Saturday, February 13, 2016

The petrodollar age is no more but with it go old certainties



Vladimir Putin, the Russian president, is being forced to consider a fire sale of state assets even as he steps up the bombing of opposition forces in Syria. Waging a war of words with Iran, Saudi Arabia is planning its debut on international bond markets. Nigeria has started talks about assistance from the World Bank.Venezuela careers from bust to bankruptcy. Welcome to the world of $30 oil.
Conversations about the oil market once started from two ironclad assumptions. Cheap oil was good for global growth because consumers are more inclined than producers to spend windfall gains and disturbances in the Middle East would send prices higher so the west should back the Arab autocrats who kept the wells pumping. 

Received wisdom has been upended. The fall from $100 a barrel in 2014 should have seen consuming nations throwing their hats in the air. Not a bit of it. Europe, beset by stagnation and overwhelmed by refugees, has other things on its mind. The US, now producer as much as consumer, is stuck with anaemic growth. China, the world’s thirstiest economy, has its own challenges. Global equity markets have tumbled in tandem with the oil price.
The geopolitics are likewise counterintuitive. Prices have fallen even as fighting in Iraq, Syria, Yemen and Libya has escalated. Saudi Arabia, once the guarantor of a floor price, now deploys higher output as a weapon against Iran. The nuclear deal with Iran has left the west torn between the old allegiance to Riyadh and the allure of detente with Tehran.
The third law of oil — that price falls are always cyclical diversions from an inexorable rise — looks shaky. The accumulating evidence points to a structural shift that will keep prices relatively low. During the century before the great price shock of the early 1970s the real cost of a barrel of oil was between $10 to $40. Economists at Llewellyn Consulting in London make a convincing case that this trading range offers a rough template for the future.
The 1970s shock rewrote the rules of international relations. The Middle East became a focus of geopolitical attention. The Soviet Union was given a new, albeit shortlived, lease of life. Venezuela, Brazil, Mexico and Nigeria were among those blessed — or perhaps cursed — by soaring prices. Now reimagine this landscape in an era of permanently cheap oil. Some producers doubtless will fare better than others but the power of the petrodollar has gone.
My sense is that western foreign policymakers are still clinging to the idea that nothing much has changed. Low prices will be disruptive — dangerously so in places — but temporary and thus unlikely to alter the geopolitical balance much. Producers will get their act together, high-cost wells will go out of business and the return of global growth will see the price rise again. The doctrine of “peak oil” — that a finite supply of hydrocarbons over time will always pull prices upwards — has its devotees.
Doubtless there will be price spikes but there are strong reasons to suppose the rules have changed. A decade ago, the US was the world’s largest oil importer. Shale oil and gas now assure it of energy self-sufficiency during the 2020s. Shale wells can be capped and uncapped relatively cheaply, providing a shock absorber in international markets. Saudi Arabia remains a swing producer but the “swing” has lost its force.
Russia will be weakened further but declining powers can be more dangerous than rising ones
Opec has been enfeebled. A 1 per cent cut in oil output should push up prices by 10 per cent in the short term, but no single supplier has enough capacity to increase revenues by cutting output. The result is a free-for-all fight for market share. As Llewellyn Consulting puts it, Opec now more closely resembles a secretariat than a cartel.
Environmental laws and alternative energy sources conspire against hydrocarbons. You do not have to believe that governments will meet their climate change targets to forecast an accelerating shift into renewables and alternative energy sources, whether electric cars or solar power. Energy efficiency is pressing in the same direction.
All this means that policymakers should be thinking a lot harder about the geopolitics.
There is not much that is reassuring for a world already described by its insecurities. Whatever the theoretical benefits, the scale and speed of the oil price drop has added another destabilising twist to the forces driving fragmentation and conflict.
Russia, facing powerful economic and demographic headwinds, will be weakened further. Events in Syria suggest Mr Putin may be more threatening for that. 

Declining powers can be more dangerous than rising ones. Falling state revenues threaten to undercut the strides made by Nigeria in fighting corruption and the security threat from Boko Haram. The last oil price collapse was among the triggers for civil war in Algeria.
Cheap oil sharpens the Sunni-Shia confrontation in the Gulf, could undermine fatally the Iraqi government and is weakening the Kurds fighting Isis. It may also hasten US and European disengagement from the region. Why get involved if they do not need the oil?
Like the cold war, the petrodollar age imposed a predictability on the world. It would be absurd to lament its passing but just as unwise to ignore the consequences. We may discover soon enough that $30 oil comes with another type of price.

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