Oil crash has eco­nomic ben­e­fits but geopo­lit­i­cal risks for US

The Pak Banker - - MARKETS/SPORTS -

The oil price crash is mostly a god­send for the United States, de­liv­er­ing Amer­i­can con­sumers and busi­nesses cheaper gaso­line prices while hob­bling the economies of ad­ver­saries like Rus­sia.

But an­a­lysts say that the longer the oil price stays so low, the greater the chances it will gen­er­ate new geopo­lit­i­cal prob­lems that Wash­ing­ton would not like to see.

Even if the 70 per­cent plunge in crude prices has bat­tered the home­grown US oil in­dus­try, over­all its econ­omy ben­e­fits: it re­mains a net im­porter of oil and as the price of crude falls, the coun­try's trade im­bal­ance im­proves.

"There's no ques­tion that low oil prices are very good for the US. Painful for some peo­ple ob­vi­ously, but for the US econ­omy and US con­sumers a very good thing," said Bruce Everett, a for­mer ExxonMo­bil of­fi­cial and pro­fes­sor at Tufts Univer­sity. There are ap­par­ent strate­gic ben­e­fits of cheap oil, too. Coun­tries like Rus­sia, Venezuela and Iran, with which Wash­ing­ton shares chilly re­la­tions, are overly de­pen­dent on oil ex­ports and their economies have been heav­ily bat­tered by the down­turn. "If you don't care es­pe­cially about the (other) oil pro­duc­ers, it's a plus," said Ge­orge Perry of Brook­ings In­sti­tu­tion.

But the flip side is that strains from a loss of oil in­come can trig­ger desta­bi­liz­ing be­hav­ior as well.

En­ergy spe­cial­ist Jan Kal­icki of the Wil­son Cen­ter posed the ques­tion of whether Rus­sia would be less or more trou­ble­some on the world scene if the eco­nomic cli­mate wors­ens. "The pres­sure is on Rus­sia from oil prices and their gen­eral eco­nomic de­cline," Kal­icki said.

"You could make an ar­gu­ment that the Rus­sians have been in­flu­enced to some ex­tent by that in tak­ing stronger steps in­ter­na­tion­ally... in Ukraine or in Syria for ex­am­ple. That, he said, serves to "take do­mes­tic at­ten­tion away from the eco­nomic prob­lems that it is fac­ing."

For Iran, the price fall comes as the coun­try is be­ing per­mit­ted to re­sume a high-level of oil ex­ports with the lift­ing of in­ter­na­tional nu­clear sanc­tions on the coun­try. The net ef­fect, in­come-wise, is lit­tle sig­nif­i­cant im­me­di­ate gain for the coun­try, ac­cord­ing to An­thony Cordes­man, a Middle East and se­cu­rity ex­pert at the Cen­ter for Strate­gic and In­ter­na­tional Stud­ies in Wash­ing­ton.

Even at a price of $40 a bar­rel -- some 15 per­cent higher than now -- the re­sump­tion of oil ex­ports won't have a big eco­nomic ef­fect for the coun­try of 84 mil­lion peo­ple. How­ever, he said, any surge in in­come in could be­come the fo­cus of an in­ten­si­fied in­ter­nal power strug­gle pit­ting mil­i­tary ver­sus civil­ian needs, ac­cord­ing to Cordes­man.

That fight "may be­come even more se­ri­ous," he said. "The im­pact of the nu­clear agree­ment on Iran's fu­ture pe­tro­leum rev­enues will be far more lim­ited than many thought when the agree­ment was signed, and Iran will face se­ri­ous in­ter­nal pres­sure over how any ad­di­tional rev­enue will be used," he told AFP.

Cordes­man raised an­other po­ten­tial pit­fall from fall­ing oil rev­enues across the Gulf and other pro­duc­ers: so­cial tur­moil as gov­ern­ments are forced to cut spend­ing. "It's very un­clear that sta­bil­ity in the Middle East is go­ing to get bet­ter if the same forces which tend to drive Is­lamic ex­trem­ism -- all of which re­late to youth un­em­ploy­ment and eco­nomic growth and mod­ern­iza­tion -- are not go­ing to be helped by a de­cline in oil rev­enues by ex­port­ing states," he said.

Kal­icki added that the fall in the oil price hurts US al­lies too, in­clud­ing Mex­ico and Canada, both of whose economies de­pend sig­nif­i­cantly on crude pro­duc­tion. In that sense, he said, oil pro­duc­ers and con­sumers have sim­i­lar in­ter­ests in a firmer mar­ket.

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