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Cheap oil drains power away from the axis of diesel
Petro-crats began to realise yesterday that their time is rapidly running out
Morteza Nikoubazl/Reuters
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It is an age of war, pestilence and confusion, but there is still something to celebrate: the “axis of diesel” has broken down.
As Saudi Arabia hinted yesterday that it would let oil prices sink even further, petro-crats in Iran, Russia, Venezuela, Libya and Nigeria began to realise that their time is rapidly running out.
If prices tumble as predicted to $60 a barrel, down from $115 in June, we can expect a new oil order to emerge.
Populous oil producers without big rainy day funds will be the first to founder. Nigeria conscientiously stowed away some oil revenue to build up a reserve of $20 billion in 2008. Now that’s down to $4 billion and President Jonathan, facing an election in February, is in deep trouble. Venezuela is also on thin ice.
“Under a scenario of flat or further declining oil prices, Venezuela will face increased risks of government instability, protests and riots,” said Diego Moya-Ocampos, who analyses Latin America for the risk consultancy IHS.
When Venezuela falters, so do its allies. Cuba is already beginning to struggle. A year ago, President Maduro of Venezuela could have counted on help from Moscow. Not any longer.
Oil producers have been ruling the roost since at least the 1970s and on the whole they have kept prices high. That made Saudi Arabia and the Gulf states the most desirable of investors and placed the stability of the Middle East at the top of every US president’s in-tray.
Now the Opec cartel that once spoke for more than a half of global production has turned into an ill-disciplined mêlée. The economics are clear: Saudi Arabia is refusing to cut production and allow prices to rise because it wants to make shale exploration a costly option for the US. Slower Chinese growth is also pushing down demand for oil.
The Saudis, the Emiratis, the Qataris and the Kuwaitis have the freedom to take this gamble. Unlike the other anguished producers, the cost of extraction is low and their huge financial reserves allow them to sit still. Libya needs to sell its oil at $184 a barrel to balance its budget and Iran at $130, but the Kuwaitis can manage with $54.
This room for manoeuvre has become part of a complex political game. It is more than an attempt to hold on to its market share in Asia. Saudi Arabia, upset for more than a year that it was unable to get Washington’s attention, is demonstrating its power and its central role as an ally in the region.
In the 1970s, when Sheikh Ahmed Yamani, the Saudi oil minister, famously boasted that he had “the world on a string”, it was high prices that gave Opec power. Today, the Saudis are using low prices to punish their Iranian arch-rivals and propel Tehran towards making serious and credible concessions on its nuclear programme.
And low prices, together with sanctions, are putting the squeeze on Vladimir Putin. Both causes are very much in the US and the western interest.
President Putin, in his state of the nation address in Moscow yesterday, did not behave as if his back was against the wall. His calculation is typically short-termist: he anticipates that oil prices will bounce back, that Russian currency reserves are ample and that the rouble devaluation brings benefits as well as problems.
Yet his banks are struggling, they have a massive amount of foreign liabilities, capital flight is galloping ahead and people are grumbling about rising food prices.
The true measure of his panic is the abandoning of the South Stream gas pipeline. It was supposed to bypass Ukraine as a transit land for Russian gas heading for western and southern Europe. Now it will lose that political leverage and its hold on countries such as Serbia, which Moscow desperately wants to dissuade from joining the European Union.
Mr Putin’s dream is opening up the reserves in the Arctic. That, more than any other project, will secure Russia’s position in the top rank of producers. Sanctions, however, have made it difficult to get drilling technology, and have frozen foreign financing. An oil price of $60 a barrel will make it impossible to advance swiftly.
On the whole the falling oil price will favour the creation of a slightly more enlightened world, if the right opportunities are grasped. At least five potential beneficiaries have emerged.
First, it is increasingly in the Russian interest to ease the tension with Ukraine; Moscow needs to establish its credentials as a reliable supplier of gas to the west. The pipeline network has to be renewed however, and that means, sooner rather than later, that some kind of deal will have to be struck.
Second, reformers in Asia, anxious to end a subsidy culture, can benefit from cheap oil. When prices plunged last month, India’s Narendra Modi moved to end subsidies for diesel.
