Oil price plummet won’t help U.S. with Iran or Russia

November 11, 2014

A motorist holds a fuel pump at a Gulf petrol station in London

Plummeting oil prices — down more than 25 percent since June to three-year lows — should relieve pressure on consumers at the pump. But is it pushing oil-exporting regimes past the breaking point?

The answer is no. Despite their reliance on oil revenue, the governments of Russia, Iran, Saudi Arabia, and Venezuela are not teetering. This is no “oil Arab Spring,” where cratering prices topple governments, spreading like wildfire from one dependent authoritarian state to another. In fact, the price drop won’t even change their stances on the geopolitical issues Washington cares most about.

Cheaper oil won’t shift Iran’s posture in nuclear negotiations. Despite the looming deadline, there is still a huge gulf between the two sides. Iran refuses to eliminate most of its existing stockpile of enriched uranium and centrifuges; Washington insists that any proposal without those concessions would be stillborn. Yet, Iran doesn’t feel pressured to cede ground, particularly when Moscow has offered support to Iran if there is no sanctions relief. And Iran’s economy has stabilized somewhat: since President Hassan Rouhani took office last year, inflation has dropped from 40 percent to 21 percent. A deal could still happen, but it would be the result of creative diplomacy and deeper compromise on both sides — not oil forcing Iran to capitulate.

Nothing will deter Vladimir Putin in his bid to destabilize and maintain influence over Ukraine. Russia can stomach the economic consequences inflicted by Western sanctions and cheaper oil for the foreseeable future. Despite massive capital flight and a battered ruble, Putin still has the will, the foreign reserves, and the popular support — his approval ratings are near historic highs — to continue his offensive. 

For the time being, Saudi Arabia remains the oil supplier of last resort. It can cut and expand production to alter global supply-demand dynamics. Riyadh has amassed an enormous rainy day fund to weather storms such as this. Saudi Arabia will participate in Washington’s anti-Islamic State campaign only insofar as it aligns with its own aims. A sectarian anti-Shi’ite stance is the guiding force in Saudi Arabia’s foreign policy; cheaper oil will have no bearing on that.

Lower oil prices are an additional strain on Venezuela’s ailing economy. But $75-80 oil won’t send the country into default. President Nicolas Maduro is committed to servicing Venezuela’s external debt and he has room to maneuver: Venezuela will likely implement a managed devaluation of its currency and unlock additional liquidity from things like asset sales and changing the terms of its loans with China. Caracas can handle the economic pain for now, without ushering in social dislocation or political upheaval that would make the military withdraw its support for Maduro.

Longer term, it’s very clear that these regimes’ overdependence on oil revenue could threaten their survival. But each regime faces unique stresses, and the breaking points, should they come at all, are neither imminent nor interconnected. When it comes to regime stability, don’t read much into this price drop just yet.

But there is an overarching trend affecting all of these petrostates: a shifting energy landscape will make them dramatically more dependent on China.

It’s already on display in Russia and Venezuela. Venezuela relies on loans from China that it repays in future oil exports; pushing for more lenient terms of these loans is part of Caracas’ strategy for dealing with the recent oil price drop. Moscow has hedged against its cratering relations with the West by sidling up to Beijing. In May, the two countries completed a 30-year, $400 billion gas deal after Russia dropped its asking price; they inked additions to that agreement over the weekend.

Two structural changes will accelerate Russia’s tack to China in the years to come. First, as Russia continues to wield its energy as a political weapon, it will alienate European consumers who will actively seek out new supplies of natural gas that don’t carry such a hefty geopolitical price tag. Second, the North American unconventional energy revolution will help provide that source—and undermine Russia’s pricing power by offering alternatives and boosting global supply.

The North American unconventional energy revolution (from fracking, tar sands and other sources) will rattle geopolitics in the Middle East above anywhere else. The U.S. Energy Information Administration predicts that by 2020, more than four-fifths of the oil the United States consumes will come from the Western hemisphere. By that point, America could be the world’s largest oil producer, and energy self-sufficient by 2035 (according to the International Energy Agency). A reduced reliance on energy from the Middle East will make the US less dependent on the world’s most volatile region—and less interested in getting involved in its geopolitical flare-ups. Meanwhile, to feed its expanding economy and growing middle class, China will become increasingly attached to Middle Eastern energy producers—and vice versa.

