Soaring oil prices threatened to change the world order; now falling prices may do the same

Venezuelan President Hugo Chavez, left, Iranian President Mahmoud Ahmadinejad, centre, and Russian Prime Minister Vladimir Putin, whose regimes were among those that benefited most from high oil prices, now face the spectre of reduced global clout and domestic instability as oil revenues fall.Jorge Silva, Reuters

The National Post presents a week-long series about some of the most interesting ideas to emerge in the past year. Today, the rise and fall of the petro tyrants.

Only six months ago, leading energy analysts were predicting that oil would cost at least US$200 a barrel, a price that would leave renegade crude producers such as Iran and Venezuela in the catbird's seat of world politics: Sitting on top of the precious resource, awash in petrodollars, the Ahmadinejads of this world would have unprecedented political clout, laughing all the way to the next OPEC summit.

Yet a worldwide downturn has dashed such hopes. Prices have tanked, OPEC is scrambling and the countries counting on a boom are left with a major cash shortfall. Until the recession blows over, this little moment of schadenfreude might be the only good news these days. But experts warn we should not gloat too much.

"High oil is very bad for us because of the dire economic consequences at home," said Michael Klare, author of Blood and Oil: The Dangers and Consequences of America's Growing Dependency on Imported Petroleum. "But cheap oil is also a problem because it undermines the stability of governments for which we rely on for fighting terrorism, such as the Saudis and the United Arab Emirates. These regimes are now at risk."

Mr. Klare noted that the drop in the price of black gold, now in the US$40-range, has already affected the Middle East and also Venezuela, whose leader, Hugo Chavez, is trying to export his revolutionary fervour across South America.

"I think that [his] clout has diminished because so much of it depended on the amount of money Chavez had to spend on projects in Latin America to earn goodwill," he said.

The destabilization of Mr. Chavez would probably not trouble anyone in the U. S.

State Department, especially in light of his recent warming relations with Iran.

Similarly, the drop might undermine his latest photoop pal, Iranian President Mahmoud Ahmadinejad.

Mr. Klare said that Iran's internal market for oil is vulnerable because the country lacks the proper infrastructure to refine, so it must import the product at a premium.

At the same time, the price of exports is dropping, so the theocracy faces a double whammy. "This is bad for the Iranian leadership," he said. "The economy is already in pretty bad shape, which means political trouble at home."

The effect on Saudi Arabia, in contrast, will not be in the short term, and it may profoundly concern the United States.

The kingdom has plenty of rainy-day cash reserves, but Mr. Klare believes that low prices are potentially dangerous in the long run: "A six-month storm they can weather, but if the price of oil stays low for a long time, the Saudis could be in real trouble."

There is a booming growth rate of young men in their late teens and early 20s entering the work force, he notes, and this welfare state needs oil to stay above US$70-per-barrel to generate jobs in the government and in state industries.

"Oil income keeps the population employed and out

of trouble," he said, adding that the country must avoid a scenario that would leave thousands of men out of work. "It's out of this youthful, male malaise that Osama bin Laden recruited the hijackers for 9/11, and there is that kind of danger that these unemployed young men pose."

Other countries, however, face other potential disasters, namely budgetary shortfalls.

Energy security expert Ariel Cohen said that when Venezuela, Iran and Russia programmed their budgets for 2009, they counted on the price of US$74 per barrel -- aggressive accounting that has left black holes in their ledgers. "The current slump generates a huge budget deficit," said Mr. Cohen, a senior research fellow at the Heritage Foundation in Washington, D. C. "It may have serious repercussions in terms of political stability."

The drop's impact on Russia is less certain. Led by President Dmitry Medvedev and Prime Minister Vladimir Putin, it holds the world's largest natural gas reserves and is one of the globe's biggest oil exporters.

Many believe that the former Soviet Union is sitting on huge cash reserves, but Mr. Cohen, who has recently co-authored The Oil-Price Roller Coaster: Global Challenges for the Obama Administration, said that it faces a crunch of its own. "Cash reserves were estimated at [U. S.]$600-billion, but they have officially spent $200-billion, which leaves them with $400-billion -- and the figures might be considerably lower from what I hear," he said. "Even if they're at 400, and the Russian budget is suffering from 30-50% deficit, in my calculations they have reserves for six months, maximum."

In the meantime, he noted, the military is downsizing, halving the number of Russian officers over the next three years.

But Mr. Cohen, for one, does not believe that these cheap prices will last. Scarcity is a big factor, and since oil companies won't be reinvesting in exploration, crude will remain scarce, which helps demand. And once the economy starts rolling again, the burgeoning middle classes in oil-thirsty nations such as China and India will be clamouring for more fuel.

"The demand for petroleum is gong to rebound," he predicted. "And probably the price will come back roaring."

coffman@nationalpost.com

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