Oil prices are low and continuing to slide. This is obviously a huge markets story, but it’s also a geopolitical story.
Business Insider talked to Michael Levi, the David M. Rubenstein senior fellow for energy and the environment at the Council on Foreign Relations, about the political implications of low oil prices. Here are the five things he said he’s thinking about the current state of the oil market:
Oil Country Budget Issues
The first impact, which we’ve already seen, is the disruptions to the economies that “combine fiscal weakness with a large dependence on oil for their budget and some isolation,” says Levi. The countries that fall into this category include Russia, Venezuela, and Iran. These are “countries that have limited ability to get help and that have floating currencies.”
Russia has a currency crisis, Venezuela has a full-on economic disaster in the works, and Iran is reportedly having trouble funding Hezbollah in Lebanon. These problems are big enough to be political, as well as economic, problems for the leaders of these states.
Central Bank Confusion
Falling oil prices also make central bankers’ lives a little tougher, as oil prices pull down headline inflation at a time “when central banks are being expected to do a lot and banks are already in uncharted territory,” says Levi. There are implications here for the ECB, which is grappling with if and when to introduce full-blown QE, and for the Federal Reserve as it considers finally raising rates this year.
A Bonus For Consumers All Over The World
That is more or less the story in the United States. Consumer spending represents 68% of the US economy. The oil industry, which benefits from higher prices, is much lower. But it’s not just the US. This is an almost universal boost for global consumers, since most countries are importers, not exporters, of oil. This means “good, big, positive things” for countries like China and India, says Levi.
This is a good opportunity for economies that have previously had big subsidies for oil to pare them back, says Levi. Last week, Indonesia just announced that it will no longer subsidise gasoline, and it lowered its subsidy for diesel. India is making big moves, too. From the WSJ this week:
For the 12 months leading up to March, two months before Narendra Modi was elected prime minister, India had fuel subsidies of almost $US22 billion for consumers, though much of that has gradually been cut, and the country is planning to deregulate fuel prices completely if oil continues its fall.
Levi thinks low oil prices are probably bad for climate change policy. There are two ways that the environment and carbon emissions are impacted by low oil prices: first, consumption rises because gas and other oil products are cheaper. People drive more, companies consume more, all in all there will be a greater use of fossil fuels.
Then, there’s the secondary impact on policy makers. All of the sudden fuel economy rules are no longer as pressing. Constituents aren’t as interested in reducing their costs. “After 1973, there was an enormous amount of effort to get a handle on us oil consumption,” Levi says. Then, “in the 1980s when rules came up from review, oil prices were a lot lower, and policy makers decided it was no longer worthwhile.”
In the mid-2000s, when prices were really high again, “a lot of people wished that their predecessors had not been so shortsighted.” Levi explained that climate change policy rarely happens on its own. There are usually security and/or economic issues that press policymakers into action. That’s not going to happen at $US50 a barrel.