warned this week of a “full-blown economic crisis” and called for better relations with Europe and the US.

But the ripple effects are spreading much more broadly than that. The price plunge may also influence Iran’s deliberations over whether to agree to a deal on its nuclear programme with the West; force the oil-rich nations of West Asia to reassess their role in managing global supply; and give a boost to the economies of the biggest oil-consuming nations, notably the US and China.

It might even have been a late factor in Cuba’s decision to seal a rapprochement with Washington.

After a precipitous drop, to less than $60 a barrel from around $115 a barrel in June, oil prices settled at a low level this week. Their fall, even if partly reversed, was so sharp and so quick as to unsettle plans and assumptions in many governments. That includes Putin’s apparent hope that Russia could weather Western sanctions over its intervention in Ukraine without serious economic harm, and Venezuela’s aspirations for continuing the free-spending policies of former president Hugo Chávez.

The price drop, said Edward Luttwak, a long-time Pentagon adviser and author of several books on geopolitical and economic strategy, “is knocking down America’s principal opponents without us even trying”. For Iran, which is estimated to be losing $1 billion a month because of the fall, it is as if Congress had passed the much tougher sanctions that the White House lobbied against, he said.

Iran has been hit so hard that its government, looking for ways to fill a widening hole in its budget, is offering young men the option of buying their way out of an obligatory two years of military service. “We are on the eve of a major crisis,” an Iranian economist, Hossein Raghfar, told the Etemaad newspaper on Sunday. “The government needs money badly.”

Venezuela, which has the world’s largest estimated oil reserves and has used them to position itself as a foil to American “imperialism”, received 95% of its export earnings from petroleum before prices fell. It is now having trouble paying for social projects at home and for a foreign policy rooted in oil-financed largess, including shipments of reduced-price petroleum to Cuba and elsewhere.

Amid worries on bond markets that Venezuela might default on its loans, President Nicolás Maduro, who was elected last year after the death of Chávez, has said the country will continue to pay its debts. But inflation in Venezuela is over 60%, there are shortages of many basic goods, and many experts believe the economy is in recession.

But the biggest casualty so far has been Russia, where energy revenue accounts for more than half of the government’s budget. Putin built up strong support by seeming to banish the economic turmoil that had afflicted the rule of his predecessor, Boris Yeltsin. Yet Russia was back on its heels last week, with the rouble going into such a steep dive that panicked Russians thronged shops to spend what they had. “We’ve seen this movie before,” said Strobe Talbott, who was president Bill Clinton’s senior Russia adviser in the aftermath of the Soviet Union’s 1991 collapse and is now president of the Brookings Institution in Washington.

Russia’s troubles have rippled around the world, slashing bookings at ski resorts in Austria and spending on London real estate; spreading panic in neighbouring Belarus, a close Russian ally; and even threatening to upend Russia’s Kontinental Hockey League, which pays players in roubles. “It is a big boost for the US when three out of four of our active antagonists are seriously weakened, when their room for manoeuvre is seriously reduced,” Luttwak said, referring to Russia, Iran and Venezuela.

Hard-hit anti-American oil producers have blamed foreign machinations for their woes, suggesting that Washington, in cahoots with Saudi Arabia, has deliberately driven down prices.

This view is particularly strong in Russia, where former KGB agents close to Putin have long believed that Washington engineered the collapse of the Soviet Union by getting Saudi Arabia to increase oil output, driving down prices and thus starving Moscow of revenue.

In many ways, the recent price fall really is the US’ work, flowing to a large extent from a surge in American oil production through the development of alternative sources like shale. By offsetting declines in conventional oil production, increases in shale oil output have allowed overall American crude oil production to rise to an average of about nine million barrels a day from five million a day in 2008, according to the US Energy Information Administration. That four-million-barrel increase is more than either Iraq or Iran, the second- and third-largest OPEC producers after Saudi Arabia, produces each day, and it has put strong downward pressure on world prices.

The geopolitical shakeout set off by the oil market has not gone entirely America’s way. Russia’s troubles have so far shown no sign of pushing Putin toward a more conciliatory position on Ukraine, and some analysts believe they could make Moscow even more pugnacious and prone to lashing out.

The Bank of England’s Financial Policy Committee, which monitors possible systemic threats, warned in minutes released this week that “sustained lower oil price also had the potential to reinforce certain geopolitical risks”. It voiced alarm, too, over an increased risk of deflation in the euro zone, the 18-nation area that uses Europe’s common currency.

The price drop could also encourage more freewheeling use of oil products like petrol, undermining what appears to be a growing consensus among nations that carbon emissions must be reeled in to offset the most dire effects of global warming. While authoritarian oil producers like Russia are clearly suffering, China is enjoying a huge windfall — thanks to the price drop. It imports nearly 60% of the oil it needs to power its economy.

China became the world’s largest importer of oil in 2013, surpassing the US, and so stands to benefit from plummeting prices.

Bank of America Merrill Lynch estimated last month that every 10% decline in the price of oil could increase China’s economic growth by 0.15%. Strong growth in China would lift demand for oil and help reduce the current agonies of OPEC, which pumps around a third of the world’s oil but, largely as a result of increased American production, has lost much of its ability to dictate prices by controlling output.

In an interview with the Middle East Economic Survey this week, the Saudi energy minister, Ali al-Naimi, indicated a fundamental rethinking by OPEC, saying that it needed to focus on keeping its market share rather than trying to raise prices by slashing production. “We have entered a scary time for the oil market,” he said.

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