For months, American drivers have been greeted at gas stations with a pleasant surprise: Gas prices have fallen by half, dropping an average of more than $2 a gallon since their most recent peak in 2011. President Barack Obama took a moment to bask in the credit last week in his State of the Union speech: “Gas under two bucks a gallon ain’t bad,” he said.

Or maybe it is. Behind that drop is an even bigger collapse in the price of oil, from more than $100 a barrel in 2014 to under $27 this week. On Tuesday, the Dow fell 250 points amid fears about what will happen if the price of oil continues its slump, which will have effects far beyond consumers, beyond even the global market.


Oil prices drive not just economics, but geopolitics. Alliances rise and fall over petroleum. Expensive oil props up governments in Russia and Iran, provides stability in Middle Eastern countries and also offers a revenue stream to extremist groups in Nigeria and Iraq. Domestically, high-priced oil spurs innovation in alternative energy; it has also driven America’s shale boom. For all these reasons and more, the collapsing value of oil will have profound consequences around the world, with the potential to destabilize regimes, remake regions and alter the global economy in lasting and unforeseen ways.

So as the global markets process the uncertainty ahead, Politico Magazine asked a panel of leading experts on energy, economics and geopolitics to tell us: As we cheer for cheap gas, what aftershocks should we be bracing for?

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‘The oil price drop will be one of the pivotal issues of 2016, and probably beyond’

John McLaughlin is distinguished practitioner-in-residence at Johns Hopkins University at the Paul H. Nitze School of Advanced International Studies

The oil price drop will be one of the pivotal issues of 2016, and probably beyond. Oil prices are notoriously hard to predict, but every indication is that they will not go up markedly, and may drop further. Countries (like Saudi Arabia) that were once able to manipulate prices with OPEC agreements have lost that ability in part because counterparts—especially those already in deep trouble (Venezuela), or those coming back online (Iran)—want to chase market share by pumping freely. Moreover, if a major producer looks for supply-cutting allies outside OPEC, they will trigger a catch-22 phenomenon: If prices go up, it will re-energize U.S. shale entrepreneurs, who have cut back investments due to low oil prices, but who are agile enough to reenter the market quickly—pushing production back up and limiting the impact of restraint elsewhere.

The political impact is likely to be strongest among countries, especially in the Persian Gulf, that have invested billions in social programs and subsidies to discourage Arab Spring-like protests. And in Russia, which needs oil prices north of $100 per barrel to meet its budget projections, the time-honored response to economic hardship is to mobilize nationalist sentiment with foreign adventures, one of the multiple motives for Putin’s plunge into Syria.

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‘What keeps the Middle East’s countries together … when the oil money runs out?’

Ian Bremmer is president of the Eurasia Group

Geopolitically, the impact of low oil prices is concentrated in the Middle East, where political structures are brittle and based on oil wealth-supported patronage. Across the region, there are immediate and direct security threats without any social, political or economic reform processes in place to address the challenges these regimes face from the inside. What keeps these countries together—as well as those that rely on them for support—when the oil money runs out?

The United States, China and Japan, the world’s three largest economies, benefit mightily from being far away from those tensions. Europe, not so much.

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It could become ‘the mother of all oil crises’

Gal Luft is co-director of the Institute for the Analysis of Global Security

High gas prices dominated the past three presidential elections, and encouraged politicians to address one of America’s most notable vulnerabilities: the dependence on oil as the sole source of energy powering our transportation sector. But with the collapse of oil prices, this dependency has become a non-issue, and America’s commitment to wean itself from petroleum has gone by the wayside.

We have been here before: The response to the oil crises of the late 1970s (increased oil production worldwide and enhanced energy efficiency) caused prices to fall in the subsequent decade. The party didn’t last for long. Between 1998 and 2008, oil prices rose seven-fold, triggering the Great Recession. This might happen again if the global economy snaps back from its stagnation. As long as the global transportation sector—cars, trucks, ships, planes—is married to oil, and as long as most of the world’s conventional crude reserves are in the hands of repressive regimes, it’s only a matter of time before prices head back to triple digits.

