The Upside of Plunging Oil Prices
Bad to the last drop.
Sharply lower oil prices have rattled equity markets and are complicating economic policy across the world. But “oilmageddon” isn’t all bad -- and its benefits go beyond lower costs for consumers. Falling oil prices also put salutary pressure on some of the world’s more unsavory regimes.
Many big oil exporters just aren’t the kind of countries you’d want to bring home to mother. Only one of the world’s top 10 oil exporters (Canada) was rated “free” by Freedom House. Many rank near the bottom on Transparency International’s indices of corruption. They spend a lot on their militaries and security services. And in many cases -- Russia, Iran, and Venezuela, for instance -- their hydrocarbon bounty has enabled them to intimidate neighbors, fuel adventurism, and generally project a baleful influence.
With huge pools of oil money, the rulers of these states are less accountable to their citizens, on whom they don’t need to rely for taxation. They’ve used the money to buy off or repress opponents, limiting political rights and squelching the development of independent civil society. In the Middle East, oil wealth has disempowered women, both by removing the need for a second family income and by retarding export industries that might employ them. The ensuing higher fertility rates and accompanying youth bulge have in turn made the region more susceptible to unrest.
The two-thirds plunge in the price of oil from its 2014 high may disrupt this unhealthy dynamic. Saudi Arabia has not only cut spending and subsidies but is considering taxes that would require the support of its people. And the anti-corruption campaign of Nigeria’s President Muhammadu Buhari has taken on a new edge.
Russia, Iran, and Venezuela are also under greater pressure. Hydrocarbon taxes account for nearly half or more of their public revenue, and current oil prices have forced their governments to run large budget deficits. (Venezuela’s debts also leave it perilously close to a possible default.) That will make it harder for these countries to support separatists in Ukraine, Bashar al-Assad in Syria, Houthi rebels in Yemen, and the Castros in Cuba.
Predicting long-term oil prices is a mug’s game -- but a restorative spike looks unlikely in the next year or two. Democracies that want to expand their ranks should try to seize the moment.
One of the best things they can do is encourage greater transparency, with rules that force oil companies to disclose their payments to foreign governments. And a glut of oil makes this a good time for countries that depend for energy on Russia and Venezuela -- or that might be tempted by cut-price Iranian oil -- to consider other suppliers.
The U.S. can step up assistance to nations such as Nigeria that are trying to lift the so-called resource curse while coping with terrorism. More generally, with its new capacity to produce oil, ample strategic reserves, and revived commitment to export energy, the U.S. is in a good position to make oil and gas less of a friend to bad global citizens than in decades past.
The costs of oil-fired economic instability are real enough, but the situation is not without benefits.
To contact the senior editor responsible for Bloomberg View’s editorials: David Shipley at email@example.com.