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Nick Butler: The Political Implications Of The Falling Oil Price

Nick Butler, Financial Times

If the oil price falls far enough and for long enough the impact on investment and future production will create the next upward surge in prices. For governments — which inevitably focus on the short term — the pain is immediate and unavoidable.

The Brent oil price has now fallen by 15 per cent in less than three months and is now below the psychologically important figure of $100 a barrel. Last week I wrote about the reaction in the industry. But the fall is beginning to have political consequences as well.

Brent Crude Oil Future three month chart

Across the world oil producing and exporting countries have come to rely on high, and ideally rising prices. Some countries save the revenue for a rainy day, but most, especially those with rising populations, tend to spend. Circumstances vary, as do the realistic options for adjustment, but the current concern is real and will shape political actions well beyond the oil sector itself.

Let’s take four examples.

The first is Iran. Sanctions have cut but not eliminated exports. Trade to Asia continues but with some discounts already in place, any fall in prices is very bad news for the regime in Tehran. The economy is already weak and a fall in revenue threatens the regime’s ability to maintain its fragile coalition. The survival of the regime is everything, including for the hardliners around the supreme leader Ayatollah Ali Khamenei. The discussions on a possible deal around Iran’s nuclear ambitions have continued over the summer —intriguingly it has suited everyone toignore initial deadlines and to keep them going. The threat of Isis now gives the US and Iran a degree of common interest previously absent. If oil prices stay down there is every chance of a nuclear deal before the end of the year.

The second is Russia. President Putin has enjoyed almost 15 years of strong prices which have sustained the government in Moscow. The revenue has not been used to modernise the Russian economy and Russia remains a hydrocarbon state dependent on export earnings. Now Mr Putin faces a simultaneous fall in oil and gas prices. Gas deals with China are years away from producing any revenue. Russia will have to retrench and as the costs of sanctions becomes ever more obvious to the business leaders on whose support Mr Putin depends, the odds must be that the conflict in Ukraine will not be allowed to escalate. The dispute is not over, but for the moment the costs to Russia of an open confrontation and ever stronger sanctions are too great. The most likely outcome is a frozen conflict.

The third is Scotland. The price fall has scarely been noticed in the noise of thereferendum campaign but the impact could be severe. Sir Ian Wood’s report set out the potential volumes which remain to be developed in the North Sea — most are marginal and require both reorganisation of the way the sector is regulated and a high price. Leaving politics aside, the industry will avoid new investments if prices stay low.

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