Just like the perfect storm of price-depressing factors that brought us to the current ebb, the current situation in the oil market holds the seeds of what could become the mother of all oil crises. If we veer away from trying to open the transportation sector to fuels made from resources other than oil, the party will end with a bad hangover.

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‘Now is the time for presidential candidates to tell us what they intend to do when oil prices go back up’

T. Boone Pickens is chairman and CEO of BP Capital and architect of the Pickens Plan, an energy plan for America

I have been through boom-and-bust cycles in the oil and gas industry all my life. Each one has had one thing in common: Because no political leader had the foresight to enact an energy plan when prices were reasonable, when prices went too high or low, there was surprise and distress.

The Saudis are risking everything on their misguided attempt to destroy America’s shale oil and gas industry. We have shut down thousands of rigs and shed 200,000 jobs. New investment is non-existent and nations around the world—from the Middle East to Central America, whose economies are wholly dependent on oil exports—are on the brink of economic collapse.

It doesn’t matter whether oil bottoms out at $29 or $27 a barrel. What matters is that, for the first time in a half-century, we look over the horizon and plan for the day when supplies begin to thin, when economies begin to recover and when oil prices begin to move back up.

Now is the time for presidential candidates to tell us what they intend to do when oil prices go back up, probably very quickly. Waiting until that happens and responding with shock and a demand for congressional hearings is just not enough.

It’s always good to have a plan. How about we start with a North American Energy Alliance?

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The dip ‘may help strengthen the long-term prospects of alternative energy’

Dan Esty is Hillhouse professor at Yale University

Many energy market experts see $30 barrels of oil as a threat to clean energy investments, particularly renewable power projects. But this conclusion reflects too narrow a view of the world. Just as today’s low oil price is a function of the forces of supply and demand at a particular moment in time, the market for renewable power has various supply and demand pressures that shape the flow of investment into wind power, solar arrays and other kinds of alternative energy. Thus, while a low oil price raises the bar on what it will take to make a renewable power project cost-effective in the coming years, the December 2015 Paris Agreement on climate change offers a dramatic countervailing signal to clean-energy markets, promising a dramatic increase in the demand for clean energy over coming decades.

As a result, investment in renewable power remains robust. In fact, the likely short-term drop in fossil fuel costs may help strengthen the long-term prospects of alternative energy. If the developers of wind, solar and other alternative energy projects are forced to cut costs, their technologies will be more cost-competitive over time. When you hear that cheap oil sounds the death knell for clean energy, don’t bet on it.



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‘Good for American consumers and U.S. foreign policy’

John Deutch is an emeritus Institute professor at the Massachusetts Institute of Technology

Massively lower oil and gas prices are good for American consumers and U.S. foreign policy. That will be true for as long as the prices last, which will likely be one or two more years, doubtfully for five years, and almost certainly not for a decade.

But the low prices have a cost, too, and the stresses they cause are not hidden: Increased consumption of carbon-emitting fossil fuels, lower profits for private oil companies, major challenges for firms seeking to introduce clean-energy technologies and economic difficulties for major resource holders account for just some of the strain.

Some countries most affected by the low price of oil—Russia, Saudi Arabia and Venezuela, most notably—may face political instability as a result. It is difficult to predict whether those changes will lead to political shifts to the left or right, but they’re unlikely to affect the flow of oil and gas to world markets.

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These prices ‘spell the downfall of frail governments’

Terry Lynn Karl is professor of Political Science at Stanford University and author of The Paradox of Plenty: Oil Booms and Petrostates

Brace yourself for another stomach-churning ride. While predicting changes in the price of oil is a fool’s errand, at least two volatile scenarios lie ahead, and neither is promising. On the one hand, oil prices are likely to stay unacceptably low through 2016. On the other, today’s bust is likely to lay the basis for a sharp price spike down the road.

Today’s oil glut is different from those of the past: It is due to the near-doubling of U.S. production of shale oil since 2009, as well as the response of Saudi Arabia and other petroleum exporters to this unwelcome competition. In the short term, the lifting of sanctions against Iranian oil will not help. While prices in the $20-30 per barrel range were once considered beneficial to the economy and the stock market, this is no longer the case. Low prices have led to painful budget cuts in North Dakota, Texas, Louisiana, New Mexico, Alaska and California; a $300 billion decline in capital investment in future extraction this year alone; the bankruptcies of dozens of energy companies; and the undercutting of incentives to build alternative clean energy.

