In 2015, we saw how falling oil prices affected world politics from Alberta to Nigeria. Net exporters like Venezuela, Russia and the oil-rich Middle Eastern countries are feeling the drop in revenues, and that could accelerate political agitation as oil prices force budget cuts.
As Brad Plumer wrote yesterday for Vox, explaining the fall in oil prices is simple. Supply has outstripped demand, and while global demand is still growing, it’s growing at about half the rate that it was even in mid-2015.
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The difference between $30 oil (about the current price level), $20 oil or $50 oil could make or break incumbents seeking reelection — lower oil prices mean fewer goodies at election time.
In 2016, that means oil prices could affect Scotland’s May regional elections by dampening the economic case for Scottish independence and, therefore, the electoral support for the Scottish National Party. It means that Russia’s September legislative elections could engender the same kind of political protests (or worse) that met the last elections in 2011. Lower oil prices are already endangering Ghanian president John Dramani Mahama’s hopes for reelection in December, given how much Mahama has staked on Ghana’s oil potential. It could even push Venezuela’s opposition, newly empowered as the majority in the National Assembly, to seek chavista president Nicolás Maduro’s recall even more quickly.
More generally, it could make life difficult for Nigeria’s new president Muhammadu Buhari. Not only will lower oil revenues hurt his capacity to deploy resources across Africa’s most populous country, but Buhari must find a way to deliver to Nigeria’s impoverished Muslim north, where Boko Haram continues to pose a security challenge, and Nigeria’s southeastern Igbo population, including Rivers state and Delta state, where much of Nigeria’s oil reserves are located. The southeastern challenge is particularly precarious, in light of the fact that Buhari defeated Goodluck Jonathan, the first president to come from Nigeria’s oil-rich southeast. A wrong step by Buhari could catalyze long-simmering demands for greater political autonomy or even secession.
On the demand side, the European Union (as a whole) imports more oil than any other country in the world — by a longshot. Lower prices could bring about the kind of truly robust economic growth that has eluded the eurozone for decades. That, in turn, could ameliorate the pressures of democratic backslide among the central European Visegrad Group, and it could goose economic activity in Mediterranean countries like Portugal, Spain and Greece, where no single political party has enough support for a majority government. That, in turn, could reduce support for radical leftist parties and bolster more moderate coalitions. It could, marginally, benefit incumbent governments in Ireland, Romania and elsewhere in 2016 and France in 2017. (The same effect, by the way, relieves a lot of pressure on faltering ‘Abenomics’ policy in Japan, too).
In his final state of the union address last night, even US president Barack Obama bragged about lower oil prices. If prices stay consistently low throughout 2016, it could marginally help Obama’s Democratic Party win the November general election.
Autocratic countries, including Saudi Arabia, the United Arab Emirates, Qatar, Angola, Algeria and Kazakhstan, could face popular protests.
So where are oil prices going? No one knows, but here’s what you have to believe if you think oil prices are going to rise substantially anytime in 2016:
- Saudi Arabia will cave on its strategy since late 2014 of maintaining production levels (and, accordingly, market share).
- Increasing international engagement in Iran and the lifting of UN sanctions against Iran will not result in a material increase in oil supply on the world market.
- New entrants, like Ghana, will not pursue development of newly discovered oil deposits, despite the promise that those deposits can materially enhance economic growth.
- US shale production decelerates instead of finding ways to adjust to the new price environment and US oil production correspondingly falls, materially lowering the supply curve.
- The decades-long tensions between Saudi Arabia’s Sunni monarch and Iran’s Shiite republic exacerbate this year to the point where it reduces the cumulative oil output of both Saudi Arabia and Iran.
- Libya and Iraq, already nearly failed states, will produce even less oil than they are producing at current levels of political dysfunction. In November 2015, the two countries together supplied 4.69 million barrels of oil per day, nearly half the amount that the world’s leading producer, Saudi Arabia, supplied (10.19 million).
- US demand for oil rises so much, due to lower prices, that the demand curve increases sharply. But that would require a cultural shift back towards more driving and higher car ownership at a time when the Millennial generation seem to shun cars at a higher rate than previous generations.
- Chinese demand suddenly returns in an environment where GDP growth is declining and the yuan is rapidly weakening, and where premier Li Keqiang believes that the ‘bazooka’ strategy of unleashing ever stronger stimulus on infrastructure projects is no longer effective.
- Brazilian demand suddenly returns in an environment where GDP growth is likely to turn negative and a political crisis over corruption and inefficiency could result in the impeachment and removal of president Dilma Rousseff.
- India’s new-ish prime minister Narendra Modi will suddenly find the magic key to unlock rapid development after nearly two years of misfiring on enacting reform through the Indian parliament, despite a very strong majority.