- 2021-03-02
The end of the petrodollar era
Russian President Vladimir Putin is stepping up its bombing of Syrian opposition forces while being forced to consider selling state assets at low prices. Saudi Arabia is planning to make its debut in the international bond market while fighting a war of words with Iran. Nigeria began to discuss seeking assistance from the World Bank. Venezuela went from depression to bankruptcy. Welcome to the world of 30 dollars per barrel of oil.
The dialogue surrounding the oil market was once based on two deep-rooted assumptions. One is that low oil prices are conducive to global growth, because consumer countries are more inclined to spend windfalls than producing countries; second, turmoil in the Middle East will push up oil prices, so the West should support those Arab dictators who maintain oil well production.
Common sense has been subverted. In 2014, oil prices fell from $100/barrel, which should have made consumer countries so excited to throw their hats in the air. But the actual situation is not the case at all. Europe, which is plagued by stagnant growth and battered by refugees, has other concerns. The United States, which is now both a consumer and a producer, cannot escape its weak growth. As the most oil-hungry economy in the world, China also has its own challenges. Global stock markets have fallen as oil prices have fallen.
Geopolitics also violates common sense. As the war in Iraq, Syria, Yemen and Libya escalated, oil prices were falling. Saudi Arabia, which used to be the guarantor of the reserve price, now uses increasing production as a tool to deal with Iran. The conclusion of the Iran nuclear agreement has caused a rift between the West’s support for Saudi Arabia and the easing of relations with Iran as it did in the past.
The third law about oil—declining oil prices is always a cyclical deviation from an unstoppable upward trend—seems to be faltering. More and more evidence points to a structural change that will keep oil prices low. In the 100 years before the big oil price shock in the early 1970s, the true cost of a barrel of oil was between US$10 and US$40. Economists at Llewellyn Consulting in London gave a convincing view: This range will be the approximate range of future oil prices.
The shock of the 1970s rewrote the rules of international relations. The Middle East has become the focus of geopolitical attention. The Soviet Union had a new but short life. Countries such as Venezuela, Brazil, Mexico, and Nigeria have been blessed (or cursed) by high oil prices. Now, reimagine this picture in an era when oil prices are always low. There is no doubt that some producing countries will develop better than others, but the influence of petrodollars is gone forever.
I feel that Western foreign policy makers still cling to the view that nothing has changed. They believe that although low oil prices will have devastating consequences—and still dangerous in some regions—it is temporary and therefore unlikely to change the geopolitical balance to a large extent. Producing countries will unite, high-cost oil wells will go bankrupt, and oil prices will rise again after global growth recovers. The "peak oil" theory-the supply of hydrocarbons is limited, and prices will always be pushed up over time-has its own fans.
There is no doubt that oil prices will rise, but we have strong reasons to believe that the rules have changed. Ten years ago, the United States was the world's largest oil importer. Today, the extraction of shale oil and shale gas ensures that the United States can achieve energy self-sufficiency in the 2020s. Shale wells can be capped and uncapped at relatively low cost to provide shock absorbers for the international market. Saudi Arabia is still a production regulator, but the strength of "regulation" has been lost.
The Organization of Petroleum Exporting Countries (OPEC, Chinese abbreviation: OPEC) has become weak. A 1% reduction in oil production should push up oil prices by 10% in the short term, but the production capacity of any oil supplier is not large enough to increase revenue by reducing production. The result is a battle for market share open to everyone. As Llewellyn Consulting stated, OPEC today is more like a secretariat than a cartel.
Environmental laws and alternative energy conspiracy against hydrocarbons. You don’t have to believe that governments will meet their climate change targets. You can predict that the shift to renewable energy and alternative energy sources (whether electric vehicles or solar energy) will accelerate. Energy efficiency is also putting pressure in the same direction.
For this world characterized by instability, there is not much that can be reassuring. Regardless of the theoretical benefits, the scope and speed of the decline in oil prices have added another destabilizing change to those forces that spawn divisions and conflicts.
Russia, facing a strong economic and demographic headwind, will be further weakened. The situation in Syria shows that Putin may be more threatening as a result.
A declining power may be more dangerous than a rising power. The decline in government revenue may undermine Nigeria’s progress in fighting corruption and eliminating security threats from Boko Haram. The last oil price crash was one of the precipitating factors that led to the civil war in Algeria.
Low oil prices have intensified the confrontation between Sunnis and Shiites in the Gulf region, may cause a fatal blow to the Iraqi government, and weaken the Kurds fighting the Islamic State of Iraq and the Levant (ISIS). This may also accelerate the withdrawal of the United States and Europe from the Middle East. If they don’t need oil, why should they participate in Middle East affairs?
Like the Cold War, the petrodollar era imposed a kind of predictability on the world. It would be ridiculous to grieve for the passing of this era, but it would be just as foolish to ignore the consequences. We may soon discover that with 30 US dollars per barrel of oil may come with another price.