What’s good at the pump is not good for the exporters

EMMELINE SUN

Oil prices have long been a determinant of the global political balance. For countries like Azerbaijan and Ukraine, falling oil prices wreak havoc on their already fragile democracies. The loss of a major source of revenue forces such countries to cut spending on a plethora of basic national services. In Iraq, falling oil prices have curtailed the revenue necessary to complete construction of its electricity and sewage systems. The source of dropping oil prices can be linked to the global recession. Although oil prices aren’t normally correlated with the stock market, the severe global recession has created a virtual domino effect on all commodity prices. With the perception that the recession won’t be as long-lasting as expected, there has been a slight but negligible increase in prices, due in large part to OPEC’s deal to boost prices by cutting production by 2.2 billion barrels a day. Still, with oil at barely $50 a barrel, oil supplying countries are contracting. Resource development and real estate in many of these countries are at a standstill.

In the midst of all this, Venezuela appears to be an anomaly. Their current political development seems unaffected by oil prices. Efforts to improve education and resource development have continued. The state recently elected to potentially extend Hugo Chavez’ rule through the removal of term limits. This political stability seems to contradict the normal trend, in which heavy dependence on oil fosters instability. However, one of Chavez’ main policies has been to keep oil prices low for his country. At $.12 a gallon, he has effectively established domestic gas prices as the cheapest in the world.

Though Chavez is buying the happiness of his people, it comes at a costly price- roughly $8.8 billion per year. In a country where 93 percent of revenue comes from exporting crude oil, falling oil prices significantly impact its wealth, even if this is outwardly unapparent. The most obvious solution to negating this effect is to raise oil prices by decreasing the subsidies that have been in place for a few decades. However, such an act will undoubtedly fuel inflation in a country that can’t afford it. Although outwardly stable, all Venezuelan leaders have recognized the internal volatility of the country, an indication made clear by the fact that subsidies have only been slashed once in the past 20 years. It’s unlikely that Chavez will break this trend if he wishes to stay in power. The toll of low oil prices is recognized in other ways. Chavez recently cut spending, increased domestic borrowing and raised sales taxes in an effort to offset the drop in revenue.

A different scenario holds true for Russia. Though it is the world’s second largest exporter of oil, falling oil prices are not as detrimental to its internal structure. A loss in revenue, even if significant, is unlikely to oust President Dmitry Medvedev from office. At the very least, Russia has $450 billion in foreign-currency reserves to fall back on, which though significant, is a steep loss from what was very recently $600 billion in reserves. Falling oil prices are also a blow to Russia’s political diplomacy. This is further exacerbated by the global recession, which has almost decimated Russia’s foreign investments. The implications explain Russia’s precarious relationship with countries like Iran and China. Because investing with Russia is risky for key oil demanders when oil prices are down, Russia seems quite willing to take a "quantity over quality" approach in choosing its allies, perhaps in hopes of boosting its diplomatic position.

When we view these actions in their historical context, we recognize that they are not unprecedented. Russia vocally opposed the US invasion of Iraq, even vetoing the UN resolution to authorize war. There were two major reasons for this: the first was that Iraq had an outstanding debt of $8 billion remaining from USSR rule that Russia feared would not be repaid in the event of a regime change; the second, and perhaps more relevant reason, was that Lukoil, Russia’s largest oil company, had a $3.5 billion contract with Saddam Hussein’s government for further oil development in Iraq. Even more intricately, Russia realized that if Iraq, with its large oil reserves, were to fall into US hands, Russian oil would hold significantly less negotiation power and monetary value.

An even further look back in history reveals just how dependent the Russian political economy has always been on oil prices. The steep drop in 1986 oil prices (a plunge from $30 per barrel to $10 per barrel) precipitated the fracture of the USSR and led to its collapse a mere five years later. Today, the same problems (fluctuating oil prices) plague Russia, despite its developed internal stability.

On the other hand, oil demanders like the US and China are quick to capitalize on dropping oil prices. At a local level, drivers are more willing to fill up their gas tanks with prices down from $4 a gallon. Though the drop aids demanders at the moment, a key concern lies in what could happen to smaller countries in Eastern Europe. The political problems that stem from a loss in oil income could easily be picked up by Russia in an effort to exert more influence over those areas.

Because oil is unrenewable, it wreaks domestic and international instability on all countries, creating a tumultuous global arena. This competition for resources will only escalate as countries continue to exhaust finite supplies. Until we develop feasible alternative sources of energy, the international community will remain in flux.

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