Drowning in Oil: Indicators of
Instability in a Low Price
Environment
Report by the Intelligence Analysis Practicum Team for the Defense Intelligence Agency
April 30, 2015
Researched and written by Amber Voigt, Brittany Walls, Mike McKemey, Dorian Bakogiannis,
Antje Williams, Chris Morley, Rachel Warga, and Rob Bronstein
in collaboration with Dr. John Deni.
1
Table of Contents
Executive Summary
Introduction
Explaining Today’s Low Oil Price Environment
Methodology
Conditions
Indicators
Economic
Oil-Industry-Specific
Social
Political-Military
Framework Application: Country Profiles
Iran
Iraq
Libya
Saudi Arabia
Nigeria
Russia
Venezuela
Azerbaijan
Case Studies
Case Study: Iraq
Case Study: The Soviet Union
Oil-Consumers: Vulnerabilities in a High Oil Price Environment
Oil is Power: Geographic Areas of Concern
The East and South China Seas
Eastern Mediterranean/Levant Basin
Conclusion
3-4
5-6
6-7
7-10
10-13
13-15
15
15-17
18-19
19-20
20-22
22-23
23-27
27-30
30-33
33-35
36-38
38-41
41-44
44-45
45
45-46
Appendix A: Historic Crude Oil Price Graph
Appendix B: Country-Specific Statistics
Appendix C: Country-Specific Indicator Chart
Appendix D: Acronyms and Oil Industry Definitions
47
48-51
52
53
Bibliography
54-74
2
Executive Summary
In June 2014, the world market price of crude oil began a steady decline from $115 per barrel (pb) to its
low point of approximately $43pb in January 2015. The decrease in the world market price was brought
on by OPEC’s changing policy objectives, increased U.S. oil production, a decline in global demand, and
decreasing geopolitical concerns regarding supply disruption in countries such as Libya and Iraq. While
many importing countries have benefited from the decline in oil prices, the effects of this drop are not
necessarily positive worldwide. Some of the world’s largest oil-producing states have struggled to
maintain economic and political stability in the face of declining oil revenue. The destabilizing effect of
low oil prices has serious implications for countries and regions of critical importance to U.S. national
security interests.
This report was commissioned to develop a preliminary framework of analysis that details indicators of
an impending security crisis in a low oil price environment. For the purpose of this report, a crisis is
identified as political, economic, or social instability that potentially warrants U.S. military attention.
Drawing on open source information on historical oil price dips and today’s oil market, the report first
identifies key antecedent conditions that make a state vulnerable to oil price volatility and/or more
susceptible to instability. These conditions include the extent of a government’s reliance on oil exports to
fund its budget, the degree of government planning in its national economy, and the value of a country’s
oil exports as a percentage of total national exports, among other factors. Conditions illustrate a country’s
structural dependence on oil and resultant risk of crisis as global prices fluctuate.
After identifying conditions of systemic vulnerability to low oil prices, the report then discusses the
economic, oil-industry-specific, social, and political-military indicators that warn of an imminent or
nascent crisis spurred by low oil prices. As countries face declining oil revenue, a range of indicators—
including a government’s inability to maintain fiscal balance under the current market price of oil, the
implementation of austerity measures, or an increase in civil unrest, among others—may emerge to signal
political or economic unraveling. These indicators are the warning beacons of instability that may be
utilized to develop timely intelligence forecasts.
To demonstrate the analytical value of the conditions-indicators framework, the report offers eight
profiles of major oil-producing countries around the world. These profiles detail the conditions and
indicators that each country has already exhibited, and explain the potential impact on vital U.S. interests
of an oil-induced crisis in those countries. The application of the report’s framework to these country
profiles enables an assessment of the comparative risks of crisis for each. Countries such as Venezuela
and Iraq are presented as high-risk because they are heavily dependent on oil revenue for all government
functions, do not possess structural resiliencies such as large sovereign wealth funds, and have
demonstrated a significant number of indicators. Conversely, countries such as Saudi Arabia and
Azerbaijan, which continue to demonstrate conditions of high resilience to oil price fluctuations even as
some oil-related indicators manifest, are presented as low-risk.
Supporting the development of the analytical framework are two historical case studies that demonstrate
the manner in which low oil prices have precipitated crisis in the past: Iraq’s 1990 invasion of Kuwait and
the collapse of the Soviet Union in 1991. These case studies serve as illustrations of the prevailing and
3
recurring conditions and indicators that are identified elsewhere in the report. Moreover, they underscore
the potential scope and severity of oil-induced crises that have demanded U.S. military attention in the
past.
Recognizing the historical volatility of global oil prices, the report lastly considers the impact of a rise in
oil prices on key countries and regions. The report finds that regions such as the South China Sea and the
Levant Basin may face rising instability if and when the price of oil rebounds. Ultimately, this section
concludes that the ability of consumer and producer states to adapt to price fluctuations is of vital
importance in preventing or mitigating the negative consequences of an eventual rise in oil prices.
The report concludes that a decline in the world market price of oil has had serious negative consequences
for oil-producing countries in the past, and that oil price fluctuations continue to interfere with states’
economic and political stability at present. These consequences may be assessed through the lens of the
analytical framework presented in this report, with the ultimate goal of improving U.S. awareness of, and
responsiveness to, security crises spurred by low oil prices.
4
Introduction
In mid-2014, world oil prices crashed to their lowest point in more than four years. This price plunge has
had ramifications for nearly every country in the world. Low oil prices benefit consumer states, where
gasoline is cheaper than it has been in years. For producing states1 that are reliant on oil sales, the drop in
the world market price (WMP) of oil is far from ideal. While the impact of the drop varies from producer
to producer, many states depend on oil revenue to finance their fiscal budgets. For these countries, a dip
in the price of oil can have destabilizing effects on their political and economic stability, as they are
forced to confront revenue shortfalls. This destabilization can create security crises that affect U.S.
interests around the world. The purpose of this paper is to offer a preliminary, dynamic framework to
identify indicators of a potential security crisis that could be brought about by a low world market price of
oil.2 Some countries are already showing signs of crisis as they confront economic woes and political
turbulence either spurred or exacerbated by today’s low oil price environment. The number and degree of
crises will largely depend on how low the price of oil falls and how long the low oil price lasts. By
applying the proposed framework to the current and future low oil price environments, the team hopes to
improve U.S. awareness of, and responsiveness to, security crises spurred by low oil prices.
