I wrote a few weeks ago that President-elect Obama might face something resembling a foreign policy crisis early on involving India and Pakistan, which would implicate Afghanistan and the entire U.S. approach to the "war on terror." Recent, potentially ominous troop movements suggest that border-area problems and disputes, while they might be resolved by the parties involved, could ripen into something ostensibly demanding the attention of the new head of the Empire shortly after Jan. 20.
In certain respects, however, circumstances and market movements are creating a situation that might well redound to the benefit of the United States in the world at large. Crude oil has been hovering at below $38 a barrel, compared to around $147 just last summer. Considering the volatility in these prices over the last year it would be foolish to make a hard prediction, but people closer to the markets than I expect petroleum prices to stay relatively low and perhaps even decline a bit more.
A few Americans, notably those convinced we need to do more to develop alternative energy sources, may be dismayed. Even with government incentives like tax credits and subsidies, alternative fuels will not be economically attractive with oil prices below $40 or even $50 or $60 (at least for now; circumstances could be different in a few years).
That shouldn’t bother most of us, however. Alternative fuels that depend on subsidies and favors to be economically viable will not be viable over the long haul. Alternative energy sources will be attractive and efficient for society when they are genuinely economically competitive. Wanting them sooner involves wasting resources based on political or emotional desires rather than economic calculation.
In almost every other respect, however, inexpensive petroleum products are good for the United States economically and geopolitically. For consumers facing a recession and uncertainty, less expensive gasoline, especially with the memory of almost-$5-a-gallon fresh in most people’s memories, feels like a bit of relief, perhaps even a confidence-builder in an economy where confidence and trust, somewhat splintered of late, are as vital to recovery as commodity prices and balance of trade. Money not spent on gasoline can be spent on other things, saved, or invested, all of which are important to the country’s economic health. Overall, people in the U.S. spend almost $2 billion a day less on gasoline than at the height of the price increases last summer.
Stratfor.com estimates that the next most fortunate countries are Germany, Italy, Spain (the Netherlands and the UK are producers, and other European countries aren’t quite so reliant on imported oil), and India. In South Korea, China, and Japan the results are more mixed but mostly beneficial.
So which countries don’t do so well in a cheap-petroleum world? The country likely to suffer most dramatically is Venezuela, with Iran a close second. In Venezuela, Hugo Chavez has spent much of the windfall from high oil prices on social programs calculated to buy political support and subsidize whatever vision of Latin American socialism floats his boat this week. To keep up such spending requires oil to be at $120 a barrel, according to some estimates. And he can’t afford to take steps to adjust to the new petro-reality too quickly, given that he has a referendum in May that could give him his desire to run for president for life.
In Iran, Mahmoud Ahmadinejad announced reductions in government spending as a first step toward adjusting outlays to fit the likely revenues from an oil price at $30 per barrel. He is already unpopular and might not survive a reelection contest in the best of times, and especially not with oil so cheap. Nigeria’s elites will suffer, but the people never saw much from oil revenue anyway. Russia’s economy is more diversified than some countries whose economies are largely dependent on a single resource. Such countries are usually corrupt and dictatorial to various degrees, especially if the resource is easily controlled by a small elite class. Low oil prices make such regimes a bit less stable. Russia will just have less money to support lavish lifestyles among the rich and powerful, and it will have a bit less capacity to play geopolitics, even in its "near abroad."
Most of the Persian Gulf countries with oil production (except Iraq) have hoarded much of the money they brought in during palmier times, so they won’t suffer as much economically as Venezuela and Iran. But Saudi Arabia especially will have less money to use increasing its influence in the region through bribery tarted up with a bit of diplomacy.
Mexico and Canada, which export more petroleum products to the U.S. than is generally realized, would also be losers with lower oil prices, but hardly to a catastrophic degree.
So what are the likely geopolitical consequences of lower oil prices extending for a while say three years or longer? The United States and Western Europe would benefit. Countries with a capacity and desire to make mischief for the U.S., notably Venezuela in this hemisphere and Iran in the Middle East, would have less capacity to do so. Russia, a country beginning to flex its geopolitical muscles with oil money, inclined to tweak Uncle Sam’s nose almost reflexively, will have less ability to rebuild its military and impose its will on others.
From the perspective of the U.S., several countries our foreign policy elites have fretted about (whether justifiably or not), such as Venezuela, Iran, and Russia, would have less ability to foment problems. Key allies in Western Europe would be better off and probably more inclined to cooperate with a U.S. that is not actively invading anybody. Potentially adversarial countries like China would be modestly weakened and perhaps forced to turn to domestic problems rather than throwing their weight around politically. Regimes in Venezuela and perhaps Iran could be made somewhat less stable.
Interestingly, a world in which potential rivals have less capacity to express their hostility would be a world in which the United States would have less reason to intervene in the affairs of others. If it could refrain from such adventures, it would probably make fewer enemies and antagonize fewer people (not that core interests have been deemed necessary of late to justify wars and other forms of bullying). So the United States could benefit in many ways if oil prices remain reasonably low for the next few years.