How Countries Around The World Are Coping With Falling Oil Prices

Every week, The WorldPost asks an expert to shed light on a topic driving headlines around the world. Today, we look at the impact of a steep decline in oil prices.

On Friday, the price of benchmark crude oil dropped to new five-year lows.

The price of oil has been plummeting for months, leaving oil-producing nations around the world aghast at their sinking revenues. Poor global economic growth has cut demand, while the U.S. is producing oil faster than ever recorded.

Prices fell further last month after Saudi Arabia and its Gulf allies blocked an effort at the Organization of Petroleum Exporting Countries to reduce production levels in order to boost the price of oil.

The OPEC episode shows that it's not only economists and oil barons who are concerned about the price crash. Many major oil producers are embroiled in domestic and international political crises, and political analysts are watching closely to see how these countries react as revenues continue to decline. Iran, struggling to balance its budget amid falling prices and international sanctions, this week blamed longtime rival Saudi Arabia for a “conspiracy against the interests of the region.” Russia recently warned that it will fall into recession in 2015.

“Optimists think economic pain may make these countries more amenable to international pressure,” The Economist explains. “Pessimists fear that when cornered, they may lash out in desperation.”

The WorldPost spoke to Jason Bordoff, director of Columbia University’s Center on Global Energy Policy, about the political fallout of declining oil revenues around the world.

Why did Saudi Arabia reject production cuts at the OPEC meeting?

Saudi Arabia has two options: They can cut their own production and therefore lose revenue and market share, or they can just let the price fall, thinking that the higher cost of production leads to a drop in supply on its own. Saudi Arabia is signaling that if OPEC needs to cut production levels, they want other exporters who are not members of OPEC to cut their production as well.

What’s changed fundamentally in the market in the last few years is the dramatic increase in U.S. oil production. There are few other instances in history when oil production has grown so quickly. I think we’re still learning a lot about U.S. oil production. Other oil producers are opting to wait and see what happens, and then take a decision.

Often in the past, OPEC has only agreed to production cuts after a few meetings and an increased sense of panic. It is certainly possible that the oil price will decline further and U.S. production will keep growing, and OPEC will have to take action.

If the price keeps falling, could this backfire on the Saudi regime by undermining stability in the country?

Saudi Arabia has very costly social programs and welfare spending. I imagine the Saudi regime is concerned about the possibility of instability. But they are in a better position than other producers. They have huge financial reserves. If they decide to run a deficit for a while, they could handle it.

What about the other major oil-producing nations?

There are very significant risks to the stability of these countries. Nigeria and Venezuela are going to be in an extremely painful position over the next year. Their economies have already suffered. Venezuela supports a subsidized oil price for regional allies, which is pushing them towards the risk of default.

Do you think trouble in the oil markets could pressure Iran to reach a deal over its nuclear program, or curb Russia's military ambitions?

Russia is facing extreme pressure from the price collapse as well as international sanctions. The ruble has already fallen sharply. Iran is also suffering from sanctions as well as the oil price. I hope the low price will provide an opportunity for the West to exert greater leverage to push for agreement with Iran and Russia, but it's hard to say how these countries will respond.

As Iran continues to negotiate with the international community over its nuclear program, the sharp fall in the price of oil is an additional reason for accommodating sooner rather than later. The flip side is that the lower oil price could make it easier for the U.S. Congress to ratchet up sanctions on Iran.

[Russian President] Vladimir Putin has shown much less willingness to move forward. I don’t think that we’ve seen signals that he will pull back from aggression in Ukraine. His popularity remains high despite the economic pain.

What do you expect to happen next to the price of oil?

It’s very hard to predict. If you had asked me two months ago I would not have predicted where we are today.

I don't think we’re yet at the bottom price. It will fall further, and then begin picking back up again in the next year. I think demand will pick up because of the lower price, and supply will grow less quickly. But how fast it will rise, and to what level, is hard to say.

This interview has been edited for clarity.