The report is broken down into the following sections: First, it explains the reasons behind the recent oil
price dip. Second, this research identifies and explains the antecedent conditions that influence a
country’s exposure to risk and resilience when operating in a low oil price environment. Next, the report
discusses the economic, oil-industry-specific, social, and political-military indicators that may signal that
a country is headed towards an oil-related crisis. Then, the paper identifies and analyzes several oil
producing states that have been negatively impacted by the oil price plunge. In support of the analytical
framework the report examines two historical case studies that detail the progression of a security crisis,
brought on by low oil prices. The paper wraps up with a look at what happens when the price of oil rises
and identifies antecedent conditions that make an oil-consuming state most vulnerable to the negative
effects of that rise. The report also presents several geographic areas that may be a source of greater
contention, aggression, and instability when prices rebound.
Explaining today’s low oil price environment
In June 2014, the world market price of oil began a steady descent from $115 per barrel (pb) to ~$66pb as
of April 2015. The fall in oil prices can largely be attributed to the following four factors:
● OPEC’s changing policy objectives: In November 2014, the Organization of the Petroleum Exporting
Countries (OPEC) failed to agree on production cuts, which resulted in a decision to maintain production
levels at 30 million barrels per day (bpd).3 OPEC’s deferral of production cuts placed greater downward
pressure on the WMP of oil and accelerated the fall of oil prices.4 This decision signaled a shift in the
organization’s previous policy objectives from targeting prices to competing for market share and curbing
1
Terms such as “producer,” “oil-exporter”, and “net-exporter” as well as similar labels, are all used synonymously in this report to refer to states
that produce and export oil. The same applies for consumer-related terms like “consumer,” “oil-importer,” and “net-importer,” among others;
they refer to states that mainly import and consume oil.
2
For the purpose of this paper, a security crisis has been defined as: A condition of economic, social, or political instability or significant risk
induced by a sustained low price in oil that warrants U.S. Military attention.
3
The World Bank, “Understanding the Plunge in Oil Prices: Sources and Implications.” January 2015,
http://www.worldbank.org/content/dam/Worldbank/GEP/GEP2015a/pdfs/GEP2015a_chapter4_report_oil.pdf.
4
Wood Mackenzie, “OPEC Decision Undermines Potential for Price Recovery.” November 28, 2014, http://www.woodmac.com/public/mediacentre/12525493.
5
unconventional U.S. oil production.5
● Increased U.S. production: A steady uptick in oil prices over the last decade has incentivized
investment in U.S. oil production.6 The 2009 collapse in natural gas prices, new discoveries in offshore
drilling, and advancements in fracking technology have opened the door to new sources of oil. In June
2014, the International Energy Agency (IEA) reported that the U.S. had become the world’s largest
producer of oil and natural gas liquids.7 The large supply from U.S. production, combined with lower
demand for oil, contributed to the price plunge.
● Low demand: Slower-than-expected economic growth, particularly in European and Asian markets,
has led to subdued global oil demand growth in the second half of 2014. It slowed to below 500,000 bpd,
the lowest level in two and a half years.8,9,10
● Diminishing geopolitical concerns about supply disruptions: Historically, oil-consumers have been
subject to sporadic oil price increases due to supply disruptions resulting from conflict within oil
producing countries.11 However, current geopolitical conflict has not elicited the same effect. In 2014,
Libya’s El Sharara oil field increased production and is currently pushing output to 350,000 bpd despite
the country’s ongoing civil war.12 Iraq continues to export oil from its southern Basra ports while battling
the Islamic State (IS).
It is important to note that oil price volatility is not a new phenomenon. In addition, today’s “low” oil
price is not as low as it has been in the past. Appendix A provides a graph of crude oil price from 18612013. Still, the price of a barrel of oil has been cut in half since June 2014, reaching levels last seen
during the 2009 recession. It remains unclear when oil prices will rebound.13
Methodology
The report provides a preliminary analytical framework for identifying indicators and evaluating the
potential for a security crisis as a result of low oil prices. The methodology utilized in researching this
paper involved the collection of open source information from academic journals; private and public oil
sector reports and country reports; experts in the energy sector and in certain regions of the world; and
historical and current media stories. The team then analyzed the compiled information and created a
framework for analysis to be applied state by state. This study is primarily qualitative in nature, though it
is supplemented with some quantitative studies. Research collected for this report focused on oil-related
instability, resilience against and vulnerability to oil price shocks, in addition to instability in general.
Indicators and conditions were developed based on the findings of the historical Iraq and USSR case
5
The World Bank, “Understanding the Plunge in Oil Prices.”
Energy Security Leadership Council, “The New American Oil Boom: Implications for Energy Security.” Securing America’s Future Energy,
2012, http://www.secureenergy.org/sites/default/files/SAFE_Oil_Boom_Report.pdf.
7
International Energy Agency, “Medium-Term Oil Market Report 2014,” 2014, http://www.iea.org/Textbase/npsum/MTOMR2014sum.pdf.
8
China’s industrial production rose at its slowest pace since 2008 and second quarter gross domestic product fell in European countries. See: U.S.
Energy Information Administration, “Today in Energy,” 8 October, 2014, http://www.eia.gov/todayinenergy/detail.cfm?id=18311.
9
Matt Clinch, “Oil Demand Growth Slips to Remarkable 2 1/2-year low.” CNBC, 11 September, 2014, http://www.cnbc.com/id/101991177#.
10
Brad Plumer, “Why Oil Prices Keep Falling-and Throwing the World Into Turmoil.” Vox, 23 January, 2015,
http://www.vox.com/2014/12/16/7401705/oil-prices-falling.
11
This was evident during Iraq’s invasion of Kuwait in August 1990. The invasion, coupled with sanctions imposed on Iraq by the international
community in response to Iraq’s aggression, removed four billion barrels of oil from the market. Production was compensated with “relief” oil
from primarily Saudi Arabia, but also Venezuela and the United Arab Emirates. See: Daniel Yergin, The Prize: The Epic Quest for Oil, Money,
and Power (New York: Free Press, 2008).
12
Reuters, “Oil Clobbered by Fading Mideast Fears; Racks Up 3rd Week of Losses.” 11 July, 2014, http://www.cnbc.com/id/101827987.
