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Crude Reckoning: The Far-Reaching, Unexpected Effects Of Falling Oil Prices

  • Frud Bezhan

Falling oil prices is good news for Western consumers, but many oil producers are feeling the pinch in a big way.

Falling oil prices is good news for Western consumers, but many oil producers are feeling the pinch in a big way.

What do a Kurdish Peshmerga fighter, a Russian villager, and an American miner have in common? They have all been adversely affected by plunging oil prices.

For many Western consumers, plummeting prices mean paying less to heat their homes and drive their cars. But cheap oil, at its lowest price in over a decade, is also having far-reaching and unexpected geopolitical and economic consequences around the world.

War On Islamic State

Low oil prices complicate Iraq's military campaign against Islamic State (IS) militants, who control large parts of the north and west of the country.

The Kurdistan regional government, a semiautonomous entity in northern Iraq that is heavily dependent on oil revenue, has accumulated $18 billion in debt, threatening its ability to pay the salaries of its security forces and public workers. That means trouble for the fight against Islamic State because the Kurdish Peshmerga has been one of the most successful in beating back the extremist group.

In cash-strapped Iraq as a whole, the oil-price plunge has caused severe problems. The country depends on oil for 95 percent of its budget, meaning price drops can affect everyone and everything.

In terms of Iraq's challenging effort to turn back IS, less cash impedes Baghdad's ability to buy military equipment, pay its security forces, and rebuild cities that have been wrested from IS fighters. The situation could leave Baghdad to look to other interested parties to help fund the fight.

"Iraqi and Kurdish fighters have not been paid for a few months," says Justin Dargin, a Middle East energy expert at the University of Oxford. "At the same time, there is a very strong international effort to confront [Islamic State] so Iraq is not going alone in this. What we will see is an effort from the United States and perhaps the European Union to plug in the budgetary shortfalls when it comes to security-related expenditures."

The United States granted the Iraqi government $1.6 billion in security assistance for 2015.

In addition, Baghdad obtained a $1.7 billion loan in July 2015 from the World Bank for economic development.

Islamic State's War Machine

Oil is one of the main sources of revenue for the extremist group, which is believed to have generated tens of millions of dollars a month by producing and smuggling Syrian and Iraqi oil.

Amid the claims, Washington and Moscow have intensified their pressure on the group by targeting infrastructure that allows the group to produce oil in Syria.

In addition to military tactics targeting production capability, analysts say low oil prices will also impact IS's ability to generate cash.

"[Islamic State militants] transport oil and provide security as well for certain middle men. It's deeply integrated in the transport of oil into southern Turkey," says Dargin. "There are people buying that oil on the other side of the Turkish border. I would say that is where [IS] obtains the majority of its revenue."

Saudi Soft Power

Sinking oil prices not only pinch Saudi Arabia's budget, they could crimp Riyadh's ability to project its influence in its own backyard.

Saudi Arabia, the world's biggest producer of oil and among the globe's richest countries, is under severe economic strain. Riyadh is planning cuts to construction projects and introducing new taxes to help sustain its lavishly funded social-welfare system. One surprising move, for example, saw the country cut gasoline subsidies for the first time. Should things continue on their current course, the International Monetary Fund predicts, the monarchy could go bankrupt in five years.

"Saudi Arabia is in a far better financial position than almost all the other OPEC (Organization of the Petroleum Exporting Countries) countries in terms of having plenty of money in the bank and having very low debt," says Spencer Welch, oil markets analyst at IHS Jane's.

"But that doesn't mean that they're not going to change and adapt," says Welch, adding that he doubts Riyadh would cut funding for foreign-policy commitments, or defense and security spending.

One area where there could be cuts, however, is in the arena of soft power: a reduction of aid projects in foreign countries, for example, or less financing for media organizations, think tanks, academic institutions, religious schools, and charities. There is already speculation that Saudi financial support for Egypt, a key regional ally, is starting to dry up.

Media Beacon Dims?

Bankrolled by oil-rich Qatar, Al-Jazeera America was launched with great fanfare in 2013 with ambitions to rival domestic heavyweights such as Fox News and CNN. After pumping hundreds of millions of dollars into its North American cable channel, however, Al-Jazeera America recently announced that it would pull the plug on April 30.

The channel, which suffered from poor ratings, explained that its business model was "simply not sustainable." But considering that a barrel of oil was selling for around $98 when the channel was launched, and is now selling for under $30, it is reasonable to assume that Qatar could not simply throw money at its effort to gain a foothold in the established U.S. media market.

Price Wars

In anticipation of the lifting of economic sanctions following the implementation of its nuclear accord with world powers, Iran's game plan has been to reap the benefits of its natural resource wealth by increasing oil exports. But low oil prices should temper Iran's expectations.

Tehran has indicated that, despite the downturn of fortune, it will nevertheless increase oil production and export as planned. In doing so, Iran will pit itself against regional rival Saudi Arabia, which facilitated the current price drop months ago by refusing to lower production, sacrificing revenue in order to preserve market share and weed out nontraditional producers. With an extra half million barrels of Iranian oil expected to flood the market following the implementation of the nuclear deal, analysts now predict a price war between the Middle East rivals.

"The Iranians have indicated that they will produce and export as much oil as they can and more or less engage in a price war with Saudi Arabia," says Dargin. "The Saudis have not restricted their production and exports, and Iran says, 'Why should we?' And Iran is in a more precarious economic situation."

"Iran will be trying to recapture its lost market share," says IHS analyst Welch. "Those buyers have been buying alternative crude and they're only going to swing back to Iran if the price is attractive, so it's going to be competition."

Shale Boom Bust

U.S. consumers will see a windfall of around $700 million a year as a result of lower oil prices, and that money is fueling stronger consumer demand.

But the low price of oil is also negatively affecting the booming U.S. energy industry. The flooding of the world market with oil has priced out U.S. shale, which is relatively expensive to produce and is seen as one of the threats that Saudi Arabia was keen on eliminating.

Shale drillers in the United States have slashed spending and tens of thousands of workers this year as prices have fallen. Last year, the International Energy Agency said low oil prices would "slam the brakes" on the fledgling U.S. shale industry.


Plunging oil prices are a mixed bag for the so-called BRIC countries (Brazil, Russia, India, and China), developing economies that were seen as being on the cusp of greatness.

Of the BRICs, China and India -- which are not net oil importers -- are reaping the benefits of cheaper prices.

But it is bad news for Russia and Brazil, both oil exporters. Tumbling oil prices have brought Brazil to the brink of economic collapse, with the world's seventh largest economy sinking into recession.

Russia has been forced to dip heavily into its hard-currency reserves and its currency, the ruble, is approaching historic lows. Moscow, which was in recession in 2015 according to economists, is running a budget deficit of 3 percent of gross domestic product this year, and the government is looking to cut 10 percent from the federal budget.

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    Frud Bezhan

    Frud Bezhan covers Afghanistan and the broader South Asia and Middle East region. Send story tips to