RIch Miller writes; Cheap oil is a geopolitical gift to the US. A new age of abundant and cheap energy supplies is redrawing the world’s geopolitical landscape, weakening and potentially threatening the legitimacy of some governments while enhancing the power of others.
Some changes already are evident. Surging US oil production enabled America and its allies to impose tough sanctions on Iran without having to worry much about the loss of imports from the Middle Eastern nation. Russia, meanwhile, faces what President Putin called a possibly “catastrophic” slump in prices for its oil as its economy is battered by U.S. and European sanctions over its role in Ukraine.
Oil is “the most geopolitically important commodity,” said Reva Bhalla, vice president of global analysis at Stratfor, an advisory company in Austin, Texas. “It drives economies around the world” and is located in some “usually very volatile places.”
Benchmark oil prices in New York have dropped more than 30 percent during the last five months to around $75 a barrel as U.S. crude production reached the highest in more than three decades, driven by shale fields in North Dakota and Texas. Output was 9.06 million barrels a day in the first week of November, the most since at least January 1983, when the weekly data series from the Energy Information Administration began.
“For 10 years, the defining factor in the oil market was the growth of China and Chinese oil demand,” said Daniel Yerginvice chairman of Englewood, Colorado-based consultant IHS Inc. and author of a Pulitzer Prize-winning history of the commodity. “Now the defining factor is the astonishing growth of U.S. oil production.”
The most probable case is a four- or five-year cycle with prices in a general range of $65 to $80 a barrel, he said. That compares with an average of about $88 from 2008 to 2013 and a high of more than $140 at one point during that period.
The big question is whether oil-producing nations will react with accommodation or confrontation, said James Burkhard, vice president and head of oil-market research for IHS.
“That’s where the water gets a little muddy,” he said. “That story will be unfolding in the months and year ahead. It does add greater uncertainty and volatility that can often lead to negative surprises.”
Russia is the biggest loser. Russia’s economy will contract by 1.7 percent next year after stalling out in 2014, IHS forecasts. It projects inflation will rise to 8.4 percent from 7.6 percent, boosted by a depreciating currency.
Iran has seen its revenue from oil exports fall by some 30 percent, President Hassan Rouhani said in remarks to parliament published Oct. 29 on Shana, the Oil Ministry’s news website. The nation needs to achieve a break-even sales price of $143 a barrel this year to keep its budget in balance, according to data compiled by Bloomberg.
Like Russia, Iran’s economy has been weakened by economic sanctions — in its case over its nuclear program. The steps by the U.S. and its allies have almost closed Iran’s oil and gas fields to investment in the last decade, limiting the country’s access to technology to boost output.
Venezuela lost 30 percent of its foreign-exchange revenue in the last month because of a “tremendous” drop in oil prices, Maduro said Nov. 13 in a televised national address from Caracas. He said he sent the country’s foreign minister to five oil producers, including Mexico and Russia, to drum up support ahead of the Nov. 27 OPEC meeting.
The U.S. is emerging as a big winner, according to the Nov. 11-12 poll of investors, analysts and traders who are Bloomberg subscribers.
Increasing energy independence means the U.S. is less vulnerable to supply disruptions overseas. The boom in U.S. energy output also enhances U.S. prestige, which had been dented by the global financial crisis that originated in America’s housing market.
China is another big winner, as it imports almost 60 percent of its crude.
The world’s second-biggest economy probably will take advantage of the savings to build up its strategic reserves rather than dedicating the funds to increased spending on defense or the environment, according to Lin.
The plunge in oil prices also gives the nation leverage in its dealings with Russia. The two countries signed a $400 billion, 30-year gas-supply accord in May during a summit in China, then deepened their energy ties earlier this month by signing a preliminary agreement for a second Russia-China pipeline.