13
Clifford Klauss, “Oil Prices: What’s Behind the Drop? Simple Economics,” The New York Times, January 12, 2015, accessed March 15, 2015,
http://www.nytimes.com/2015/01/13/business/energy-environment/oil-prices.html?_r=1.
6
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studies, among others. Conditions and indicators were also derived from recurring trends in several
rounds of research on major oil producers and consumers, as defined by their share of global production
and consumption according to the Energy Information Administration (EIA).
Research took place over the course of four months. The project began with the breakdown of the team
into three lines of research: net-exporter countries, net-importer countries, and prospective historical case
study countries. Researchers in the first two groups were assigned a preliminary set of 24 countries in
their respective categories to investigate; they examined both historical and contemporary cases.
Conditions and indicators were identified for inclusion in this report largely because of their recurring
nature in past and present low oil price environments. Others indicators were conceptualized by the team.
The country profiles included in the report were selected to demonstrate the wide and varied second,
third, and fourth order effects of a low or declining WMP of oil. The case study researchers explored
entire periods of low oil price in the past and investigated 5 specific country experiences during such
periods. The Iraq and Soviet Union case studies were chosen to demonstrate the chronicled nature of
certain conditions and indicators and to provide historical examples of extreme, worst-case scenarios of
security crises caused, accelerated, or exacerbated by a low oil price environment.
The team recognizes that the correlation between a drop in oil price and a seemingly subsequent event or
indicator does not imply causation. Still, this long-term research project has led the team to believe that a
dip in the price of oil has been a causal variable in certain major events or decisions in the past. In other
cases, the low oil price environment has instead exacerbated or accelerated unstable situations that were
already present at the onset of the drop. More research is required to explore these connections.
Conditions
Recognizing the volatility of oil prices, it is important to determine a state’s exposure to instability as a
result of such fluctuations. The impact of a low WMP on a state varies in type and magnitude based on
certain domestic conditions. Conditions are the key factors that make up the state’s pre-existing political,
economic, and social environment and influence the state’s reaction to fluctuations in the world market
price of oil. Oil-specific conditions illustrate a state’s structural dependence on the oil industry and
subsequent risk when the market price drops. Furthermore, there are several governance-related
conditions that further or reduce the degree of political and economic risk to which a state is exposed. On
their own, the governance-related conditions may not lay the groundwork for a crisis, but when coupled
with the key structural oil dependency conditions, they can have an exacerbating effect when there is a
dip in the price of oil. Collectively, these conditions offer a foundation to assess a given state’s risk or
resilience to fluctuating oil prices.
The following factors make up the oil-specific conditions that determine a state’s structural dependence
on the oil industry. The greater a state’s structural dependence, the more at risk the state is to instability in
light of an oil price dip.
● Degree of state planning: If the government plays a large role in running the economy, bureaucratic
or political considerations may impede the industry’s ability to adjust or respond to oil price
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fluctuations in a flexible and/or expedient manner.14
● Role of the state in the oil industry: For many of the states highlighted in this report, the oil sector is
made up of national oil companies (NOCs) from which the state directly collects revenue. For these
states, a dip in the price of oil will mean less revenue for the government, which negatively impacts
the state’s fiscal accounts. This is in contrast to a state where the oil sector is operated by taxable
private companies in which the state does not play a role in company operations or revenue
collection.15 NOCs gain many competitive advantages over private companies and increase the burden
on the state when they face growing risk or difficulty. States that issue debt or act as the guarantor of
debt on behalf of the NOC(s) are obligated to pay for it if the company cannot. In addition, NOCs may
be used by government leadership as an instrument of influence by such means as granting favors or
giving unfair advantages to political allies.16
● Degree of dependence on oil revenue to create and balance budget: States that greatly depend on
revenue from state-owned oil companies to create and balance fiscal budgets face risk when the price
of oil falls. The degree of risk depends on a state’s fiscal breakeven price per barrel of oil, or the price
at which oil needs to be sold in order for a state to balance its budget. The higher the breakeven price,
the greater the budget deficit a state will face as the price of oil drops.17
● Oil export ratio: The ratio of the value of oil exports as a percentage of total national exports serves
to gauge how dependent an economy is on producing and selling oil for economic growth.18 Without a
diverse export portfolio, a state is at even greater risk to oil price volatility. For states with a high oil
export ratio, an extended period of low global oil price can lead to major trade deficits, which would
negatively impact the state’s economy.
Several governance-related conditions make certain states more or less resilient to instability in general.
States that are both structurally dependent on the oil sector and less resilient to instability are of most
concern in a low oil price environment. Some of these conditions are related to a state’s political
structure, while others are related to a state’s financial make-up.
Regime type is important as certain regime types are known to be more or less stable.19 Full democracies
and full autocracies tend to be relatively stable, while partial democracies and partial autocracies are more
prone to instability.20,21 Full autocracies vary in how vulnerable they are to instability, yet these subsets
are still more stable than their partial counterparts.22 The degree of risk of instability is determined in part
14
Effects of state control on an economy are discussed in: Thane Gustafson, “Putin’s Petroleum Problem,” Foreign Affairs 91 (2012): 83-96.
Benoit Faucon et al., “Oil-Price Slump Strains Budgets of Some OPEC Members: Oil-Producing Countries Face Steep Deficits If Price War
Continues,” Wall Street Journal, October 10, 2014, http://www.wsj.com/articles/oil-price-slump-strains-budgets-of-some-opec-members1412952367.
16
Joseph Dresen, “The Role of States Corporations in the Russian Economy” Wilson Center. Accessed April 21, 2015,
http://www.wilsoncenter.org/publication/the-role-state-corporations-the-russian-economy.
17
“Cheaper Oil: Winners and Losers” The Economist, October 25, 2014, accessed March 31, 2015,
http://www.economist.com/news/international/21627642-america-and-its-friends-benefit-falling-oil-prices-its-most-strident-critics.
18
Securing America’s Future Energy, Oil Security Index, October 2013, p. 3.
19
Goldstone, Jack, et al., “A Global Model for Forecasting Political Instability,” American Journal of Political Science Association 54 (2010):
194.
20
Partial democracies are defined as democratic regimes that lack free and fair elections or political participation from the public. Goldstone et
al,“Global Model for Forecasting Political Instability,” 195-197.
21
Partial autocracies are defined as regimes that hold elections but restrict participation or meaningful contest for the office of chief executive.
