- 2021-06-09
Will low oil prices affect global stability?
Saudi Arabia and Russia signed a landmark agreement to freeze oil production. This is the first time the two sides have cooperated in an effort to reduce near-record oversupply and curb the collapse of oil prices.
After witnessing a 70% drop in oil prices since mid-2014, Saudi Arabia's Oil Minister Ali Al-Naimi said that the freezing of production in some of the world's major oil producers should begin to stabilize the market.
Saudi Arabia and Russia signed the agreement against the background of tensions in their political relations. The situation surrounding the Syrian civil war remains highly tense. Moscow and Tehran support the Bashar al-Assad regime in Syria, while Riyadh supports the opposition forces.
Although OPEC's power broker Saudi Arabia and the world's largest oil producer Russia quickly finalized an agreement that surprised the market, traders still doubt whether this interim agreement can be more widely accepted. People believe that the OPEC member Iran is the biggest stumbling block. So, will low oil prices have a major impact on the global economy? Let's take a look at the opinions of the experts.
Chris Bledowski (Kris Bledowski) Director of the Economic Research Department of the Manufacturing Productivity and Innovation Alliance
The answer depends on how we define "stable". We can indeed see the spread of instability in some countries that rely heavily on oil. However, this impact is limited to the region rather than the global one, and it is mostly in countries where the political situation is already unstable, such as Venezuela, Nigeria and parts of the Middle East. Potential conflicts are unlikely to spread to foreign countries or other regions.
The economic impact has spread to the world. In the United States, the decline in the mining industry has led to a decline in industrial output. In Canada, the plunge in oil prices caused its entire economy to fall into recession in 2015. At the same time, the income from the consumer side at least partially offset the negative impact of the shrinking income. The relative prices of major inputs and outputs have been changing, and the world economy is flexible enough to absorb these changes. On the whole, oil and its derivatives account for only a small and shrinking share of energy expenditure.
If global capital flows become more unpredictable, currency volatility becomes greater, and income changes become more pronounced, other factors should also be taken into account, including: differences in monetary policy (in the US and EU), private debt levels (in the Brazil and China), and economic governance (in Russia and Saudi Arabia).
Ian Bremmer (Ian Bremmer) Chairman and Founder of Eurasia Group
Did Gorbachev's reforms stifle the stability of the Soviet Union? the answer is negative. They just speed up the melting process of unstable conditions that have already been "frozen". This is the impact of low oil prices on the Middle East, particularly the Sunni Arab oil countries and their governments that rely on generous subsidies to maintain system governance.
Currently in these countries, the legitimacy of the regime has gradually diminished. The United States is less interested in continuing to be a "regional police" in these areas, and no one is willing to pick up the baton. Communication technology makes it easier to incite disillusioned young people. In addition, the governments in these areas have done little in terms of social, economic, and political reforms, and the security measures they have adopted are incapable of solving potential problems. Cheap oil makes the expansion of these conflicts sharper and faster.
Jan Cienski, Editor, Energy and Security, "Politics" magazine
No, low oil prices will not stifle global stability—in fact, they will strengthen it. Of course, this is not to say that it is not bad news for countries such as Russia, Saudi Arabia, Venezuela, and Angola that base their finances on oil revenue support. But the rulers of these countries are mostly arbitrary. As revenue shrinks, they will have to focus more on preventing domestic people from turmoil and resistance due to budget cuts, and they will not have the energy to create troubles internationally.
Russia will be the first country to feel economically tight, and soon Saudi Arabia will find it difficult to maintain a defense budget that accounts for 10% of its GDP. For the rest of the world, low energy prices have been the driving force of economic growth since the past, and there is no reason to suspect that this relationship will be broken now.
Deborah Gordon Carnegie Energy and Climate Project Leader
The development of the global economy is inseparable from oil. But it cannot be said lightly that low (high) oil prices alone have caused global instability. However, the increased volatility of the oil market is undoubtedly a huge destabilizing factor. If oil prices continue to fluctuate wildly in the next few years, it is likely to completely disrupt the economic, technological, and geopolitical foundations.
