You’ve probably noticed that the smelly and slippery substance that powers the global economy has become extremely cheap recently. Much to the average consumer’s delight, the price of oil has tumbled, at some points touching record lows not seen in many years. While cheap gas is a fantastic economic prospect, a prolonged period of low oil prices could be a political game-changer for oil-producing societies. Countries and regions dependent on oil dollars are being bludgeoned by the more than 50 percent crash in prices, and they could be in for a very painful readjustment. The forecast is dim for these oil-dependent governments, as it is widely expected that oil prices are going to stay low for quite some time.
The biggest story of the past decade in the oil world went down right here in the United States. Until very recently, Saudi Arabia was the world’s largest oil producer. Last year, that coveted top spot was seized by the United States, largely because of the oil shale revolution in places like Texas and North Dakota. The American oil bonanza flooded the world market, driving down prices ever-downward, culminating in a historic crash. Even with low oil prices, production has not declined as oil producers don’t want to lose market share. They’re continuing to pump in the face of really low prices, which is only further favoring conditions for a long-term slump.
The crash has left oil producing countries scrambling to figure out how they’re going to weather this storm. Fortunately, many of them have rainy-day funds that they’ve assembled during better times. But countries can only sustain lopsided budgets for so long. If they stay low for several years, low oil prices will eventually bankrupt societies around the world. Even oil powerhouse Saudi Arabia only has about five years of reserves before it runs out of cash. That’s a pretty scary forecast considering all of the instability we’re already seeing in the Middle East.
How low oil will go is anyone’s guess. Some say another 50% decline could happen. That would mean 99 cents a gallon for gas in America isn’t out of the question. Even if a rebound happens, it’s going to have to be a big surge to bring back solvency to oil producing nations. The International Monetary Fund says Russia, Saudi Arabia, Nigeria, Iran, Algeria, and Venezuela all need a barrel of oil to cost more than $100 to balance their budgets. That’s more than double the price that a barrel goes for today.
Many of these countries have become addicted to windfall profits. Considering production costs are only about $10 a barrel in Saudi Arabia and about $17 in Russia, these countries are going to have to learn to go about running their societies without insane profit margins. These countries will have to learn to spend less or continue to raid their piggy banks.
Here at home, low oil prices are already inflicting budgetary pain on oil-dependent states such as Texas, North Dakota, Oklahoma, Wyoming, Alaska and Louisiana. Regional recessions and spikes in unemployment could already be in the cards for these areas who have become accustomed to an economy lubricated by oil earnings. Mexico and Canada are also feeling the pain, because the price of production is higher in North America. That means that razor-thin profit margins can quickly turn into massive losses during oil price swings.
For everyone else, oil’s tragic fall isn’t so tragic. Saving money at the pump is a welcomed development considering many Americans have been clobbered by decades of stagnant wages. Low oil prices could be exactly what the doctor ordered to finally put the Great Recession and the underwhelming recovery behind us. The last time the United States enjoyed a cocktail of sustained low oil prices and record low-interest rates was during 1990’s. Those conditions laid the groundwork for what many consider the most economically successful decade in American history.