Cheap-Oil Era Tilts Geopolitical Power to U.S.
Comment of the Day

November 19 2014

Commentary by David Fuller

Cheap-Oil Era Tilts Geopolitical Power to U.S.

Here is the opening of this topical article from Bloomberg:

A new age of abundant and cheap energy supplies is redrawing the world’s geopolitical landscape, weakening and potentially threatening the legitimacy of some governments while enhancing the power of others.

Some changes already are evident. Surging U.S. oil production enabled America and its allies to impose tough sanctions on Iran without having to worry much about the loss of imports from the Middle Eastern nation. Russia, meanwhile, faces what President Vladimir Putin called a possibly “catastrophic” slump in prices for its oil as its economy is battered by U.S. and European sanctions over its role in Ukraine.

“A new era of lower prices is being ushered in” by the U.S. shale oil and gas revolution, Ed Morse, global head of commodities research for Citigroup Inc. in New York, said in an e-mail. “Undoubtedly some of the geopolitical changes will be momentous.”

They certainly were a quarter of a century ago. Plunging oil prices in the latter half of the 1980s helped pave the way for the breakup of the Soviet Union by robbing it of revenue it needed to survive. The depressed market also may have influenced Iraqi leader Saddam Hussein’s decision to invade fellow producer Kuwait in 1990, triggering the first Gulf War.

Russia again looks likely to suffer from the fallout in oil markets, along with Iran and Venezuela, while the U.S. and China come out ahead.

David Fuller's view

There are several very important points here, which will not surprise subscribers of this service. 

1. This is the beginning of a secular change in which countries which receive most of their revenue from crude oil exports are losing their century-long control over global energy prices.

2. The economies of countries that are mainly crude oil exporters will underperform until they are able to reinvent themselves profitably.

3. The global economy will benefit from lower crude oil prices because there are far more oil importing than exporting countries.   

4. The USA is a major beneficiary because its technological lead has enabled it to become the first highly developed economy to become virtually energy independent in the 21st century. 

5. Most other developed and developing economies have the potential to reduce both their energy dependence and also their overall cost of energy by following the USA’s lead.

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