Brookings scholars weigh in on impacts of falling oil prices

Brookings scholars convened earlier this month to analyze the global impacts of the oil market crash.  Panelists discussed market trends influencing oil prices as well as the effects of lower demand on Iran, Venezuela, and Russia. A transcript and audio of the event is available online.

Charles Ebinger, a senior fellow with the Energy Security and Climate Initiative, stated that the fall of oil prices is not a temporary change, but a structural one. He noted that falling or static energy demand worldwide—including major importers China, India, and Brazil—combined with oil’s market share erosion over the past decade suggests that forecasts of a huge growth in oil demand may need to be reassessed.

Looking ahead, Ebinger pointed to several dynamics that he believes may transform the future of the world oil market, including the growing use of biofuels in the transportation sector, the influence of the environmental community on Wall Street evaluations of fossil fuel companies, and the possibility of downward demand due to aging populations in countries such as China and Japan. In the short term, he forecast an oil price floor of $36-38 per barrel.

Falling oil revenues in Iran: domestic impacts and the nuclear debate

Following Ebinger’s remarks, the conversation turned to the specific impacts on Iran, Venezuela, and Russia, three countries that have been particularly hard hit by low oil prices. Suzanne Maloney, a senior fellow with the Center for Middle East Policy, discussed how sanctions targeting Iran’s financial sector—particularly those since 2011—have already severely impacted its energy exports. A relatively high-cost producer, Iran’s older oil fields require capital and technology that sanctions have effectively cut off. These lower levels combined with rising production from countries such as Iraq have put Iran in what Maloney called a “very beleaguered battle for market share.”

The collapse in oil prices—and alongside oil, the price for petrochemicals—has further decreased Iran’s export revenues and exacerbated its economic problems. Maloney discussed the political fallout for Iran’s moderate president, crediting the government for efforts to mitigate the economic impact by revising the budgeted oil price from $72 to $40 per barrel.

For U.S.-Iranian nuclear negotiations, Maloney said that the falling oil prices may not bring Iran to a deal but can positively influence Tehran’s approach to the talks. She cited President Hassan Rouhani’s recent public advocacy in favor of international engagement and orienting Iran’s foreign and domestic policies to support economic growth. While she noted that the Supreme Leader explicitly disagreed, Maloney contrasted today’s situation to the sharp oil drop in the 1980s when “no one was willing to go to then Ayatollah Khomeini and say it’s time to end the war.”

Venezuela: difficult economic conditions collide with plunging oil revenue

Harold Trinkunas, a senior fellow and director of the Latin America Initiative, noted that unlike Iran, Venezuela’s leadership has shown a lack of realism in its response to the oil market crash. Echoing a recent article he wrote on the subject, he described how falling prices have been catastrophic for Venezuela’s economy.

Trinkunas pointed out that prior to the oil crash, Venezuela already had the highest inflation rate in the world, at over 50 percent in 2013. More than 95 percent of Venezuela’s foreign exchange earnings derive from oil sales, and Venezuela’s heavy, sour crude nets approximately $5-8 per barrel less than market price. When prices were in the $100/bbl range, he pointed out, Venezuela’s economy was still in trouble, adding that for every dollar the price of oil drops, Venezuela loses $775 million of earnings per year.

In response to this crisis, President Maduro has sought to persuade oil producers to coordinate to raise prices. He has also sought loans to help Venezuela manage its economic turmoil. Trinkunas believes that Maduro failed on both counts, and remains pessimistic about Venezuela’s ability to improve its economic situation in the near term.

Amidst sanctions and diminishing growth, more of the same in Russia

Clifford Gaddy, a senior fellow with the Center on the United States and Europe, spoke next on Russia. Gaddy discussed how, similar to Iran, Russia faces a difficult combination of economic sanctions—including, importantly, those on its oil and gas sector—and the oil price drop.

One of the most significant impacts of sanctions, Gaddy pointed out, is the climate of uncertainty they create for investors:  the “Russia is radioactive” mentality can potentially have huge consequences for long-term development, including in the energy sector. In the short term, however, Gaddy noted that Russia hasn’t yet seen any major political effects of the oil crisis. The ruble’s collapse has been largely due to oil prices, though the government has made a strategic choice to permit devaluation rather than using its financial reserves. While Gaddy predicts that Russia may see a GDP drop of up to 8 percent in 2015 should oil prices stay around $50 a barrel, he added that President Vladimir Putin’s regime will continue to do everything in its power to allocate shrinking rents in a way that supports Russia’s survival, sovereignty, security, and social stability.

According to Gaddy, it is unlikely that the fallout from the price decline will threaten government stability or noticeably affect its foreign policy posture. With that said, it is important to follow the domestic debate closely and watch for future developments.

Charles Edwards-Kuhn contributed to this post.