Oil will roil everything

If sub-$90 oil persists, look for much nervousness even in Riyadh.

There’s a very good chance that we have already seen more or less the average price of oil for the year—$50 to $60 a barrel. (I’ve made a wager with colleagues on the energy beat that Brent crude will end 2015 at $57.75 a barrel.)

We have already weighed in on how these prices will shake up geopolitics this year: In brief, OPEC’s richest countries—Saudi Arabia, Kuwait, Qatar—will suffer a hit, regardless of their current game faces, but have no choice other than to see their low-price strategy through to its conclusion. This strategy seeks to drive higher-cost rival producers out of the business—those in the US shale oil patch, Canadian oil sands, and Brazilian deepwater crude. The strategy is guided in large part by the Stay in Power Rule, which states that political leaders, regardless of their locality, will do what it takes to keep their jobs. In this case, the longer that shale producers in particular are permitted to build market share, the greater the threat to incumbent drillers in the Persian Gulf.

But along the way, these rich countries will be bruised by the loss of income and draining down of their prodigious cash reserves. Saudi Arabia in particular claims it’s prepared to withstand cut-rate prices for up to five years, but this reeks of bravura: If sub-$90 oil persists for two years—and possibly before—look for much nervousness and a change of tactics even in Riyadh.

As for the poorer OPEC members—such as Iran, Nigeria, and Venezuela—they have barely any cash reserves about which to become agitated. Nigerian officials specifically have observed the Getting Rich Rule all these years, feeding from the trough while large swaths of the population have gone without electricity.

But now that the commodity boom is over, Staying in Power will guide the behavior of these lesser OPEC producers. Low oil prices and tightened government spending can lead to public unrest, in line with the Injustice Rule, which explains the public reaction under conditions of perceived economic and judicial unfairness. Look for a combination of reactions: an initial impulse by governments to crack down on unrest, but eventually—the longer that prices stay low—a move to greater fiscal discipline and economic diversification. What not to expect: utter collapse. This is because, even in times of desperation, nations tend to Muddle Along.

Source: qz.com