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Washington and the Geopolitical Benefits of Plunging Oil Prices: Real but Limited

January 19, 2015 in Economics

By Ted Galen Carpenter

Ted Galen Carpenter

The past six months have witnessed an extraordinary plunge in global oil prices. A barrel of Brent Crude now hovers below $50, a price roughly half of what it was in the late spring and early summer of 2014. That change has major economic implications for producers and consumers around the world. Consumers, as well as companies that must utilize large quantities of fossil fuels, understandably love lower prices. For example, the average American family of four currently enjoys approximately $35 per month in savings from reduced energy costs — money that can be used for other purposes.

The impact on oil suppliers is more complex. Low-cost producers, most notably Saudi Arabia, can still function profitably at the new price range, but higher-cost producers find their profit margins severely squeezed or even eliminated. US foreign policy officials are not displeased by that development. Although some domestic oil companies find themselves under pressure, the primary impact is on such foreign producers as Russia, Iran and Venezuela. Washington is on bad terms with the governments of those countries and is not unhappy to see their economies come under increased pressure, creating possible political problems for incumbent anti-US regimes.

Indeed, the United States appears to see potential geopolitical gains in all three cases. Those beleaguered oil-producing states also sense that US officials are pleased with the current pricing environment, and some leaders even suspect that Washington engineered the precipitous plunge in prices for geopolitical reasons. Venezuelan President Nicolás Maduro explicitly charged that the Obama administration is attempting to destroy oil states that won’t accept US domination of their foreign and social policies.

Western leaders need to proceed in a sober, cautious fashion.”

Such a crude conspiracy theory is not supported by evidence. Two major factors led to the sharp decline in prices. One was a significant change in both global supply and demand trends. The past decade of high oil prices brought a surge of new sources on line, including the emergence of robust shale oil production in the United States. That development peaked in 2013 and early 2014, just as several rapidly expanding economies, especially those of China and India, experienced a marked slowing of their growth. Conditions were ripe for an oversupply of oil and a resulting price correction.

The other key factor was a Middle East struggle for political power between Saudi Arabia and its allies on one …read more

Source: OP-EDS

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