A Growing Dependence on Oil Money
In the United States, we are accustomed to viewing dependence on oil from a user’s perspective. However, for many oil exporting nations, the “producer’s curse” creates oil dependence of an entirely separate nature. As a result, the increasing economic perils that they face could spell serious trouble ahead for the U.S.
This week, Iranian President Mahmoud Ahmadinejad said that Iran needed to make “structural changes” to its economy in order to lessen the bite of international sanctions targeting its oil sector. Iran depends on oil for more than 50% of its state revenues. As oil exports have dropped precipitously from 3.7 million barrels per day (mbd) to just 2.7 mbd as a result of the sanctions, revenues have taken a massive hit. Absent expected inflows of oil money, Iran can’t pay its bills.Iran is not unusual among leading oil producing nations in its strong dependence on oil revenues. Also this week, Saudi Arabia’s oil minister said that the Kingdom was aiming to keep oil prices above $100 per barrel in order to meet growing demands for public spending. Russia and Venezuela are also increasingly dependent on high oil prices – more than $100 per barrel – to meet revenue needs. The chart below offers a glimpse of the extent to which many oil-producing nations are kept financially afloat by petrodollars. So who are the customers that are making all of this possible? The United States, for one. Since 2007, the U.S. has accumulated a $1.7 trillion trade deficit in crude oil and petroleum products, but even this direct transfer of wealth doesn’t tell the whole story. Even if American consumers don’t buy oil directly from certain producers, such as Iran, the nation’s massive demand for oil sustains global prices at high levels, filling the coffers of all oil sellers. As OPEC member states become even more dependent on even higher oil prices to sustain growing public spending demands – and in some cases, potentially the government itself – post-Arab Spring, the landscape becomes ominous for nations like the United States, whose economies are adversely affected by rising oil prices. OPEC members produce about 40% of global oil, and its exports account for about 60% of the oil traded internationally. How much recourse would the United States and other consumers have if OPEC members collectively decided that domestic considerations necessitated oil prices at 10, 20, 50, or 100 percent more than current levels? It is generally presumed that the days of cheap oil are behind us. However, producers also appear to be reaching a point at which oil revenue is becoming less of a windfall and more of a revenue stream nearly stretched to its limit. Moving forward, therefore, we may begin to see oil prices determined less by consumer demand for petrol, which has already driven prices up, and more by supplier demand for petrodollars, which could result in completely unpredictable price spikes. Every U.S. recession for 40 years has coincided with a spike in oil prices, and, due to the non-free nature of the global oil market, many of these price-spikes and corresponding economic downturns had nothing to do with natural supply and demand dynamics. If the budgetary needs of oil producers lead to intensifying market manipulation and artificiality, dependent consumers – like the United States – will be living this reality again.
December 6, 2013
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