Goldstone et al,“Global Model for Forecasting Political Instability,” 195-197.
22
Against civil conflict, single-party autocracies and monarchies are more resilient due to greater control over co-opting and repression
institutions and mechanisms in both cases, and elements of tradition and legitimacy in the latter. Military regimes, however, are more susceptible
to civil conflicts due to the absence of institutional capabilities to co-opt rivals. Personalist autocracies are likewise susceptible to civil conflict
due to their lack of institutional supports for the regime and reliance upon the head of state’s personal connections to rule. See: Hanne Fjelde,
“Generals, Dictators, and Kings: Authoritarian Regimes and Civil Conflict, 1973-2004,” Conflict Management and Peace Science 27 (2010):
15
8
by the relative strength or weakness of institutions; the state’s capacity to utilize co-option and repression;
and the likelihood of a state to listen to and redress grievances of its people.23 Whether or not a state has a
revolutionary government is also important. States that have revolutionary governments and earn more
than 10 percent of their GDP from exporting oil are 2.5 times more likely to engage in international
conflict.24 One must consider how the price of oil influences this tendency. Furthermore, a state’s degree
of factionalism may also impact its risk to instability.25 As oil prices drop, a state can become politically
unstable as its leader(s) grapple with the loss of oil revenue needed to maintain state operations and
implement policies. In a state with a large degree of competition, different factions may take advantage of
the perceived weakness of the government and attempt to delegitimize it for their own gain by inciting a
coup, mass protest, or other subversive activity.26 Other conditions to consider include the degree of
corruption within a state and confidence in government. A government that is perceived as unjust,
incompetent, or unable to meet the needs of its populace may not be able to maintain popular support.27
The falling price of oil can erode confidence if the people do not believe that the government can
effectively respond to deteriorating economic conditions.
It is important to consider conditions related to a state’s financial resilience in addition to those related to
its political makeup. This includes the size of a state’s sovereign wealth fund (SWF), which is a stateowned investment fund typically financed by commodities revenue, especially oil sales.28 Governments
rely on SWFs for financial stability and recovery during economic downturn. A large SWF provides a
fiscal safety net from which the government can draw in light of falling oil revenue. It also affords a
government considerable freedom in policy decision-making.29,30 Additionally, a state’s national debt,
the amount of foreign reserves it holds, and its credit rating, are among the other major finance-related
factors that should be considered when determining a state’s financial risk or resilience in a low oil price
environment. The stronger and more secure a state’s financial position is, before a drop in the WMP of
oil, the more resilient it will be to the destabilizing effects of that drop.
208-215.
23
Fjelde, “Generals, Dictators and Kings,” 215-216. The type of repression matters as well during times of economic crisis, with repression
against dissidents coming in the form of political and legal restrictions proving more effective overall than harsher restrictions on physical
integrity. Institutions are still required for effective use of repressive measures. See: Dan Tanneberg, Christoph Stefes, and Wolfgang
Merkel,“Hard Times and Regime Failure: Autocratic Responses to Economic Downturns,” Contemporary Politics 19 (2013), 125-126.
24
Revolutionary governments are defined as those brought about by deposing the previous government through mass revolt, coup, or similar
process. Colgan, Jeff, “Oil, Domestic Politics, and International Conflict” Energy Research & Social Science 1 (2014): 201.
25
Factionalism in this context refers to “a pattern of sharply polarized and uncompromising competition between blocs pursuing parochial
interests at the national level . . . [it] is often accompanied by confrontational mass mobilization . . . and by the intimidation or manipulation of
electoral competition.” Goldstone et al.,“Global Model for Forecasting Political Instability,” 196.
26
Ibid. 196-197.
27
J. Eli Margolis, “Estimating State Instability,” Studies in Intelligence 56, (2012): 17-18.
28
International Working Group of Sovereign Wealth Funds, Sovereign Wealth Funds: Generally Accepted Principles and Practices, October
2008. http://www.iwg-swf.org/pubs/eng/santiagoprinciples.pdf.
29
Saudi Arabia, for example, has been able to implement an oil production policy that favors market share at the cost of near-term profits
precisely because its SWF is more than double the government’s annual revenue (See: Central Intelligence Agency. “The World Factbook: Saudi
Arabia,” last modified April 21, 2015. https://www.cia.gov/library/publications/the-world-factbook/geos/sa.html). Conversely, a country such as
Venezuela, with a SWF that would cover less than 1 percent of annual expenditures, has little choice but to implement economic, social, and
political policies that are near-sighted and potentially destabilizing. (see: Central Intelligence Agency. “The World Factbook: Venezuela,” last
modified April 21, 2015, https://www.cia.gov/library/publications/the-world-factbook/geos/ve.html).
30
Beyond their role as potential drivers of state-level economic distress, SWFs also may drive regional and global economic decline as a
consequence of specific asset allocation. SWFs typically are invested in low-risk, high-liquidity instruments such as government bonds, including
U.S. Treasuries; a rapid unwinding of this type of asset by a major stakeholder could flood bond markets, forcing issuing governments to increase
yields and reducing the market value of SWFs that remain invested in certain bonds. (See Chris Vellacott, “Oil states’ recourse to sovereign funds
could rattle world markets,” Reuters, December 3, 2014, accessed April 18, 2015, http://www.reuters.com/article/2014/12/04/us-sovereignwealthfunds-idUSKCN0JH25I20141204). Additionally, some SWFs also prioritize commercial real estate investments and, as a consequence of rapid
divestment, could negatively influence the commercial real estate markets in cities such as London or Dubai.
9
All of these conditions are important to examine when determining a state’s degree of risk or resilience to
the destabilizing effects of a low oil price. States that are highly exposed to instability and heavily
dependent on the oil sector are of utmost concern during a low oil price environment. They are more
likely to enter a crisis spurred or exacerbated by the drop in oil price than countries that are not
structurally dependent on the oil sector and/or less prone to instability. By identifying ‘high-risk’ states
through the examination of these conditions, one can better identify countries or regions most likely to
display indicators of crisis, which are explained in the next section.
Indicators
Indicators are events, decisions, or developments that signal a potential, imminent, or incipient crisis that
threatens U.S. interests. The indicators below are separated into four categories: economic, oil industryspecific, social, and political-military. The actors prompting these indicators may be state or non-state,
internal or external. While some of the following indicators will only arise in a low oil price environment,
others are indicators of crisis regardless of the price of oil. Furthermore, this list is not exhaustive. Other
indicators related to the oil sector and instability should be added as they are uncovered.