Most immediately, low prices are a catalyst for the rise in global conflict. Cheap oil translates into huge revenue losses and increased poverty, especially for Russia, Brazil and Mexico but also for Canada. In the 10 OPEC countries where oil comprises more than 85 percent of export revenue, the consequences are especially dire. Where regime stability rests on a classic “oil pact” (that is, the provision of economic benefits to key constituencies in exchange for political support or, at least, passivity), low prices create a toxic mix of weak currencies, inflation, growing debt, budget and trade deficits, rising food prices, cuts in essential services and soaring poverty.

Such a grim prognosis traditionally spells the downfall of fragile governments—and, sometimes, even regimes that appear stable. In Venezuela, which is already in a constitutional crisis, this year’s projected 10 percent economic contraction will plunge its extremely polarized population into even more intense civil conflict. The already dangerous situation in the Middle East and North Africa will be intensified. Because national boundaries in that region are not resolved and political institutions are crumbling, the grim economic forecast for oil-exporting governments makes them less capable of appeasing their populations or securing their oil facilities and pipelines in the face of vicious insurgencies. The Islamic State, for example, lives off the earnings from oil fields in Syria and Iraq, and similar dynamics fund Boko Haram in Nigeria and al Qaeda affiliates in Central Asia and the Caucasus.

Ironically, one likely impact of this oil glut is a future price spike. Despite all the current hype, only a relatively thin margin separates surplus from shortage. Global crude oil production has already dropped substantially, with U.S production falling to 2008 levels. The delayed actions of major producers like Chevron and ExxonMobil, which are holding off planned large-scale oil projects—and, hence, millions of barrels of future supply—has the potential to fuel a surge in prices as early as next year. And widespread conflict in oil regions—exacerbated by low and unstable oil prices—could significantly disrupt supply at almost any time.

Oil-related violence underlies almost all of today’s major hotspots, even those conflicts that appear solely ethnic or religious in nature, including the Syrian Civil War and its spillover into Iraq, growing tensions between Iran and Saudi Arabia, and the continued civil unrest in Yemen, Afghanistan, South Sudan, Nigeria, Algeria, Somalia, Libya and the Sahel, Russia and the Ukraine and Venezuela, to name a few. Many of these governments—including, notably, Russia and Saudi Arabia—have every incentive to take aggressive nationalist political action abroad to deflect attention from deteriorating economic conditions at home.

Whether oil prices stay too low or suddenly spike, their very volatility perilously whiplashes both winners and losers, destabilizes economies and polities and encourages war—a compelling reason to look for new sources of energy, just in case climate change alone was not enough reason to get off the fossil fuel roller coaster.

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‘This is an ideal time for the U.S. to shape an agenda of its own in the Middle East’

Stephen Kinzer is a senior fellow in International and Public Affairs at the Watson Institute of International & Public Affairs at Brown University

One of the great weaknesses of American foreign policy is the glacial pace with which it changes as the world changes. Radical reordering of the global energy market gives the United States tantalizing new foreign policy options. If history is any guide, we will not consider them. Instead, we’ll remain wedded to policies of the past.

For decades, we had to embrace the foreign policy agendas of Persian Gulf sheikhs because we needed their oil and their support in our confrontation with the Soviet Union. The drop in oil prices and sharp rise in domestic production—along with the end of the Cold War—freed us from that bondage, but we choose to remain trapped. This is an ideal time for the United States to shape an agenda of its own in the Middle East, one that embodies our own security needs rather than those of our partners.

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It could drive Russia and Iran closer together, and strengthen Saudi-U.S. ties

Dennis Ross is the William Davidson fistinguished fellow at the Washington Institute for Near East Policy

There is no reason to expect that oil prices will rise any time soon. The Saudis will keep producing at high rates—not just to preserve market share and deny the Iranians any excessive benefits from sanctions relief, but also to reduce incentives to keep rigs operating, investing in new pipelines and spending on exploration of new fields. The Saudis expect that in time, this will affect supply and bring the price back up. It requires patience on their part because it could well take 2-3 years to rebalance the market the way the Saudis expect.

