Many winners, a few bad losers

Many winners, a few bad losers
A lower price will boost the world economy and harm some unpleasant
regimes—but there are risks
Oct 25th 2014

THE collapse of the Soviet Union in 1991 had many causes. None was as
basic as the fall in the price of oil, its main export, by two-thirds in
real terms between 1980 and 1986. By the same token, the 14-year rule of
Vladimir Putin, heir to what remained, has been bolstered by a threefold
rise in the oil price.

Now the oil price is falling again. Since June, it has dropped from
about $115 for a barrel of Brent crude to $85 or so—a reduction of
roughly a quarter. If prices settle at today's level, the bill for oil
consumers will be about $1 trillion a year lower. That would be a shot
in the arm for a stagnating world economy. It would also have big
political consequences. For some governments it would be a rare
opportunity; for others, a threat.

Predicting oil prices is a mug's game (we speak from experience). The
fall of the past three months is partly the result of unexpected—and
maybe short-lived—developments. Who would have guessed that chaotic,
war-torn Libya would somehow be pumping 40% more oil at the end of
September than it had just a month earlier? Saudi Arabia's decision to
boost output to protect its market share and hurt American shale
producers and see off new developments in the Arctic was also a
surprise. Perhaps the fall was exaggerated by hedge-fund investors
dumping oil they had been holding in the false expectation of rising prices.

Geopolitical shocks can surprise on the upside as well as the down.
Saudi Arabia may well decide to resume its self-appointed post as swing
producer and cut output to push prices up once more. With war stalking
Iraq, Libya still fragile and Nigeria prey to insurgency (see article),
supply is vulnerable to chaotic forces.

But many of the causes of lower prices have staying power. The economic
malaise weighing down on demand is not about to lift, despite the tonic
of cheaper oil (see article). Conservation, spurred by high prices and
green regulation, is more like a ratchet than a piece of elastic. The
average new car consumes 25% less petrol per mile than ten years ago.
Some observers think the rich world has reached "peak car", and that
motoring is in long-term decline. Even if they are wrong, and lower
prices encourage people to drive more, energy-saving ideas will not
suddenly be uninvented.

Much of the extra supply is baked in, too. Most oil investment takes
years of planning and, after a certain point, cannot easily be turned
off. The fracking revolution is also likely to rage on. Since the start
of 2010 the United States, the main winner, has increased its output by
more than 3m barrels per day to 8.5m b/d. Shale oil is relatively
expensive, because it comes from many small, short-lived wells. Analysts
claim that a third of wells lose money below $80 a barrel, so shale-oil
production will adjust, helping put a floor under the price. But the
floor will sag. Break-even points are falling. In past price squeezes,
oilmen confounded the experts by finding unimagined savings. This time
will be no different.

For governments in consuming countries the price fall offers some
budgetary breathing-room. Fuel subsidies hog scandalous amounts of money
in many developing countries—20% of public spending in Indonesia and 14%
in India (including fertiliser and food). Lower prices give governments
the opportunity to spend the money more productively or return it to the
taxpayers. This week India led the way by announcing an end to diesel
subsidies. Others should follow Narendra Modi's lead.

The axis of diesel
For those governments that have used the windfall revenues from higher
prices to run aggressive foreign policies, by contrast, things could get
uncomfortable. The most vulnerable are Venezuela, Iran and Russia.

The first to crack could be Venezuela, home to the anti-American
"Bolivarian revolution", which the late Hugo Chávez tried to export
around his region. Venezuela's budget is based on oil at $120 a barrel.
Even before the price fall it was struggling to pay its debts.
Foreign-exchange reserves are dwindling, inflation is rampant and
Venezuelans are enduring shortages of everyday goods such as flour and
toilet paper.

Iran is also in a tricky position. It needs oil at about $140 a barrel
to balance a profligate budget padded with the extravagant spending
schemes of its former president, Mahmoud Ahmedinejad. Sanctions designed
to curb its nuclear programme make it especially vulnerable. Some claim
that Sunni Saudi Arabia is conspiring with America to use the oil price
to put pressure on its Shia rival. Whatever the motivation, the falling
price is certainly having that effect.

Compared with these two, Russia can bide its time. A falling currency
means that the rouble value of oil sales has dropped less than its
dollar value, cushioning tax revenues and limiting the budget deficit.
The Kremlin can draw on money it has saved in reserve funds, though
these are smaller than they were a few years ago and it had already
budgeted to run them down. Russia can probably cope with today's prices
for 18 months to two years, but the money will eventually run out. Mr
Putin's military modernisation, which has absorbed 20% of public
spending, looks like an extravagance. Sanctions are stifling the economy
and making it hard to borrow. Poorer Russians will be less able to
afford imported food and consumer goods. If the oil price stays where it
is, it will foster discontent.

Democrats and liberals should welcome the curb the oil price imposes on
countries like Iran, Venezuela and Russia. But there is also an
increased risk of instability. Iran's relatively outward-looking
president, Hassan Rouhani, was elected to improve living standards. If
the economy sinks, it could strengthen the hand of his hardline
opponents. Similarly, a default in Venezuela could have dire
consequences not just for Venezuelans but also for the Caribbean
countries that have come to depend on Bolivarian aid. And Mr Putin,
deprived of economic legitimacy, could well plunge deeper into the
xenophobic nationalism that has fuelled his campaign in Ukraine. Cheaper
oil is welcome, but it is not trouble-free.

http://www.economist.com/news/leaders/21627619-lower-price-will-boost-world-economy-and-harm-some-unpleasant-regimesbut-there-are