It is said that the sovereign wealth fund (a financial investment portfolio held by Saudi Arabia, Russia and other oil-rich countries) accumulated by oil and gas has reached 7 trillion US dollars. Many countries rely on oil profits to maintain their economies and stabilize their societies. In addition, the global oil industry, which currently has a market value of more than US$1 trillion, also relies on more unexploited oil resources. The severe loss of market valuation will affect political power.
But oil will not always be so cheap. The market operating mechanism determines that the rise will eventually fall, and vice versa. The oil market is undergoing transformation right now. This may be a good time to impose a carbon tax. When the market re-adjusts itself, the impact of climate change (a greater global destabilizing factor) will also be reflected in oil prices.
Kristina Kausch (Kristina Kausch) Carnegie European Center Non-Resident Researcher
In the next few years, low oil prices are likely to aggravate the turbulence in the Middle East, especially the Gulf region.
Everyone knows that the rule of these oil country dictators is based on subsidies, low taxes and other economic privileges that can please citizens. Under the impact of the plunge in oil prices, economies that are highly dependent on hydrocarbon resources such as the UAE, Saudi Arabia, Bahrain, Oman and Qatar have started to cut subsidies in the past few months, and basic food and fuel prices have also risen by 60%. Faced with the situation of continuing to "tighten their belts" in the future, the citizens of Gulf countries that are accustomed to the government's generous charity may not quietly accept such losses.
Perhaps more importantly, it is precisely because of the awareness that power is declining, the regime in the Gulf region may become more aware of the dangers and threats it is facing, and then take some more radical regional actions. It is worth noting that Saudi Arabia’s fanaticism often triggers radicalism, such as the Yemen war and the recent forced escalation of confrontation between Riyadh and Tehran. This reminds people of the fury of a wounded lion, and it also makes Saudi Arabia look less like an ally of the West but more like a troublemaker.
Despite the heavy loss of income, Saudi Arabia still insists on increasing production to ensure that their oil floods the market, suppress potential Iranian oil exports, and protect its market share.
Michael Rühle, Head of Energy Security, NATO Emerging Security Challenges Department
Low oil prices may not destabilize the world, but they will make international relations more unpredictable.
If oil prices continue to maintain their current low levels, Russia and some oil-producing countries in the Middle East and North Africa will suffer greater economic losses. For countries that are accustomed to using large subsidies to stabilize the people, the expectation of continued global oil surplus may become an incentive for these countries to experience domestic instability. Coupled with the intensifying geopolitical conflicts among some Middle Eastern oil producing countries, You may see a violent storm erupting at the door of NATO. At this moment, Iran has not yet returned to the oil market.
From the NATO perspective, Russia is the most important link. Russia’s recent aggressive military modernization process is in sharp contrast to the huge economic losses it has suffered due to low oil prices. As oil and natural gas exports account for more than half of Russia’s fiscal budget, the Russian economy is heading for recession. Will this make Russia a more moderate partner? Or will the Russian government move towards an adventurous foreign policy, blaming the West for its economic problems? Russia's choice is vital to European and global stability.
Dmitri Trenin, Director of the Carnegie Moscow Center
The continued decline in oil prices has not caused new instability to the world, but it has played a huge role in fueling the existing instability. Those countries that rely on oil revenue for their finances are facing severe domestic restrictions and the potential for social and political unrest. The countries that are suffering from this kind of pain are those still rich oil-producing monarchies in the Gulf, not the poorer Arab countries.
For Russia, the huge plunge in oil prices has dealt a fatal blow to the economic model on which it has survived over the past 15 years, and has weakened the various political and social relations that maintain the country. Russia is not only in such a serious crisis, it has also encountered a domestic crisis of confidence and a lack of sense of direction. All this happened during the period of Russia's extremely active foreign policy, just as the Russian government has broken the world order dominated by the United States after the Cold War and has interfered in Ukraine and Syria by force. Poverty is severely limiting the Russian government’s ability to act abroad, but it is unlikely to stop there.
In principle, falling oil prices will return Russia to economic and political realism, prompting it to promote economic diversification, develop technology and invest in human resources. But these wishes have not yet been realized. Today's powerful people are sitting on vested interests, so they stick to the rules and do not ask for change. On the contrary, they hope that oil prices will soon rise to a level that is comfortable for them, and their interest in change and transformation is negligible. With the postponement of Russia's revival, recession is accelerating.