Amidst the torrent of seemingly endless negative geo-political and security events overseas, comes a glimmer of good news…now I am admittedly outside my comfort zone when evaluating commodities such as oil prices, nor am I an economist, but a recent piece by CNN did make me sit up and take notice (and admittedly, smile).
In an article entitled “These countries are getting killed by cheap oil”, Jesse Solomon at CNN maps out the price point per barrel for oil producing countries to balance their budgets. The article includes a chart that plots the break-even price. For example, at the high end, Iran has oil budgeted at $135 per barrel. Venezuela at $120; Russia $100; and Saudi Arabia $95. Based on their chart, which pegged the price of oil at $83 per barrel, only Kuwait can balance their budget at current prices. It is worth noting that the price of oil fell even further earlier this week, to under $80 a barrel – hitting 3 year lows – before rebounding back to $83.33 when the markets closed on Wednesday.
The implications of cheaper oil undoubtedly have significant geo-political ramifications. Should prices remain at current levels, there will be clear winners and losers. For starters, Russia, Venezuela and Iran will suffer. To what extent and for how long is unclear. But the CNN article cites a former commissioner of the Federal Energy Regulatory Commission (FERC), Branko Terzic: “that depressed prices might bring Russia to the negotiating table over its actions in Ukraine.” Perhaps a bit optimistic, but coupled with sustained US/EU sanctions, it will undoubtedly sting and potentially blunt the impact of the Kremlin’s heavy-handed strategy to use energy as a political weapon.
Moreover, in addition to the countries listed above (and not mentioned in the article) is another big loser: ISIS. As David Cohen, Undersecretary for Terrorism and Financial Intelligence at the Department of Treasury, underscored in a recent speech, ISIS hauls in $1 million per day from oil smuggling and sales on the black market. While it is doubtful that ISIS spends too much time worrying about balancing budgets or maximizing the production of anything other than hate and terrorism, they do have real costs – especially running a terrorist enterprise that spans such vast territory. There are terrorists to feed, train, equip and recruit. In addition to other means of combating their finances and denying them sources of and access to the international financial system and revenue, cheap oil hurts ISIS. Buyers are less likely to purchase oil from ISIS’ criminal networks and risk sanctions – or worse – when cheap oil is available elsewhere. Perhaps a recent alleged help wanted ad placed by ISIS, seeking an ideologically suitable candidate (with a $225,000 salary) to run an oil refinery is an indicator that the heat is on.
On the positive side of the ledger, the beneficiaries of lower oil prices include India, China, the United States, Europe and pretty much every other net importer with a little more money in hand to boost spending and economic growth.
Closer to home, it seems to me that now is a good time to double down on policies and actions to spur energy independence and security. While there is a lot of discussion swirling around about new mandates post-elections, this should be near the top of the list – and it should have bi-partisan appeal — as the solutions will require a combination of approaches ranging from continued exploration and development of domestic energy to increased investment in alternative and renewable forms of energy. After all, in addition to stimulating the American economy and generating jobs, it has the added benefit of shortening the purse strings of the Kremlin and the Ayatollahs. Sounds like a win-win to me.