These indicators are not meant to display a linear progression - each indicator may arise in the absence of
others. While it seems intuitive that the more indicators a state displays, the greater the chance of crisis,
there is no required number of indicators to signal an imminent crisis. Finally, a crisis can come in many
forms. The following have been identified as indicators of crisis:
Economic
World market price average falls below a state’s fiscal budget breakeven price
For states that own or control the production and exportation of oil, stability in the world market price
(WMP) is essential to the formation of the state’s fiscal budget. State-run social programs and financial
commitments are developed with an expectation of what the average WMP of oil will be. This benchmark
price becomes the state’s fiscal breakeven price.31 In addition to world supply and demand, market
speculators, oil technology investments, exploration and discovery of oil deposits, the activities of nonstate actors, and states’ political and economic policies impact the WMP of oil.32 The goal for producer
states is to target a fiscal breakeven price that is equal or less than the average world market price.
Formulating budgets targeted to the minimum average price per barrel or breakeven price, allows the state
to forecast a balanced budget.33
When the WMP falls below the fiscal budget breakeven price, the impact on the state’s ability to fund
government services and programs depends on the state’s pre-existing resiliency measures and exposure
to oil price volatility.34 The more prolonged a period of low WMP, the more likely it is that a state will
31
“Cheaper Oil: Winners and Losers” The Economist.
“Why the Oil Price is Falling”, The Economist, December 8, 2014, accessed March 17, 2015, http://www.economist.com/blogs/economistexplains/2014/12/economist-explains-4.
33
Simeon Kerr, “IMF Urges Gulf Countries to Reduce Spending as Oil Price Plunges” Financial Times: Gulf, January 21, 2015, accessed March
31, 2015, http://www.ft.com/intl/cms/s/0/a763aeba-a0b9-11e4-9aee-00144feab7de.html#axzz3W0o0Bu82.
34
Alberto Nardelli, Larry Elliott, Alec Luhn, Saeed Kamali Dehghan, Ian Black and Virginia Lopez, “Recession in Russia, Revolt in Venezuela?
The Knock-On Effects of Tumbling Oil Prices,” The Guardian, October 16, 2014, accessed March 31, 2015,
http://www.theguardian.com/news/datablog/2014/oct/16/datablog-low-oil-prices-chill-producer-economies.
32
10
not reach its fiscal breakeven revenue requirement, which means the state may have to restrict
government spending or find another revenue source.35 A state’s ability to fund its budget will have direct
economic and political consequences.36
State chooses to decrease sovereign wealth fund totals or foreign currency reserves
As the collapse in the price of oil restricts revenue to states dependent on oil sales, many are cashing in
their sovereign wealth fund investments or foreign currency reserves in order to keep their budgets afloat.
The larger a state’s SWF or pool of foreign currency reserves, the longer a state can use those funds to
maintain balanced budgets, despite the loss in oil revenue. It is estimated that "oil-based sovereign wealth
funds are a major force in international finance, holding more than $5 trillion in assets."37, 38, 39 The
withdrawal of SWFs and foreign currency reserves also directly impacts the United States. Because many
countries invest in U.S. Treasury bonds or hold U.S. dollars, the removal of those “recycled petrodollars”
would cause U.S. Treasury yields to drop by fifty basis points.40
State chooses to implement dramatic currency devaluation policies
Currency devaluation is a form of currency manipulation that occurs, frequently in a pegged or fixed rate
economy, where the state chooses to decrease the currency’s official exchange rate or increase the volume
of domestic currency in the home market.41, 42 For the domestic economy, currency devaluation is a sign
of decline in the country’s standard of living.43 When the oil price drops significantly, states dependent on
oil revenue may print more money instead of introducing budget cuts in the short-term with the hope that
prices rebound so that they can fund their programs. Should the state print too much money or adopt a
monetary policy whereby the value of the country’s currency has to be robustly defended through
spending financial reserves, then currency depreciation and inflation occur. Such a policy forces the
country to run the risk of total currency collapse, hyperinflation, or stagflation.44
35
International Monetary Fund, “Learning to Live with Cheaper Oil Amid Weaker Demand,” January 2015, accessed March 31, 2015,
http://www.imf.org/external/pubs/ft/reo/2015/mcd/eng/mreo0115.htm#two.
36
Dr. Abhishek Deshpande and Nic Brown, “Fiscal Break-Even Oil Prices for Major OPEC Members”, Oil & Gas Financial Journal, April 2,
2014, accessed March 6, 2015. http://www.ogfj.com/articles/2014/04/fiscal-break-even-oil-prices-for-major -opec-members.html.
37
Chris Vellacott, “Oil States’ Recourse to Sovereign Funds Could Rattle World Markets,” Reuters, December 3, 2014, accessed March 10,
2015, http://www.reuters.com/article/2014/12/03/us-sovereignwealth-funds-idUSKCN0JH25I20141203
38
“Saudi foreign minister says no need to create a sovereign wealth fund,” Reuters, December 26, 2014, accessed March 19, 2015,
http://www.reuters.com/article/2014/12/26/us-saudi-sovereign-funds-idUSKBN0K40A820141226.
39
While states like Saudi Arabia and Norway have huge SWFs that will allow them to better withstand a prolonged period of low oil price, with
SWFs totaling $757 billion and $882 billion respectively, other countries like Nigeria and Bahrain do not have such large SWFs to fall back on.
Nigeria’s SWF totals $1.4 billion while Bahrain’s SWF totals $10.5 billion. Sovereign Wealth Fund Institute, “Sovereign Wealth Fund
Rankings,” accessed March 15, 2015, http://www.swfinstitute.org/fund-rankings/.
40
Chris Vellacott, “Oil States’ Recourse to Sovereign Funds Could Rattle World Markets.”
41
Pegged rate economies set a value range for their currency in terms of another stable currency such as the dollar, the euro or a basket of
currencies. On one hand, the pegged rate system forces some amount of discipline on government policies and decreases short term exchange
rate volatility. On the other hand, the government is forced to defend the value of their currency by spending foreign reserves in order to maintain
parity range. Atish R. Ghosh and Jonathan D. Ostry, “Choosing an Exchange Rate Regime,” IMF: Finance and Development, December 2009,
accessed March 15, 2015, http://www.imf.org/external/pubs/ft/fandd/2009/12/ghosh.htm
42
Fixed rate economies maintain the value of their currency with fixed exchange rates between currencies otherwise known as the official parity.
