The Strategic Implications of Cheap Oil

The price of oil is dropping, and while the average consumer is certainly enjoying the low cost of gas over the holiday season, there are some very interesting machinations occurring in the international sphere that are causing the stark decline, and they have a very real and diverse impact on international relations.

A large reason for the initial decline has been the highly successful production of oil from deposits in North Dakota and Texas. The added influx of American oil on the global market has put OPEC, the multinational cartel that controls 40% of world production, in quite a bind. Cheaper oil is not a good thing for countries like Iran, Venezuela and over half of OPEC countries that rely on prices being over $100 per barrel in order to pay for national spending.

It would have been probable that in response to the dropping prices OPEC would have decided to cut production after their November 27 meeting in Vienna. Surprisingly, they did quite the opposite and decided to continue production as normal, much to the chagrin of countries like Russia (non-OPEC), Venezuela, and Iran who will certainly feel the budgetary pinch.

The Saudis have reportedly been the primary proponent of letting the market run its course. The conventional wisdom explaining as to why they have chosen to do this is because the Saudis and their neighbors can produce oil at a much cheaper rate than the expensive shale producers in the US. The theory being that expensive American shale will not be able to compete in the long run. This explanation makes sense from an economic standpoint, but we cannot ignore the global security implications of this decision.

In the globalized world of the 21st century, economics and security are almost completely intertwined. The push by the Saudis to maintain current oil production has some very real implications for Iran and Russia; both countries that happen to have poor diplomatic relations with the primary Saudi ally, the United States. There is of course no hard evidence to support the Saudi move was a favor to the US, but even the most casual of observers can see there is more at play here than meets the eye.

Hampering Iran economically suits Saudi interests as well as those in the West. The tense Saudi-Iranian relationship is centuries old, stretching back to the era of the Persian empires of antiquity. Arabs and Persians have long been in conflict over regional supremacy in the Middle East, with control of the oil trade and the Persian gulf being the current battlefield.

The historic Persian-Arabic divide has given the Saudis and their Arabic neighbors reason to be extremely concerned about the Iranian regime obtaining a nuclear weapon. Such a move would shift the current paradigm in Iran’s favor in two ways. First, it would help solidify Iran’s control over the Shia Crescent, the cross-border area in the Middle East where Shia populations reside. Second, it could start a nuclear arms race in the Middle East that the Saudis probably will not win. Both shifts would significantly destabilize the political paradigm of the region, something the Saudis and their allies want to prevent. Though Iran will see around $700M a month in sanctions relief as the P5+1 negotiations carry on into July of 2015, a lower price per barrel on oil will act as a de facto sanction for a country that is already extremely restricted in selling its most valuable commodity.

Russia felt the sting of OPEC’s decision almost immediately, with the Russian rouble plummeting to its lowest price since 1998. The massive drop in value was only stabilized by intervention from the Russian central bank on Monday, a move that may have cost Russia “billions”, says Tim Ash of Standard Bank. In conjunction with international sanctions, it appears that Russia will stand to lose the most from the low price of oil.

Again, security strategy plays into the implications of OPEC’s decision. Russia’s proxy war in the Ukraine and condemnable annexation of the Crimea has irked Western leaders who are limited in their options for response. Given that Russia is a major energy supplier to many of its European neighbors and that NATO would be apprehensive to attack a nuclear power, utilizing a veto to maintain current oil production via OPEC is the West’s best option to punish President Putin for his forays in Eastern Ukraine. The great Roman statesman Cicero said “the sinews of war are infinite money”, and without money Putin may find it difficult to continue his aggressive expansionism in Eastern Europe.

For the US, the current status of the oil market not only means a lower price at the pump for the average consumer, but also a significant blow to key adversaries in Russia and Iran. Though US consumers, oil producers, and politicians are happy with this turn of events, there are still some significant questions as to whether US oil producers will be able to sustain this new status quo.

Article originally appeared at https://wonkreport.com/article/the-strategic-implications-of-cheap-oil/