Ramifications

The United States is to establish diplomatic relations with Cuba. Stronger than expected economic and job growth. American companies repatriating. Russia cancels natural gas pipeline. Pro-Russian separatist push in Ukraine stalls. Iran declares its commitment to reaching a nuclear agreement. Baghdad reaches oil export and revenue agreement with Erbil

Today’s headlines may seem disconnected, but there are two common threads:  oil and money, which themselves are tightly wound together.

Little explanation is needed. The Cuban regime is on its last economic legs. It needs an opening to the US to survive. Its massive subsidies from Venezuela are coming to an end, because Caracas is one of the countries most forcefully hit by the decline in oil prices. The economic upturn in the US, and return of US companies from abroad, is at least partly due to more cash in consumers’ pockets, due to lower prices at the pump, and readier availability of energy resources. Russia’s South Stream pipeline fell victim to the combination of sanctions and lower natural gas prices. Russian support for the separatists in eastern Ukraine is falling short in part because the Russian economy is in an oil-price-induced nose dive, along with the ruble. Iran needs a nuclear agreement more than it did a few months ago in order to get sanctions relief that will help it deal with lower oil prices. Both Erbil and Baghdad needed an agreement, not only because of the ISIS threat but also because of lower oil prices, which pinch their finances as much as ISIS’s.

It would be nice to hear some other good news: reduced Russian and Iranian support for Syria’s President Assad, a pickup in China’s economy, and an end to recession in Europe are all within the realm of the possible. May this icy account of an official Iranian visit to Assad is a harbinger.

There is of course a price to pay for the benefits of lower energy prices. US oil and gas production, which had been climbing rapidly at $100/barrel, will slow down at $50/barrel. Oil company stocks are down. The stock market is jittery. Kim Jong Un, his economic woes relieved, is emboldened and less vulnerable.

The balance for America’s foreign policy is however positive. It is also likely to be long-lasting. American oil and gas production may stop climbing so fast, or even fall, laying the foundation for another price rise in the future. But the new technologies that enable exploitation of “tight” oil and gas are viable at anything above $80/barrel, and likely at prices a bit lower. Nor is the US the only country in which these technologies can be used. China, the UK, Poland and many others also have “tight” oil and gas. Once they start producing it, $80/barrel or so will become a ceiling for oil prices, a level that will require serious fiscal discipline in many oil-producing countries, both friend and foe. Russia, Venezuela and Iran have all been budgeting at $100/barrel or more.

The demand side also has an impact on foreign policy. While supply has been booming in the Western Hemisphere, demand is booming in the East, especially China and India. Middle Eastern oil that used to get shipped to Europe and the US will now go to Asia. That is already true for 50% of the oil coming through the strait of Hormuz. The percentage is headed up to 90% within the next decade. US diplomats are busily reassuring Gulf oil producers that Washington is fully committed to maintaining its close relations with them, but it is hard to believe we are that dumb (or that they are).

Rapidly declining oil imports from the Gulf will eventually make the Americans reevaluate. If and when the Iranian nuclear issue is resolved, Washington will want to renew the effort to move its diplomatic and military attention even more definitively to the East, where its economic and commercial focus already lies. China and India will have to pick up more of the burden for energy security, by holding larger oil stocks (neither keeps the 90 days that International Energy Agency members commit to) and naval patrolling. The US should be welcoming them with open arms into a multilateral effort to protect Hormuz. A few extra burdens of this sort would also encourage New Delhi and Beijing to restrain their oil demand and contribute more to limiting global warming.

The ramifications of lower oil prices are profound. We would do well to start thinking hard about them and acting accordingly.

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