The government must be able to defend those exchange rates with foreign reserves. The advantage of this monetary system is that it eliminates
short-term exchange rate risk and forces monetary and fiscal discipline. The disadvantage is that the total lack of monetary independence and the
increase in currency speculation. Reem Heakal, “Currency Exchange: Floating Rave Vs. Fixed Rate,” Investopedia, accessed March 15, 2015,
http://www.investopedia.com/articles/03/020603.asp.
43
Buttonwood, "What Devaluation Actually Means," The Economist, February 12, 2013, accessed March 10, 2015,
http://www.economist.com/blogs/buttonwood/2013/02/currencies.
44
The Federal Reserve Bank of New York, “Currency Devaluation and Revaluation,” September 2011, accessed March 17, 2015,
http://www.newyorkfed.org/aboutthefed/fedpoint/fed38.html.
11
Dramatic increases in sovereign debt sales
In order to raise money, a government may issue sovereign debt.45 A government’s decision to issue this
debt instrument to fund operations may demonstrate that the government lacks the revenue to support its
fiscal expenses.46, 47 While issuing sovereign debt to pay for fiscal expenses is a routine operation for a
country’s central bank, problems arise when the country is too far extended beyond their ability to pay for
the debt that is sold. Increases in debt and decreases in income could lead to long-term debt default.
Debt default
Debt default occurs when a country fails to promptly repay its obligations of interest or principal when
due and indicates that a country is already in an economic crisis.48 For countries that spend more than they
accrue in revenue, they may have to dramatically increase their issuance of sovereign debt.49 For states
that are dependent on oil revenue, a prolonged dip in the WMP may affect the state’s ability to make debt
payments. Default could hamper the state’s ability to issue future debt on the global market as it would
expose the state to a potential downgraded credit rating and higher interest rates.50
Introduction or increase of austerity measures
If a state is highly dependent on oil revenue to balance its budget, a prolonged drop in oil prices may push
the state to introduce or increase austerity measures to respond to a budget deficit. Austerity measures
refer to official government action taken during a period of adverse economic conditions, to reduce its
budget using a combination of spending cuts and/or tax hikes.51
A government may cut social programs in an attempt to shrink growing budget deficits. The subsequent
public reaction would depend on the percentage of the population dependent on the programs for survival
and the cost that the public would have to bear without government subsidization. Decreasing social
programs may lessen the government’s monetary burden but may increase the political pressure on the
sitting administration, which may precipitate the appearance or acceleration of civil unrest.52 For some
countries, the government’s provision of gas subsidies is essential to supplement the welfare of the
domestic population. Subsidized energy programs, like Venezuela’s Petrocaribe program, can also be
used as regional tools of influence.53 In an attempt to reduce expenditures, a government may cut gas
subsidies to free up revenue to invest elsewhere.54 Cuts to gas subsidies, like other social programs, may
spur internal civil unrest or regional instability. Austerity measures may include the implementation of or
increase in taxes, in addition or in substitute of spending cuts.55 This decision directly impacts the taxed
This is the process by where a government issues bonds in a foreign currency and sells them to foreign investors with the promise of paying
them back at a certain time with the original investment plus interest, this is known as sovereign debt. Daniel Kurt, “Why Governments Issue
Foreign Bonds,” Investopedia, May 13, 2013, accessed March 10, 2015, http://www.investopedia.com/articles/investing/051413/whygovernments-issue-foreign-bonds.asp.
46
Ibid.
47
Mark Koba, “Sovereign Debt: CNBC Explains,” CNBC, October 14, 2011, accessed March 12, 2015, http://www.cnbc.com/id/44771099
48
Buttonwood, "What Devaluation Actually Means.”
49
Rebecca Nelson, “Sovereign Debt in Advanced Economies: Overview and Issues for Congress,” Congressional Research Service, October 28,
2013, accessed March 17, 2015, http://fas.org/sgp/crs/misc/R41838.pdf.
50
“What Happens When A Country Goes Bust”, The Economist, November 24, 2014, accessed March 21, 2015,
http://www.economist.com/blogs/economist-explains/2014/11/economist-explains-20.
51
“Definition of Austerity Measure”, The Financial Times, accessed March 17, 2015, http://lexicon.ft.com/Term?term=austerity.
52
“Unrest in peace”, The Economist, October 22, 2011, accessed April 28, 2015. http://www.economist.com/node/21533365.
53
“Single Point of Failure”, The Economist, October 4, 2014, accessed March 17, 2015, http://www.economist.com/news/americas/21621845venezuelas-financing-programme-leaves-many-caribbean-countries-vulnerable-single-point
54
Nelipher Moyo and Vera Songwe, “Removal of Fuel Subsidies in Nigeria: An Economic Necessity and a Political Dilemma”, Brookings
Institute, January 10, 2012, accessed March 17, 2015, http://www.brookings.edu/research/opinions/2012/01/10-fuel-subsidies-nigeria-songwe.
55
“Definition of Austerity Measure,” The Financial Times, accessed March 17, 2015, http://lexicon.ft.com/Term?term=austerity.
45
12
populace, and could result in potentially destabilizing civil protests.
Falling oil prices may force states to reduce defense spending, along with other government outlays. Cuts
in military spending might hamper the state’s ability to protect and defend itself. Depending upon the
preexisting relationship between political and military leaders in the state, defense-spending cuts may
have serious political implications. On the other hand, cuts in defense spending may limit a state’s
antagonistic tendencies. Oil producing states may not necessarily decrease defense spending in light of
falling oil prices, and thus falling revenue. “If nations face falling oil revenues and still have the will and
ability to expand their military or security capabilities, then they might do so through the sacrifice of
domestic spending or regional stability.”56 National objectives, strategic demands, regional threats, the
desire to maintain internal status quo and other interests of producers may force the state to maintain and
increase defense spending even in light of reduced revenue flows.57 This decision could spur internal
unrest, as the government sacrifices social programs for defense. In addition, it could incite regional
instability as surrounding states are forced to confront the security dilemma.
