Opportunities as Good as Black Gold

Oil

By Matthew Rock.

“Jesus!” exclaimed one Durham, North Carolina, resident on Sunday.  “$3.01 for a gallon of regular unleaded.  Unbelievable…” Lee Jones says he remembered a few years ago when gas prices teetered toward $5 a gallon.

These low gas prices, the lowest in nearly four years, result from a simultaneous U.S.-led wave of crude oil, made possible by the fracking revolution and weak global demand for oil.  On Tuesday, the global benchmark for oil prices slid 4.5% to $81.84 a barrel on the New York Mercantile Exchange, which left the price of a barrel 20% down since the start of June.  

Most American citizens view the fall in oil and gasoline prices as a positive development, since it decreases their energy spending and leaves them additional income.  According to one estimate by Brett Ryan, a Deutsche Bank economist, every one-cent decrease in the price of gas leads to a $1 billion annual fall in energy spending in the U.S. economy. According to Tom Kloza, chief oil analyst for gasbuddy.com, “[The fall in oil prices is] a positive for U.S. corporates and makers of goods and services.”  He explains the decline leaves the average American family an additional $50 of discretionary income per month, free to be spent on consumer products.  However, because America is the largest producer as well as the largest importer of oil, a falling oil price produces mixed results for the American economy.  According to Michael Cohen of Barclays Bank, a 20% drop in world oil prices cuts American producers’ profits by a matching 20%.  In addition, Stephen Brown of UNLV reckons the decreasing importance of oil imports in the U.S. means every 1% drop in the price of oil boosts GDP by only .01%, compared to an estimated growth effect of .04% in the early 1980s.  In all, according to The Economist, cheaper oil and lower interest rates should contribute .1% to the 2015 growth rate, although this is likely to be negated by a stronger dollar, weakening global demand for exports, and fickle stock markets.  

Although the fall in oil prices has dealt the U.S. economy a more or less neutral hand, it has given U.S. foreign policymakers a far more intriguing set of cards.  In particular, the recent slide in crude oil price has left Venezuela, Iran, and Russia, three of the world’s largest exporters of oil and America’s most vitriolic critics, highly vulnerable to economic strain and political instability.  The Obama administration should take advantage of this rare opportunity to pursue its foreign policy agenda.  

Challenge Venezuela in the Caribbean

Take Venezuela.  As The Economist reports, its government needs oil at $120 a barrel to finance its spending plans, an impossible rise in price given the current market conditions.  To compound the Venezuelan public’s concern, a debt service payment in early October pushed reserves below $20 billion for the first time in a decade, and last year’s fiscal deficit stood at 17% of GDP.  Official inflation measures top 60%, and Standard and Poor’s, a ratings agency, downgraded Venezuela’s debt to CCC+ in September.

America’s opportunity for foreign policy action lies in Venezuela’s connection to the Caribbean economy.  Venezuela runs PetroCaribe, a program in which it provides Caribbean countries cheap financing to buy Venezuelan oil.  Because Venezuela’s present economic state means it likely will cut back on this $2.3 billion per year program, the heavily oil-import-dependent nations of Haiti, Jamaica, Nicaragua, and Guyana fear the imminent economic shockwaves.  

In order to promote the stability of the region and to dilute Venezuela’s influence there, the U.S. should declare it in its national interest to export shale-extracted natural gas to the Caribbean region, as has been suggested by some higher-ups in the Obama administration. This should not be too hard, since Caribbean governments have already begun to entertain the possibility of a switch from a dependence on Venezuelan oil to American ethane and propane.  

In addition to this effort, America should look to expand renewable energy installation and research in the region, which would set in place a long-term partnership between them and the U.S. and steer the Caribbean toward West.  In September, Jamaica’s Public Service signed purchase agreements with two wind farms and a solar-power scheme, which points to interest in renewable energy in the region and enhances the plausibility of a U.S.-led program.

Force Iran into a Nuclear Deal

Iran is in an even worse position than Venezuela.  According to The Economist, Its government needs oil at $136 dollars a barrel to finance its spending plans, and in 2013 it spent $100 billion, 25 % of GDP, on consumer subsidies To make matters even more unsustainable, sanctions prevent it from borrowing to continue its spending, which suggests an instantaneous decrease in the standard of living for Iranian citizens when the bill comes due.  

Because the citizens elected current president Hassan Rouhani on the platform of improving living standards, lower oil prices are likely to force further reforms and to increase pressure for Iran to broker a deal with America over Iran’s nuclear program.  Currently, Iran and the U.S. (plus five other world powers) are wrapped in deadlocked negotiations, the deadline of which is in late November.  Rather than close talks and miss the opportunity for a deal, the U.S. should allow an extension on the negotiations and maintain the current level of sanctions to let Iran feel the effects of a falling oil price over the next couple of months.  As its economic state worsens and President Rouhani comes under increasing public pressure, a deal in which Iran agrees to dismantle its nuclear capacity for a lifting of sanctions becomes far likelier than it has been in the past era of high oil profits.  

Double-down Against Russia

Finally, look to Russia.  On Tuesday, Russian President Vladimir Putin admitted that the national budget is “stressed” due to oil’s fall, as reported in The Wall Street Journal.  Half of Russia’s federal receipts come from oil and gas exports.  According to Evgeny Nadorshin, chief economist at AFK Sistema, if oil prices remain below $90 a barrel, Russia’s economy could begin to contract.  Inflation is at 8%, setting the stage for stagflation.  Furthermore, the slide in the rouble, the Russian currency, has made imports more expensive and threatens to decrease the standard of living.

All of this bodes ill for Russian largesse in Eastern Europe and makes Russia more vulnerable to sanctions.  To this date, Russia has yet to recognize its well-documented role in the provision of weapons and personnel to the Russian separatist rebel movement in eastern Ukraine, which has resulted in billions of dollars of damage to Ukraine, thousands of lives lost, and the downing of a commercial Malaysian Airlines flight.  Furthermore, it makes no apology for its illegal annexation of the Ukrainian region of Crimea.  

Rather than loosen sanctions to alleviate a possible Russian economic downturn, the U.S. and the rest of the West ought to enhance financial and export sanctions.  They must pressure Putin to cut all ties to the Russian separatists in Ukraine and to discourage his pivot toward Soviet-era tactics.  In particular, the EU should now reduce its import of Russian gas, since the low global price would cushion the blow of decreased oil flow from the east.  Although some may argue Putin will use Western sanctioning as a way to drum up nationalistic support for his regime, a tough stance is far more likely to discourage future belligerence on the part of Russia and other nationalistic nations than appeasement would.

Seldom does one economic development give the U.S. three simultaneous opportunities to make global affairs closer to their ideal.  In the cases of the Caribbean energy scheme, the Iranian nuclear negotiations, and Russian sanctioning, it is far better for the U.S. to act strongly and swiftly now than to wait on the sidelines.  After all, opportunities, like oil, have a tendency to dry up.  




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