November 26, 2014

USE TAXES TO GET IT TO $40:

The Geopolitical Impact of Cheap Oil (Martin Feldstein, 11/26/14, Project Syndicate)

The big losers from falling oil prices include several countries that are not friends of the US and its allies, such as Venezuela, Iran, and Russia. These countries are heavily dependent on their oil revenue to support their governments' spending - especially massive transfer programs. Even at $75 or $80 a barrel, these governments will have a difficult time financing the populist programs that they need to maintain public support.

Although Saudi Arabia and several of the Gulf states are also major oil exporters, they differ from other producers in two important ways. First, their cost of extracting oil is extremely low, which means that they will be able to produce profitably at the current price - or even at a much lower price. Second, their enormous financial reserves allow them to finance their domestic and international activities for an extended period of time, as they seek to transform their economies to reduce their dependence on oil revenue.

A further decline in the price of oil could have major geopolitical repercussions. A price of $60 a barrel would create severe problems for Russia in particular. President Vladimir Putin would no longer be able to maintain the transfer programs that currently sustain his popular support. There would be similar consequences in Iran and Venezuela.

It is not clear whether these countries' current regimes could survive a substantial and sustained future decline in oil prices. By contrast, it is obvious that oil-importing countries would benefit greatly - as they already are.



Posted by at November 26, 2014 6:03 PM
  

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