Third, desperate producers are putting aside their quarrels: the government in Baghdad has at last struck a deal on sharing oil revenue with Iraqi Kurds.
Fourth, Islamic State jihadists are receiving significantly lower revenues from stolen oil. It is no longer profitable for Turkish middlemen to sell it on.
Finally, cheap oil can help China grow faster. The example of China shows how finely tuned is the question of winners and losers in the new oil order. Coastal manufacturers are happy, but the Chinese hinterland, already suffering from low coal prices, and the northeast provinces, bordering Siberia, are squirming. China is after all also an oil producer.
Some global trends will probably remain immune from the oil boom. It doesn’t cost Iran much to prop up the Syrian dictatorship or to fund Hezbollah. This will continue. And an important feature of the axis of diesel is that its leaders can, with their backs to the wall, be extremely vicious.
Mr Putin is more than capable of irrational brinkmanship.
“The key thing to remember is that economic turndown doesn’t necessarily temper foreign policy behaviour,” said Brenda Shaffer, of Georgetown University’s Centre for Eurasian, Russian and East European Studies. “It can galvanise them against foreign enemies alleged, and perceived, to be the cause of their economic misery.”
On second thoughts: hold off on those celebrations.
WINNERS AND LOSERS:
WINNERS
United States: For politicians on all sides, the great prize now is to make the US fully energy independent. Jeb Bush, a probable 2016 Republican presidential contender, said this week he would back an “all-in” energy policy, opening up more federal lands for drilling, to hit that target within five years. The US sees great political advantages in easing itself away from dependence on Middle East oil and being able to start exporting gas to Europe as an alternative to Russian supplies. It also puts more money in the pockets of American consumers, a key element of the global economy.
China: The country’s industrial future, and the Communist party’s ability to continue making good on its promise of economic growth, are dependent on its ability to keep itself supplied — about 60 per cent of its needs are met with imported oil. Lower energy prices may mean that China is less inclined towards the protectionist policies that have taken it to the brink of trade wars with the US and EU.
Environment: A winner, but not necessarily in the long term. Low prices mean less investment in new oil-producing enterprises, and may sound the death knell for the massive hard-to-extract Canadian tar sands oil projects, and associated pipelines loathed by campaigners. But low oil prices also encourage drivers to use their vehicles more, and discourage investment in more expensive, but cleaner, forms of energy.
India: Few countries are more delighted by the plunging price than India, which imports 78 per cent of its supplies. It has already trimmed its fuel subsidies and will have more cash available to spend on healthcare and infrastructure.
Japan: It is dependent on imported energy and tailored its foreign policy towards it. At times it is forced to do oil deals in countries like Iran, where its most important ally, the US, would prefer it did not
LOSERS
Russia: Russia relies on oil revenues for half its budget and needs it to sell at more than $100 to balance the books. The oil crash is already hurting its sanctions-hit economy and ordinary Russians are beginning to feel the pain. Western sanctions have seen the price of basic foodstuffs spike by 17 per cent in the past four months.
Venezuela: The Socialist government is almost entirely (96 per cent) dependent on revenue from the oil company to fund its welfare projects. Economists estimate it needs the price of a barrel of oil to stay at $150 to be able to balance its books.
Nigeria: Africa’s largest producer has massively overestimated the oil price in its 2015 budget, but relies on it for more than 75 per cent of its revenues. It devalued the naira last month, and the country’s finance minister is raising taxes on luxury items and cutting spending by 6 per cent.
Saudi Arabia: If Saudi Arabia’s initial motivation for sparking a global oil slump was to flush out costly shale and tar sands producers in north America so that it benefits in the long term, then the opportunity to turn the screw on the labouring economies of Russia and Iran was a welcome fringe benefit. Though about 90 per cent of its revenues come from oil exports, Riyadh can afford to rein in spending and dip into its cash reserves to ride out the storm.
Iran: Failure to secure a nuclear deal by last week’s self-imposed deadline prompted a fresh slide in the value of the rial and a spike in inflation. President Rouhani’s administration needs oil prices above $130 to finance its spending plans. The longer the crisis goes on, dissent will mount.
Islamic State: Islamic State’s once-booming black market oil business, earning $3 million a day, was already suffering as it haemorrhaged skilled staff from the ageing wells seized in Iraq and Syria.
