Oil and the global economy: When down is up

Oil and the global economy: When down is up

The rapid decline in crude oil prices -- more than 40 percent over the last few months -- and the corresponding drop in what customers pay for gasoline and other fuels is an unmitigated good for the overall U.S. economy.

For anyone buying gasoline for personal or business use, the benefits of cheaper fuel are obvious. The fall in oil and natural gas prices is already having a positive impact on U.S. foreign policy as well.

Some historians like to use the term "overdetermined," meaning there are many factors moving events in a certain direction, any one of which could have been solely responsible. This is the case with the decline in the price of oil, with slowing Chinese economic growth, Europe's slip into recession, and increased efficiency in the developed world reducing demand.

On the supply side, the entry of oil from Canadian tar sands and U.S. shale, stable production by mature producers such as Saudi Arabia and the Gulf States, and the frantic attempts by nations such as Russia, Venezuela, Iran and Libya to balance their budget deficits but pumping even more oil, all are flooding the market with more capacity than the world needs.

Saudi Arabia and its allies in OPEC (the Organization of Petroleum Exporting Countries), the cartel that dominates global oil supplies, see their interests now in low oil prices. These rich gulf states, with their many billions in reserves, can endure months, even years, of low prices.

Russia, Iran and even ISIS, which earns black market funds from captured oil fields in Iraq and Syria, live month to month, even week to week, based on oil sales, and all built their annual budgets for 2014 and beyond based on oil at $100 or more per barrel.

The current price around $60 per barrel is crippling these actors, along with smaller producers such as Venezuela and Libya, who do not have the economic strength of Saudi Arabia, Kuwait and the United Arab Emirates.

The biggest losers are Russia and Iran. Having invaded its neighbor Ukraine and seized the Crimean Peninsula, Russia emanated victorious bluster for the first half of 2014.

U.S. and European sanctions had a modest impact on the Russian economy, but it has been the collapse of oil process that have thrown Vladmir Putin's autocratic state into a recession.

The ruble has fallen to an all-time low against the U.S. dollar, reflecting the scramble but foreign and Russian investors alike to flee the crumbling Russian economy.

Rich Russians are seeking dual citizenship -- with Cyprus and Serbia most frequented -- to prepare for a possible catastrophic implosion of the tottering Motherland.

Recent Putin appearances have been more somber, warning of coming belt-tightening for Russia's long-suffering population. Having relied on oil for the majority of Russia's budget and foreign currency earnings, Moscow is now facing the next few years with prices below what is needed to prevent fiscal ruin.

Russia's difficulties are complicated even more by the fact that sanctions have curtailed international collaboration in the oil industry. As much as Russia expresses disdain for the West, they are desperate for U.S. and European technical expertise to exploit hard-to-get oil out of the Siberian permafrost, Arctic Ocean, and deep wells elsewhere.

Dozens of contract cancellations have shut off not just current production in Russia, but delayed future exploitation of oil that Moscow needs in 2020, 2025 and beyond.

Iran is also facing a bitter future. The Iranian theocracy survived a mass uprising in 2009, protesting against a stolen presidential election, in large part because the countryside stayed loyal. This loyalty, however, was based on massive subsidies of food, cooking oil, and other commodities and services from the central government.

Despite the unreality in which many Iranian leaders live, fantasizing about the destruction of the United States and Israel with either heavenly fire or nuclear weapons, depending which becomes available fire, even the mullahs cannot manufacture hard currency earnings from oil from $60 oil.

As with Russia, international sanctions alone have not forced Iran to negotiate in good faith over their violations of international agreements and law -- in Iran's case over their development of nuclear weapons, but collapsing oil prices seem quite persuasive.

If the Obama administration will realize the pain being endured by both of these adversaries, and lean even more strongly on them, both will have little choice but to behave more appropriately or face irresistible internal demands for change, perhaps leading even to regime collapse.

There are some friends and allies of the U.S. that are losing from falling oil prices: the UK, Norway, Canada, Mexico and even the U.S. do have significant production. Some oil companies in these nations, especially those engaged in more costly extraction practices, are closing less productive lines. However, Western companies are far better capitalized, and able to adjust with some nimbleness.

Additionally, these producers are the most efficient in the world, extracting oil from similar geologic areas at 20 to 40 percent less expense than Russia, Iran and others can manage.

Shale oil from North Dakota will continue to flow, as will that from Alberta's tar sands for years after less efficient areas in other countries are taken off line. Even with the collapse in prices, oil still remains far more efficient at producing energy than almost anything else.

Producers and governments will also increasingly realize that the heavy subsidies to alternative fuels -- solar, wind, geothermal, biomass -- are less necessary, even counterproductive in the face of long-term cheap hydrocarbons.

Oil is like water in a big bathtub, with a global price for a single commodity. It doesn't matter to consumers and the world economy from where it derives. At the moment, however, at for at least the next two to three years, the Russians, Iranians and other bad actors will be screaming most loudly that the tub is full, and someone needs to turn off the water. For the Saudis, the U.S. and growing economies worldwide, however, a bit of an overflow is just fine.

Perhaps a full tub will force Moscow and Tehran to fix their own plumbing before sabotaging their neighbors.

Wayne Bowen received his Ph.D. in history from Northwestern University, and is also an Army veteran.