The Destabilizing Effect Of Cheap Oil

The Destabilizing Effect Of Cheap Oil

The low cost of oil may be welcomed by many economies, but it is creating a great deal of political and social volatility in numerous producer countries.

These countries have relied on oil revenues to cope with their youth bulge. Often, more than half of the population in oil-producing countries is below the age of 25 and most of them, due to low levels of education and training (and hence skills) lack real options for the future.

That is why low oil prices could set off a dangerous spiral in countries like Algeria and Libya.

Great care is needed. The Arab springs of six years ago were triggered in part by a rise in the price of bread. Could the fall in the oil price lead to autumns and winters of discontent?

The countries that make up OPEC (Organization of Petroleum Exporting Countries) have seen their oil income fall by 60% (from $1.182 trillion to $433 billion) between 2012 and 2016, according to a recent article published by the U.S. Energy Information Administration.

n some instances, the collapse in income has been even more dramatic: from $63.9 billion to $19.2 billion in the case of Algeria and from $52.5 billion to just $2.3 billion in the case of Libya.

Steep declines have also hit countries such as Nigeria, Angola, Venezuela and Ecuador.

Saudi Arabia’s oil income has fallen from $368.9 to $133 billion – a decline by almost two-thirds. This fall is one of the factors underlying the promotion of Mohammad bin Salman (known as MbS, aged 31) to first in line to the throne.

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His appointment constitutes not only a generational shift but also a shift of focus. The new crown prince is the person who launched a plan to diversify the Saudi economy as a means of avoiding dependence on oil by around 2030.

Failure to diversify

However, Gulf nations have been talking about diversification for more than 30 years, without really achieving anything of significance (with the possible exception of the United Arab Emirates).

Meanwhile, they have seen fit to pursue a costly arms race in the Gulf. Will things be any different this time?

The failure to diversify their economies is a problem for almost all oil-exporting countries around the globe, including Venezuela under the disastrous stewardship of Chavez and his ilk.

It does not help these countries that OPEC’s leverage has waned – witness the latest fruitless attempt to cut production to raise the price.

This is closely related to the emergence of independent producers led by the United States. It had been thought that the output of shale oil and gas would be harmed by the fall in the oil price, but North American producers have been able to adapt to prices below $50 per barrel.

Nick Butler, the well-known analyst, argues in his Financial Times blog that this fall in oil prices is a structural rather than a cyclical phenomenon (although revenues will rise somewhat this year and next).

He calls it “the most destabilizing economic event to have hit the world since the financial crash of 2008,” albeit in slow motion.

Knock-on Effects

The reduction in oil revenues has already forced many countries in the Mediterranean and beyond to make further cuts in public spending and extend austerity policies, precisely when more public spending would be in order to mollify their youthful and disgruntled populations.

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The great uncertainty represented by Algeria, accelerated by the demise of Bouteflika, is one of the most worrying.

The effects of cheap oil can spread far and wide. The drop in Gulf countries’ revenues has meant that home-grown workers have started to be hired to do jobs hitherto undertaken by immigrants.

This, in turn, has had a negative impact on the money such immigrant workers send back home, especially in South East Asia and countries such as India, Pakistan and Bangladesh.

As a result, remittances fell by 6.4% last year – in the case of India by 8.9% – with local impacts that are sometimes much more serious.

The “geopolitics of energy” is making a comeback, as Gonzalo Escribano argues, with the difference being that this time around it is cheaper oil prices that trigger all sorts of consequences.

There also is a notable “geosocial” impact. The lower price of oil may have consequences for the stability of various regimes as well as the appeal of jihadist terrorism, even post-Daesh.

 

 

Source Link – The Globalist

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