Helping America Navigate a New Energy Reality

The Hidden Consequences of the Oil Crash

By on 26 Jan 2016 in analysis, notable posts

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(Politico) For months, American drivers have been greeted at gas stations with a pleasant surprise: Gas prices have fallen by half, dropping an average of more than $2 a gallon since their most recent peak in 2011. President Barack Obama took a moment to bask in the credit last week in his State of the Union speech: “Gas under two bucks a gallon ain’t bad,” he said.

Or maybe it is. Behind that drop is an even bigger collapse in the price of oil, from more than $100 a barrel in 2014 to under $27 this week. On Tuesday, the Dow fell 250 points amid fears about what will happen if the price of oil continues its slump, which will have effects far beyond consumers, beyond even the global market.

Oil prices drive not just economics, but geopolitics. Alliances rise and fall over petroleum. Expensive oil props up governments in Russia and Iran, provides stability in Middle Eastern countries and also offers a revenue stream to extremist groups in Nigeria and Iraq. Domestically, high-priced oil spurs innovation in alternative energy; it has also driven America’s shale boom. For all these reasons and more, the collapsing value of oil will have profound consequences around the world, with the potential to destabilize regimes, remake regions and alter the global economy in lasting and unforeseen ways.

So as the global markets process the uncertainty ahead, Politico Magazine asked a panel of leading experts on energy, economics and geopolitics to tell us: As we cheer for cheap gas, what aftershocks should we be bracing for?

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‘The oil price drop will be one of the pivotal issues of 2016, and probably beyond’
John McLaughlin is distinguished practitioner-in-residence at Johns Hopkins University at the Paul H. Nitze School of Advanced International Studies

The oil price drop will be one of the pivotal issues of 2016, and probably beyond. Oil prices are notoriously hard to predict, but every indication is that they will not go up markedly, and may drop further. Countries (like Saudi Arabia) that were once able to manipulate prices with OPEC agreements have lost that ability in part because counterparts—especially those already in deep trouble (Venezuela), or those coming back online (Iran)—want to chase market share by pumping freely. Moreover, if a major producer looks for supply-cutting allies outside OPEC, they will trigger a catch-22 phenomenon: If prices go up, it will re-energize U.S. shale entrepreneurs, who have cut back investments due to low oil prices, but who are agile enough to reenter the market quickly—pushing production back up and limiting the impact of restraint elsewhere.

The political impact is likely to be strongest among countries, especially in the Persian Gulf, that have invested billions in social programs and subsidies to discourage Arab Spring-like protests. And in Russia, which needs oil […]

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