The Russians and Iranians will surely suffer from the low oil prices. In the case of the Russians, this could lead to increasing coercive pressure on the Saudis. Will this give the Russians additional incentives to team with the Iranians to apply direct and indirect pressure on the Saudis? It could. It surely gives the Saudis a stake in preserving close ties with the United States. While the Saudis don’t have much trust in the Obama administration, they will not let their ties to us diminish, and they’ll look to the next administration to strengthen U.S. commitments to their security.

Iranians drivers refuel their vehicles at a gas station in Tehran on January 19, 2016. | Getty

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‘Low oil prices are unambiguously good for global welfare’

Robert N. Stavins is Albert Pratt professor of Business & Government, John F. Kennedy School of Government, Harvard University, and director, Harvard Environmental Economics Program

When one examines virtually any significant price change from an economic perspective, there inevitably seems to be both good and bad news. That’s the case with the fall in crude oil prices. There can be a major impact on the U.S. motor fuels sector, where the market for biofuels is negatively affected by low conventional gasoline prices. These impacts must be somewhat muted by public policies that subsidize the use of biofuels. Low gasoline prices have also resulted in decreased demand by consumers for motor vehicles with high fuel efficiency, and sales of SUVs and pickup trucks have rebounded from previous lows. When prices are low, people drive more and use more fuel, which means more emissions and congestion.

There is upside to these changes in crude oil markets: Low oil prices are unambiguously good for global welfare. Consumers will see an increase in disposable income, amounting to nearly $2,500 per U.S. household annually, according to Stephen Brown. If we account for the income losses to U.S. oil producers, the net gain per U.S. household amounts to a bit more than $800 per year, with benefits accruing disproportionately to low-income households.

With gas prices low and natural gas supplies holding down electricity prices in the United States, there has never been a better time to introduce progressive climate policies in the form of carbon-pricing, whether via carbon taxes or through carbon cap-and-trade. Unfortunately, none of us should hold our breath waiting for that to happen.

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‘The game is getting dangerous—not just for the Saudis, but for the entire world’

Amory B. Lovins is cofounder and chief scientist at the Rocky Mountain Institute

The rotted remains of primeval swamp goo that fuel four-fifths of today’s economy are on their way out, and not a moment too soon. Yoyoing oil prices obscure a striking underlying trend: Like whale oil in the 1850s, petroleum has become uncompetitive even at low prices before it becomes unavailable even at high prices. Oil companies are now even more at-risk from market competition than from climate regulation, because over the long run, more of their oil is unsellable than unburnable. In 2015, modern renewable energy sources set new records—up 4 percent in investment and 30 percent in capacity additions, the gap reflecting renewables’ plummeting prices. Persian Gulf states are already switching their own power supplies to solar because it’s cheaper than local oil. Even if the sheikhs, with their vast financial reserves, do ultimately crush competition from fracking, that will have the side effect of reducing their U.S. natural-gas co-production—making gas costlier and renewables even more attractive.

But a word of caution: What’s sinking oil prices is Saudi Arabia’s logical refusal to give up market share to higher-cost competitors by unilaterally cutting its own output. Oil exporters suffering from low prices now include not just bystanders like Nigeria and Venezuela, but also Iran, newly empowered by the lifting of nuclear sanctions and eager to earn more by resuming oil exports. Now Russia is in the neighborhood, too—militarily formidable, the master of covert, disguised and proxy warfare, and likely to run out of money this year or next. Much higher oil prices and the lifting of Ukraine-spawned sanctions by the West are vital to Putin’s political survival, which he engineers by seeming to protect his people from the crises he creates. Either Russia or Iran, perhaps covertly or deniably, could use cyber-attacks to cripple Saudi Arabia’s highly centralized oil capacity. Over decades, Saudi forces have defeated all such attacks, but the attackers need to succeed only once. The game is getting dangerous—not just for the Saudis, but for the entire world.