Petrostates’ tectonic shift away from the United States towards China will have far-reaching ramifications for these governments, their neighborhoods, and the global energy picture. A risk-averse Chinese leadership will not address the geostrategic issues and security concerns that go hand in hand with energy production in volatile Eurasia and the Middle East. While Washington doesn’t have a formal strategy to intervene on behalf of American energy companies, U.S. engagement does coincide with these linkages. For example, robust energy ties between the United States and Saudi Arabia have underpinned the strategic alliance. That will not be the case with China as it increasingly inherits the United States’ role as the world’s principal energy importer. China will work to engage commercially with no strings attached: it will gladly ink sweetheart energy deals with Russian leadership, but that doesn’t commit Beijing to any deeper geostrategic engagement. That is a very different style of “partner” indeed.

China will likely choose to maintain this more transactional approach to diplomacy, contributing to an expanding power vacuum in these regions. Interventionist diplomacy beyond the Asia Pacific region is new for the Chinese, and meddling in distant countries is particularly troublesome for a leadership that so adamantly believes sovereignty is sacrosanct as it safeguards its own internal affairs against outside intervention. The only thing more problematic than an absence of leadership could be an inconsistent and opaque Chinese presence.

Don’t overestimate the near-term impact of oil prices in free fall. Yet, even if cheaper oil doesn’t upend these regimes — or align them with Washington — it will accelerate their deepening dependence on China. That is a recipe for greater instability and a more volatile global energy landscape.

PHOTO: A motorist holds a fuel pump at a Gulf petrol station in London April 18, 2006. REUTERS/Luke MacGregor


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Maybe the author can tell us why gasoline is not priced according to domestic consumption anymore.

Posted by rikfre | Report as abusive

The current drop in oil prices may reverse as soon as this winter – seasonal demand ofsetting the EU/Russia recession.

If Putin does not escalate further in Ukraine – that pressure on the world economy will ease, allowing demand growth to return

Posted by DonD1977 | Report as abusive

In my opinion, the US dependence on China has much graver consequences for this country and the world than Russia’s or Venezuela’s.

Posted by UauS | Report as abusive

The only reason why oil prices are so low is because the Federal Reserve has manipulated the value of the Dollar massively higher in order to crush the Russian economy (oil is priced in Dollars). The price of oil has absolutely ZERO to do with supply and demand.

Posted by CF137 | Report as abusive

Oh! How energy price plays part internationally! A wonderful and daring article!
The auther should have connected following points,
1,Oil from shales is expensive.
2,Transport of oil to Europe is tigious and expensive.
3,There is going to be the end of getting oil by fracking because of limited reserves there and lack of competitive price available.
4,ISIS is becoming new sourse of oil in the black market.
5,Wars everywhere consumes more oil.
6,It is not only oil but refining oil to gas capacities with America.Countries want gas,not oil.Developing countries oil requirement is galloping.
………….however the article is great!
Ashok Amin (83) (Please ignore my spelling mistakes)

Posted by gentalman | Report as abusive

Just wait til next week. The USA Thanksgiving travel Holiday will send gas prices at least 30-40 cents higher in the blink of an eye, irrespective of supply/demand. Why? Because the oil co’s know they got ya!.

Posted by steve399 | Report as abusive

I could not agree more that China will be the new driving force in the market for oil with the old US oil partners. This itself I believe to a short term view though. China’s aggressive expansion into the South China sea is a path that mimics the US’s drive to energy independence. If they find expansive reserves you will see the market continue to its downward trend.

China is a transnational partner at best and an opportunist in every regard. they will undoubtedly use any newly found reserves as continued leverage for better and better deals with any oil producing country.

I side benefit to all of this will be that our friends across the pond in the EU. they will see much lower costs for energy and time to retool their energy plan since as a continent and collective of countries they are are very energy resource poor.

All-in-all I see a collective positive in these moves. the US will not have a need to continue to engage in the middle east like current demands require. China will drive prices down for the rest of the world. EU should end up with a great contract from Russia and other regional suppliers….

The one thing I disagree with is the effect on Russia and Venezuela. Since neither of these counties have a robust educational system, infrastructure for modern/hi-tech industry and the corruption in these countries limits foreign investment. These countries will suffer greatly if the prices continue at current level or decline further. The issue will be that the rest of the world will care less and less.

Posted by phaber74 | Report as abusive

It surely would be egg on the face if they built Keystone XL and nobody came.

Posted by Felder2 | Report as abusive