Oil-Industry-Specific
OPEC chooses to increase/maintain oil production while world demand stagnates/declines
Collectively, OPEC member states produce roughly 40 percent of the world’s oil. As such, their decisions
to increase or maintain oil production in the face of stagnant or decreasing world demand impact OPEC
and non-OPEC oil-producers worldwide. The OPEC decision to maintain/increase oil production in a
low-priced environment creates political and economic difficulty for countries dependent on high oil
prices that lack the resilience to ride out the low oil price environment.58 When the WMP is low, producer
states will maintain/increase production for different reasons like maintaining market share or accruing as
much revenue as possible. The irony of such an action is that maintaining or increasing production of oil
will only keep the price of oil low or drive it down farther.
Oil imports increase
An oil-exporting country may choose to import oil for any number of reasons, including economic
mismanagement, lack of investment, or attacks on infrastructure. A state may also choose to import oil
because it can no longer support domestic needs with internal production, or, domestic production may no
longer be a commercially or financially viable option. Any number of these explanations signals distress
in the state’s oil system whether due to political or economic reasons.
Cuts in spending, staff, and dividends
As the price of oil falls, oil companies must make cost-saving decisions to stay afloat. Among them are
decisions to cut spending, staff, and dividends. Cuts to current and future projects are likely and foreign
direct investment is expected to fall as well. Wage cuts or layoffs will not just impact those working on
the rigs; it could also reach the more specialized workers like the engineers and geophysicists. Beyond the
energy sector, companies that provide equipment, construction, and engineering services for energyrelated projects will feel the pinch as well. Dividend cuts, either because of weakening earnings or limited
56
Clayton Chun, “Do Oil Exports Fuel Defense Spending?” Strategic Studies Institute, February 2010, accessed March 12, 2015,
http://www.strategicstudiesinstitute.army.mil/pdffiles/pub967.pdf.
57
Ibid.
58
Krishnadev Calamur, “OPEC Members Feeling the Pain of Falling Oil Prices,” National Public Radio, January 13, 2015, accessed March 15,
2015, http://www.npr.org/blogs/thetwo-way/2015/01/13/376995989/opecs-decision-to-keep-production-steady-starts-to-hit-members.
13
funds available to meet the dividend payment, will signal a company’s declining financial position.
Generally, cutting dividends makes the company less attractive to investors.59, 60
Share price falling and/or investors selling stock
The price of an oil company’s shares may fall or investors may sell stock for any number of reasons like
weak company performance, lack of investor confidence in the future of the company or wider oil
industry. No matter the reason, either action negatively impacts the valuation of the company.61
Decline in remittances
An oil-related company’s decision to lower wages or lay off workers has serious implications beyond the
company’s bottom line; these cost-saving decisions impact the amount of remittances sent home by
expatriate oil workers as well. This is especially important when considering that economies in the
Middle East and North Africa, as well as those in Central Asia and the Caucasus, are heavily dependent
on remittances from major oil producing countries.62, 63 Lower remittances will harm the economies of the
receiving countries.64
Migrants return to home country
Rising unemployment means some migrant workers will return to their home countries. This collateral
effect of low oil prices could have damaging economic consequences for the home country as they
struggle with rising unemployment and fewer remittance flows.65
Merging of oil companies
Oil companies may merge in a low oil price environment for various reasons. Two similarly-sized gas and
oil explorers could merge or create joint ventures to capture economies of scale, increase buying power,
build stronger balance sheets, or cut duplicative functions. Financially strained companies can be picked
up by healthier ones that want to increase their market share, which leads to larger assets and synergy
benefits.66 There are obvious winners and losers in these deals; mergers are not necessarily bad for the
economy in the short-term. However, if in the long-term, the smaller companies disappear and the larger
companies grow bigger, the health of the sector may depend on the success of the large remaining few. If
a handful of large companies start making poor business decisions, they could risk the entire industry,
59
Goldman Sachs has estimated that almost $1 trillion USD of spending on future oil projects is at risk after the recent oil price plunge.
According to the Financial Times, “any cancellation of these developments would deprive the world of 7.5m barrels a day of new output over the
coming decade - or 8 percent of current global oil demand.” Christopher Adams, “Oil Price Threatens $1t of projects,” The Financial Times: Oil
& Gas, accessed April 10, 2015, http://www.ft.com/cms/s/0/b3d67518-845f-11e4-bae9-00144feabdc0.html?siteedition=intl#axzz3W0o0Bu82.
60
Rebecca Penty and Zain Shauk, “Crude Collapse Has Investors Braced for ‘80s-Like Oil Casualties,” Bloomberg, January 21, 2015, accessed
February 1, 2015, http://www.bloomberg.com/news/articles/2015-01-21/crude-collapse-has-investors-braced-for 80s-like-oil-casualties.
61
Ibid.
62
Total remittances from the Gulf Cooperation Council countries (Saudi Arabia, Bahrain, Oman, Kuwait, Qatar, and Yemen) to the rest of the
Middle East and North Africa region accounted for $21 billion USD in 2013. Economies in Central Asia and the Caucasus are dependent on the
remittances of ~7 million citizens who work in Russia. World Bank, “Who Gains and Who Loses from Plunging Oil Prices in the Middle East
and North Africa Region?” January 29, 2015, accessed April 1, 2015, http://www.worldbank.org/en/news/feature/2015/01/29/who-gains-andwho-loses-from-plunging-oil-prices-in-the-middle-east-and-north-africa-region.
63
Owen Matthews, “Who Gets Hurt with Russia’s Falling Ruble?” Newsweek, December 23, 2014, accessed April 1, 2015,
http://www.newsweek.com/2015/01/02/who-gets-hurt-russias-falling-ruble-294387.html.
64
Keith Johnson, “Central Asia’s Cheap Oil Doulbe Whammy,” Foreign Policy, March 3, 2015, accessed March 5, 2015,
http://foreignpolicy.com/2015/03/03/central-asias-cheap-oil-double-whammy-russia-china-silk-road/.
65
Ibid.
66
Claire Poole, “14 Oil Companies that Should Start Looking for Merger Partners,” The Deal Pipeline, February 4, 2015, accessed April 3, 2015,
http://www.thedeal.com/content/energy/14-oil-companies-that-should-start-looking-for-merger- partners.php. Also: Antoine Gara, “Oil Shakeout,
Corporate Breakups Could Driver Merger and Acquisition Activity in 2015,” Forbes, December 23, 2014, accessed April 3, 2015,
http://www.forbes.com/sites/antoinegara/2014/12/23/oi8l-shakeout-corporate-breakups-could-drive-merger-and-acquisitionactivity-in-2015/.
