Drop in oil price stymies Iran, Venezuela and Russian foreign policies

October 21, 2008

Not only is our over consumption of oil destroying the environment, but it is giving incredible wealth and power to petro-states like Iran, Venezuela and Russia.  However, now with the plunging price of oil and natural gas, these countries that have enjoyed windfall revenues over the past few years are facing a new reality of imbalanced budgets and cost cutting.

Oil has fallen from $147, a few months ago, to below $80 today.  Neither Iran or Venezuela can maintain their spending levels with oil below $90, and Russia apparently counts on around $70 barrels (note: this number is different from the approx. $82 level we sited before).  However, Russia has squirreled away nearly $200 billion in a rainy day fund, so they are somewhat insulated from short-term price dips.

This dramatic decrease in oil revenues will force these countries to reassess their geopolitical aspirations.  Over the past few years, Iran has reached out across the Middle East to influence events in Israel, Lebanon and Iraq, all the while vigorously pursuing a nuclear program.  Venezuelan leader Hugo Chavez has built up enormous domestic subsidies and also reached out across South America, to push forward his socialist ideology.  And more notoriously, Russia has invaded Georgia, and also used natural gas supplies as a foreign policy tool with Ukraine, Czech Republic and the rest of Europe.  It is not a coincidence that Russia has increased its relations with Venezuela.  Chavez, after announcing that Venezuela would engage in naval exercises with the Russian Navy last month, declared “Go ahead and squeal, Yanquis.  Russia’s naval fleet is welcome here.” 

Many of these aggressive geopolitical maneuvers will have to be reigned in with falling gas prices. 

Of course, the lesson of this situation is that we need to take comprehensive steps to recreate the currently depressed price of gas in the future.  As soon as this current economic crisis subsides and the global economy begins to heat back up, the price of oil will follow.  And when that occurs, the windfall profits of these petro-states will shoot back up.  Now is not the time to be complacent, it is the time to figure out how to make it so the next spike in oil is the last spike in oil.  

Photo credit.

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