The plunging price of oil is a geopolitical game-changer.
The dizzying drop came quickly, but it was caused by long-term factors, including technological transformations like hydraulic fracturing that have rebalanced the supply and demand dynamic that shapes the global oil market.
No nation is untouched by the change. Here at home, a recovering economy will be boosted by lower prices at the pump. But it creates challenges for oil-producing states such as neighboring North Dakota. Elsewhere, energy importers, including key allies Japan, South Korea, many European nations and others, will benefit from lower prices. Exporting nations, however, including some already facing (or causing) crises, have been hard hit by the rapid reversal.
Most notably, Russia’s ruble has collapsed despite desperate efforts to prop it up, including Monday’s overnight interest rate jump of 6.5 percentage points — to 17 percent. The ruble’s steep slide was accelerated by declining oil prices, but the collapse can also be traced to fundamentals in the Russian economy — including corruption and cronyism — as well Western sanctions put in place because of the annexation of Crimea and Russian support for separatists in eastern and southern Ukraine. The result is a near-certain recession in Russia, and it could even mean a debt default.
It’s clear that it won’t be Russia’s kleptocracy that’s hit hardest, but the average Russian. That’s unfortunate and unfair, but perhaps it will soften the surging nationalism that has resulted in record support for Russian President Vladimir Putin.
Putin’s malevolence isn’t limited to his internal suppression or incursions into Ukraine. He’s menaced other neighbors and tested the resolve and readiness of several European nations with provocative military moves. Outside the continent, he has immorally enabled Syrian President Bashar Assad, whose homicidal regime is at the root of a massive refugee crisis and the growth of the Islamic State of Iraq and the Levant (ISIL).
An added blow to Russia’s economy — and Putin’s leadership — came courtesy of the U.S. Congress, which unanimously passed a bill allowing for more sanctions on Russia’s military and energy sectors and sent $350 million in military aid to Ukraine. President Obama, who expressed understandable reservations about not acting in unison with European leaders, was nonetheless right to sign the bill. Russia’s destabilization must come with a price. Whether the moves will alter Putin’s calculus is unknown. But he, his sycophants and everyday citizens must know that a change in direction, if not government, is needed.
Russia’s economic collapse and international isolation could have the opposite effect and embolden rather than deter Putin. Given that possibility, U.S. and European Union leaders must be ready for any political or even military miscalculation.
Like Russia, Iran is an international pariah. Its internal repression, external provocations and potential nuclear weapons program have resulted in strict economic sanctions. Dramatically lower oil prices exacerbate the country’s economic challenges. Global leaders negotiating with Iran should use this expanded advantage to press Iran’s leaders to reach a diplomatic agreement on the nuclear issue.
But diplomats and elected officials should carefully calibrate their strengthened hand, lest it backfire by strengthening hard-liners in the theocracy who want to scuttle a deal. The alternative to diplomacy, after all, could be war.
Other nations already facing crises could be roiled further by oil’s decline. Venezuela’s authoritarianism has already resulted in national paralysis, and now the government of President Nicolas Maduro will be hard-pressed to try to redistribute oil wealth as he, and his late predecessor, Hugo Chávez, previously did. And Nigeria’s ineffective fight against Islamic extremists will become that much harder.
There are numerous other examples of rising and declining national challenges prompted by oil’s decline. However, it should be noted that these changes are far from permanent. Declining prices will eventually and inevitably reduce the incentive to extract. A contraction could just as quickly send prices soaring again.
For now, though, there are potential foreign policy benefits to the United States, presuming deft diplomacy and an effective Congress will take advantage of the situation.