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‘Peak Oil may have already happened’

Hal Harvey is CEO of the Energy Innovation LLC

Low oil prices help America in two ways, hurt us in one and have surprisingly little effect in a third respect. Many of America’s geopolitical adversaries—Russia, Iran, Venezuela—are substantially weakened as they lose their source of cash. Second, the plummeting price of oil eliminates demand for many exotic, dirty oil sources, such as tar sands, and will slow much of the extraction in the United States, leaving America and the world with substantially fewer climate and environmental problems. Renewable energy, which has seen its fortunes mount in the electricity-generation sector, will be largely unaffected because oil and electricity are almost entirely separated in America. Solar, wind and energy efficiency will continue to prosper.

Solar panels at the Utah Red Hills Renewable Park. | AP Photo

The downside? After 25 years of practically ignoring fuel efficiency technologies, the auto companies got serious about innovation during the early years of the Obama administration. Already, progress has been substantial, but low oil prices may cause both consumers and manufacturers to lose interest. Short-term thinking would have punishing long-term costs.

It’s worth noting that “peak oil” may have already happened: not because of supply shortage, but because of moderated demand. It has happened with coal, and oil is likely next.

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‘Expect greater repression in Iran 2016 and 2017’

Elliott Abrams is a senior fellow for Middle Eastern Studies at the Council on Foreign Relations

In the Middle East, cheap oil is already forcing the new Saudi leadership to speed up reforms that have been needed for years: reducing gas subsidies, raising tax revenue and cutting infrastructure spending. The reduced revenues for Egypt’s Gulf donors—primarily Saudi Arabia, Kuwait and the UAE—will mean reduced aid to Egypt, whose economy badly needs it. That means trouble for President Sisi and Egypt’s government.

The upside of lower oil prices is that it gives Iran and Russia less money to play with. Putin sees his window for geopolitical gains closing as revenues diminish and the Obama administration’s conflict aversion with Russia disappears. That suggests Putin may be especially aggressive in 2016. For Iran, low oil prices mean that any economic boost from the end of sanctions will be far smaller than expected, which may well lead to a public outcry. Expect greater repression in Iran in 2016 and 2017.

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‘Policymakers have to adjust to low oil prices’

Sarah Ladislaw is director and senior fellow, Energy and National Security Program, Center for Strategic & International Studies

Well over a year and half into the current oil market downturn, the consensus view among industry analysts is that oil prices will be lower for longer, reflecting the belief that the fundamental drivers of low prices—oversupply and sluggish demand—will take a while to come into balance. Sustained low oil prices can have lasting effects resulting from adjustments countries or companies make to weather the storm. The most prominent example is the capital expenditure cuts made by oil producers around the world: These cost-cutting measures often set up the kind of underinvestment in developing new oil supplies that can lead to a price spike down the road.

Oil revenue dependent economies can often absorb short-term economic pain from oil price downturns, but over a sustained period of time, adjustments beyond fiscal austerity often become necessary. A number of countries have already announced efforts to reform oil-related subsidy programs, including the UAE, Kuwait, Saudi Arabia and Nigeria. Whether these reforms stick is another matter, but should they succeed, those economies and the oil market dynamics will shift.

Policymakers also have to adjust to low oil prices. Countries aiming to move their economies away from oil and fossil fuels will find it harder for alternative energy sources to compete. While renewable energy has made significant strides in bringing down costs, low oil prices undercut both the market for these technologies and the support for policies that bolster them.

It is important to remember that oil markets are cyclical and that today’s environment will not last forever. Countries and companies should look to act in ways that put them on even more solid footing when oil prices recover.

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‘Global trade withers’

Seth Kleinman is head of European energy research at Citigroup

The dark side to low oil prices is starting to reveal itself both at home and abroad. In America, there is the direct economic impact of thousands of layoffs and the collapse in oil and gas capital expenditures (which accounted for almost 15 percent of overall U.S. capital expenditures in 2013). But these losses don’t account for oil’s massive ripple effects on trucking, construction, metals and the army of businesses that partner with the oil and gas industries.

Internationally, low oil prices are wreaking havoc with commodity-exporting nations, including manufactured good exporters like China. Since these oil exporters were enormous importers, global trade withers.