Cheaper oil's winners and losers
By Robert A. Manning
We have a new oil crisis, but the U.S. is largely a winner
The recent drop in world oil prices — from more than $100 a barrel in
June to about $80 a barrel now — will benefit the global economy,
American consumers and a beleaguered U.S. foreign policy. And there are
reasons to think oil could remain in the $75-to-$95 range for the next
But it's important to understand why oil is suddenly cheaper, and to
consider what international ramifications the price drop will have.
One reason for the plunge is the global economic slowdown, and another
factor is the surge in U.S. production from the "shale revolution."
But the biggest force driving it is that OPEC's largest producer, Saudi
Arabia, which pumps 9.7 million barrels a day, has made it clear that it
can live with lower prices.
What are the Saudis up to?
The International Energy Agency recently lowered its estimate of world
oil demand for 2014 by 250,000 barrels per day. Lower demand means that
if the Saudis and other Gulf oil producers want to maintain or increase
their market share, they will have to provide incentives, which is why
they started discounting oil, first to their European and Asian
customers, and now to the U.S.
Another Saudi aim appears to be to slow the North American shale boom —
even at the cost of undermining OPEC. Shale extraction has helped boost
U.S. oil production to about 9 million barrels a day, which some
analysts say puts the country on track to surpass the Saudis by 2016.
But getting oil from shale is expensive, and the Saudis know that a big
drop in oil prices could de-incentivize investment in U.S. shale
projects. When prices fall to $80 or below, shale is a less attractive
The picture gets even more complicated when you consider the effect of
lower oil prices elsewhere in the world, especially how they will affect
troublesome petro-states and their clients. Russia and Iran compete with
Saudi Arabia in the international oil market, and both need oil prices
to be at roughly $110 a barrel in order to balance their budgets. If oil
prices remain at $80 a barrel, the strategic ambitions of Tehran and
Moscow could be severely undermined.
Not that Saudi Arabia would mind that. Russia and Iran have backed
Syrian President Bashar Assad's regime in the Shiite-Sunni proxy war now
roiling the Middle East, while Saudi Arabia is backing the rebels.
But the lower prices are also likely to cause internal disruptions,
particularly in Russia, which is already having to deal with a range of
problems, including Western sanctions, the flight of capital from the
country (an estimated $100 billion this year alone) and a steady brain
drain. Russia's expected growth for 2014 is an anemic 0.5 percent, and
similar growth has been projected at least through 2016. With sharply
diminished oil revenue, Russian President Vladimir Putin would be
hard-pressed to find money to spend on boosting pensions and government
salaries or to fund other measures to keep Russians happy.
It's unclear what effect $80-a-barrel oil will have on Russian
expansionist behavior in Ukraine and elsewhere. Some analysts believe
that Putin is so animated by a desire to restore what pieces he can of
the former Soviet Union that he won't let cost stand in his way.
Elsewhere in the world, low oil prices are likely to put additional
pressure on the communist regime in Cuba. The island nation has been
kept afloat in recent years by oil subsidies from Venezuela, which sends
115,000 barrels a day worth some $3 billion.
Cuba has been toying with limited market reforms as its economy has
faltered. But it's unclear what a cutoff in cheap oil from Caracas would
mean. The Castro regime might decide to live with serious economic
stagnation, which would impose even more hardship on its citizens. But
it might also move toward more Chinese-type market-oriented reforms.
As for Venezuela's horrendously mismanaged socialist regime: It must be
very nervous about facing the Venezuelan public without the cushion of
$110 oil, and it may also have to rethink its gift to Havana.
Here at home, the news, other than for shale investors, is mostly good.
Americans will see an immediate benefit, with gasoline at $3 a gallon or
less, a boon not just for drivers but also for the businesses that serve
them. Lower prices are likely to spur both consumer spending and the
overall U.S. economy.
The oil crisis of the 1970s brought long lines at U.S. gas stations and
high prices. Today we have a new oil crisis, but its negative effects
are primarily being felt in other parts of the world. This time, the
U.S. is largely a winner, both at home and abroad.
Robert A. Manning, a former State Department official, is a senior
fellow at the Brent Scowcroft Center on International Security at the
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