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Political consequences of the oil price fall

Political consequences of the oil price fall

Repercussions from Iran to Venezuela

by Nick Butler

Tue 21 Oct 2014

This is the second article in a two-part series.

Across the world, the oil price fall is beginning to have political consequences. Oil-producing and -exporting countries have come to rely on high and, ideally, rising prices. Some countries save the revenue, but most, especially those with growing populations, tend to spend.

Iran Sanctions have cut but not eliminated exports. Trade to Asia continues but with some discounts already in place, any fall in prices is bad news for the regime in Tehran. The economy is already weak and a fall in revenue threatens the regime’s ability to maintain its fragile coalition. The survival of the regime is everything, including for the hardliners around the supreme leader Ayatollah Ali Khamenei. The discussions on a possible deal around Iran’s nuclear ambitions have continued over the summer. Intriguingly, it has suited everyone to ignore initial deadlines and to keep going. The threat of Isis now gives the US and Iran a degree of common interest previously absent. If oil prices stay down there is every chance of a nuclear deal before the end of the year.

Russia President Vladimir Putin has enjoyed almost 15 years of strong prices which have sustained the government in Moscow. The revenue has not been used to modernise the Russian economy and Russia remains a hydrocarbon state dependent on export earnings. Now Putin faces a simultaneous fall in oil and gas prices. Gas deals with China are years away from producing any revenue. Russia will have to retrench. As the cost of sanctions becomes ever more obvious to the business leaders on whose support Putin depends, the odds must be that the conflict in Ukraine will not be allowed to escalate. The dispute is not over, but for the moment the costs to Russia of an open confrontation and ever stronger sanctions have a strong deterrent effect. The most likely outcome is a frozen conflict.

Scotland The price fall was scarcely noticed in the noisy campaign before the No vote in the independence referendum on 18 September. The main question now is the speed of the decline in production in coming years. This year’s report by Aberdeen businessman Sir Ian Wood set out the potential volumes which remain to be developed in the North Sea. Leaving politics aside, the industry will avoid new investments if prices stay low. Scotland’s best hope is that the Treasury in London, which is reviewing the tax regime, will reduce tax rates soon. The tax reduction and the price fall will take away revenue, and bury the dreams of an independent Scotland creating a Norwegian-style oil fund.

Central and South America Reform of the industry – including some opening to foreign investment – is much talked about in Mexico, but nothing substantive has happened. Investment is badly needed to maintain production. If a price fall squeezes the revenue available to Pemex, the state-owned petroleum company, the answer could be faster reform.

In Venezuela, high prices in the last decade have underpinned former President Hugo Chávez and his successor Nicolás Maduro. To reverse industry underperformance a new settlement between Petróleos de Venezuela – one of the longest-established state oil companies in the world and once one of the most professional – and the international industry may be necessary.

In Brazil, Petrobras, another company with great technical skills and huge potential in view of the country’s abundant natural resources, has fallen victim to mismanagement and corruption, some of which is now becoming public. There too a falling price may be the trigger for radical change – whoever wins the second round of the election on 26 October.

Prof. Nick Butler, a member of the OMFIF Advisory Board, is Chair, King’s Policy Institute, King’s College London.

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