- - Thursday, January 7, 2016

With the price of crude oil approaching its natural bottom in the $20 range, we should be aware of the untenable, economic pressure this price collapse is putting on the petro-dictators of the world. Many states, such as Russia, can withstand a multi-year reduction in revenue; they have built rainy day funds in the past for just such occurrences. What they cannot endure is a semi-permanent, decade long, crude price in the teens. This busts all budgets and makes it impossible for a dictator to maintain power where he has negotiated a social contract with the population which essentially trades prosperity for loss of political freedom.

Currently, the geopolitical stage highlights multiple regimes where this scenario is playing out. Russia is the most obvious choice for analysis. Russian President Vladimir Putin has built his sky-high popularity ratings on increased prosperity for millions of Russians and the rebirth of Russia as a strong, global power. With oil on its way to a $20 handle, the situation in Moscow could very well become unbearable. Mr. Putin has promised much to the Russian people. With the almost complete loss of oil revenue, this makes his promises empty. Yes, Mr. Putin receives oil in dollars and therefore can devalue the ruble to somewhat make up the difference. However, no country has ever devalued its way to prosperity. The ruble already is at historic lows. How much lower can it go? The answer is a lot lower. This loss of revenue will also make it very difficult for Russia to maintain its military modernization, which is critically important to the Kremlin’s power projection agenda.

The problem for these types of regimes is that there are no foreseeable market catalysts to drive the price of oil higher. Iran is bringing millions of barrels of production online. The U.S. fracking boom has produced a very elastic supply profile. Fracking wells can be turned on and off very quickly. This means that if the price of crude starts to creep higher, additional production from North Dakota and elsewhere can come online immediately which will act to keep the lid on price.

Speaking of Iran, the regime has been expecting a large amount of revenue from the opening of its crude oil markets again to the world with the removal of sanctions. Now those dreams are dashed, at least in the short run. The reason the regime desperately wanted the sanctions removed is that the Iranian population has suffered economically and the mullahs are scared of possible unrest. Now their crude oil savior scenario doesn’t look rosy. Interesting enough, the Iranians are buying up Russian weapons as fast as possible.

Venezuela is another situation where the brown matter has hit the fan as the price of oil has collapsed. The regime is out of options and will likely have to default on Vene bonds at some point in the future. This will endanger the golden oil goose as the regime’s access to capital in the bond markets will be severely damaged.

Although it is not oil that is causing the problem, the Chinese Communist Party’s hold over the population could very well be endangered due to economic collapse. It is very possible that Chinese growth has weakened to the point that China can no longer follow through on its economic social contract either. Chinese economic data is now routinely seen in global markets as fabricated. No one knows the real situation in China. The extremely volatility in their equity markets is a reflection of this fact. China could be the black swan for 2016 and a huge one at that.

The point is that there are many totalitarian governments now under severe economic stress. Many of these regimes have large militaries or have access to terrorist networks. At some future date, these regimes may decide the pressure is too great and they need to act militarily to relieve the economic pressure or to take their public’s mind off their economic hardships. What would drive the price of oil higher? An expanded conflict in the Middle East, a large terrorist attack on the West, another Islamic war against Israel, there are many possibilities. No one knows how low the price of oil can go before the black swan appears. The Obama administration’s foreign policy record does not leave one confident that they can foresee or even handle any eventual crisis. January 2017 can’t come soon enough for America.

Copyright © 2018 The Washington Times, LLC. Click here for reprint permission.

The Washington Times Comment Policy

The Washington Times is switching its third-party commenting system from Disqus to Spot.IM. You will need to either create an account with Spot.im or if you wish to use your Disqus account look under the Conversation for the link "Have a Disqus Account?". Please read our Comment Policy before commenting.


Click to Read More and View Comments

Click to Hide