War Stories

What Happens if Oil Doesn’t Recover?

If demand doesn’t pick up this summer, we could see major shifts in global power.

View of a large outdoor sculpture of a hand holding up an oil derrick.
View of the Peace Monument sculpture outside the headquarters of the oil company PDVSA in Caracas, Venezeula, on Wednesday. Federico Parra/Getty Images

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The collapse of the oil market—which triggered the bizarre, if brief, sight of subzero futures prices this week—might unleash something more serious and enduring in certain regions of the world in the coming months: socioeconomic breakdowns, political disruptions, and shifts in the balance of power.

Consider these statistics. In Saudi Arabia, oil revenues account for 60 percent of the country’s GDP, two-thirds of the government’s budget, and nearly three-quarters of its exports. In other states in the already-turbulent Middle East, including Iran, Iraq, Qatar, and Kuwait, the dependency is greater still. In Russia, petroleum accounts for one-third of GDP, half of the budget, and two-thirds of exports.

(By contrast, oil accounts for just 8 percent of U.S. GDP—a significant share, with a bruising effect in certain states, especially Texas, but not the looming force that it is in many other countries.)

With coronavirus lockdowns causing a drastic reduction in demand for oil, many of these countries won’t be able to pay their bills, bribe their military officers, or provide basic social services to their populations.

Bruce Riedel, a former CIA analyst, now a senior fellow at the Brookings Institution’s Center for Middle East Policy, told me this week that the Saudis in particular “are facing the perfect storm—weak oil, prices, pandemic, and quagmire in Yemen.” The combination, he said, “will impact stability” inside Saudi Arabia and possibly in throughout the region.

As for Russia, the rise and fall of regimes and revolutions have sometimes moved in tandem with the rise and fall of oil prices—the implosion of the Soviet Union was, in many ways, brought on, or at least accelerated, by a huge drop in oil prices; by the same token, the relative stability of President Vladimir Putin’s reign, especially during the past few years, has been facilitated by high oil prices. Putin, who knows his country’s history well, must be haunted by the possibilities in his twilight musings.

Philip Gordon, a former Middle East official in the National Security Council, now a senior fellow at the Council on Foreign Relations, cautions against overstatement. “Obviously, this is a big deal,” he told me, “but basic geopolitical relationships don’t easily change.” For instance, sanctions against Iran have cut its oil revenues by tens of billions of dollars, but its policies and position in the Middle East haven’t changed much.

Saudi Arabia and Russia, the two biggest oil-dependent states, are also cushioned by sovereign wealth funds—Russia’s amounts to $150 billion, Saudi Arabia’s to more than twice that sum—which they can draw on to make up for losses of revenue.

Even so, the decline in oil prices just since the virus broke out has compelled Putin to postpone several social spending programs that he’d hoped would stimulate a stagnant economy and quell growing protests. It has also put a huge crimp in Crown Prince Mohammed bin Salman’s efforts to diversify Saudi Arabia’s economy away from oil—a campaign that for now must be funded, ironically, by oil export revenues.

“The trillion-dollar question is how long this goes on,” said James Davolos, a hard-assets analyst at Horizon Kinetics, a financial research and investment firm. “If there’s a massive snapback in demand this summer, these countries will weather the storm. If the lockdown is prolonged, we may see very big fireworks.”

A country’s tolerance for lost revenue is often measured by its “breakeven point”—the price of oil that a country needs to balance its budget. Russia’s breakeven point is $42 per barrel. Saudi Arabia’s is $84 per barrel. Over the past decade, this hasn’t been a huge problem: The price of crude oil has fluctuated between $60 and $100 per barrel. But earlier this week, the price plummeted to below $16 a barrel. On Thursday, after what some are calling a “stabilization,” oil goes for the still staggeringly low $21 a barrel.

Comparatively wealthy Russia and Saudi Arabia are hardly in the toughest spots. Libya’s breakeven point is $100 per barrel. Iran’s is $195 per barrel. And the Middle East is hardly the only region facing trouble. Nigeria, which boasts the fastest-growing economy in Africa, has a breakeven point of $144 per barrel. Its government depends on oil for 60 percent of its revenue and 90 percent of its foreign exchange. If the fallout from COVID-19 persists, Nigeria could go bankrupt.

Then there are the poorer countries of Latin America. Venezuela, already ravaged by poverty and corruption, is almost completely dependent on oil for its revenue. Ecuador, where COVID-19-infected corpses are lining the streets, will see its economy shrink by at least 4 percent because of falling oil prices alone.

Previous plunges in the oil market have had an upside: They’ve meant lower retail prices for gasoline, saving consumers money and spurring spending throughout the economy. That isn’t happening during this downturn. It’s a plunge driven by dried-up demand. People aren’t driving at all; they’re not going anywhere to spend money. It is, as the Wall Street Journal put it, a crash without a silver lining. And we haven’t yet nearly seen the extent of its toll—not just on life, death, commerce, the arts, and the sense of community, but also, especially elsewhere in the world, on politics, war, and peace.