14
creating a “too big to fail” scenario similar to the one seen in the banking industry in the 2008 U.S.
financial crisis.
Company restructuring
If a company is struggling to make payments on its debt, it may restructure its operations through cutting
costs or reducing the company’s size, among other examples, with the hopes that payments will become
more manageable. Generally, restructuring is a last ditch effort to eliminate financial harm and improve
the business before it collapses.67
Bankruptcy
Bankruptcy occurs when a business is unable to repay its outstanding debts. A sustained low oil price
environment can force energy companies out of business. Depending on the size of the company and the
number of companies facing bankruptcy, this could have serious economic implications for the host
country, the home country, and even the global economy as a whole.68
Social
Upsurge in civil unrest
A shortage of consumer goods or the cutting of widely used social programs are just two examples of
why civilian populations may protest in the wake of falling oil prices. If a government lacks the ability to
meet the needs and expectations of their populace during an oil price decline, the state may experience a
heightened degree of civil unrest.69 Unrest that leads to violence, whether directed at the government or
amongst the populace, is of great concern as it may signal lack of political control or growing
fractionalization within the people that may lead to death, destruction, repressive government response,
and/or military involvement, among others.70
Political-Military
Increases in political infighting
As an oil producing state’s revenues diminish, levels of political infighting may rise.71 Tension amongst
policy makers become more acute as leaders grapple with how to address the various forms of instability
caused by an oil price plunge while maintaining their positions in power.
Implementation of/rise in repressive measures
For decades, “oil revenue [has] contributed to continued authoritarianism in some states and [has]
encouraged corruption and poor governance.”72 If falling oil prices spur instability within a state, the
government may respond with repressive measures in order to ensure political control and/or discourage
civil unrest. Increasing repressive action demonstrates a government’s real or perceived sense of
instability, which could have any number of implications for the host country, its neighbors, and the
world.73 Such repressive measures may include: the imprisonment of journalists; a crackdown on social
67
“Restructuring,” Investopedia, accessed March 15, 2015, http://www.investopedia.com/terms/r/restructuring.asp.
“Bankruptcy,” Investopedia, accessed March 15, 2015, http://www.investopedia.com/terms/b/bankruptcy.asp.
69
"Unrest in peace," The Economist, October 22, 2011, accessed April 28, 2015, http://www.economist.com/node/21533365.
70
Ibid.
71
Political infighting is defined as fighting, dissent, or disagreements among members of a political group, party or organization.
“Infighting,” Merriam-Webster Dictionary, accessed April 26, 2015, http://www.merriam-webster.com/dictionary/infighting.
72
Emma Ashford, “Petrostates Have a Cheap Oil Malady,” Al Jazeera America, January 30, 2015, accessed March 5, 2015,
http://america.aljazeera.com/opinions/2015/1/petrostates-have-a-cheap-oil-malady.html.
68
73
Reed Wood, “A Hand Upon the Throat of the Nation”: Economic Sanctions and State Repression,” International Studies Quarterly 52 (Sept.
15
media or a ban on external news sources; the assassination of political opponents or critics; or a
declaration of martial law, among others. Growing repressive measures may spark domestic protests.
Long-term repression may encourage civilian populations to flee to neighboring countries causing
potential spillover effects. Lastly, countries around the world may be forced to address human rights
abuses if repressive measures become extreme.
Attacks on oil infrastructure
The loss of revenue due to a low oil price environment may impact a state’s defense capabilities, making
it more vulnerable to attack or sabotage from non-state or state actors. Taking advantage of a state’s
vulnerability in a low oil price environment, non-state actors may seek to either commandeer the state’s
oil infrastructure, to steal the lucrative resources, or destroy it as a symbolic anti-government act and a
denial of the state’s main source of revenue.74 If non-state actors are able to capture and operate oil
facilities, they can use the profits to fund future operations.75 Non-state actors, less interested in stealing
the lucrative good, may attempt to disrupt production by bombing pipelines, oilfields, or refineries and
kidnapping or killing oil workers.76 These attacks not only force oil operations to slow down or
completely halt, they also create an insecure environment that discourages foreign investment.77 Maritime
chokepoints represent another target for either state or non-state actors looking to either control it or
disrupt trade, among other reasons. The blockage of a chokepoint like the Strait of Malacca or the Bab elMandab would lead to substantial disruptions in world energy and trade markets and would signal a
crisis.78
A less resilient oil producing state may use military action against a more resilient state to disrupt oil
production and drive oil prices back up. Alternatively, a state may choose to capture and operate another
state’s oil facilities in order to steal its profits. An example of such a situation is Iraq’s invasion of
Kuwait, which is featured in the case study below. Similar events today would likely garner a comparable
U.S. military response as the one elicited in the Iran-Iraq War.79
Increase in aggressive rhetoric, threats
Faced with a situation that threatens to weaken a government's hold on power, a state may search for an
external scapegoat to distract its citizens. Hoping to lessen internal criticisms and produce a rally-aroundthe-flag effect, a state may direct aggressive rhetoric, such as the use of accusations or threats, toward its
perceived or invented foreign enemies.80 A less resilient oil-producer may direct its belligerent rhetoric
towards high-resilience states.81, 82 Historic enemies or neighbors may also become the target of hostile
2008): 489-513, http://www.jstor.org/stable/29734248.
74
Benoit Faucon and Matt Bradley, "New Attacks on Libya's Oil Assets Shake Nation's Stability, Energy Markets," Wall Street Journal, March
8, 2015, accessed April 15, 2015, http://www.wsj.com/articles/new-attacks-on-libyas-oil-assets-shake- nations-stability-energy-markets1425840239.
75
Arwa Damon and Hamdi Alkhshali, "ISIS targets Iraq's largest oil refinery," CNN, April 13, 2015, accessed April 15, 2015,
http://www.cnn.com/2015/04/12/middleeast/isis-assault-iraq-baiji-oil-refinery/.
76
"Libya violence: Foreign oil workers 'kidnapped,'" BBC, March 9, 2015, accessed April 15, 2015, http://www.bbc.com/news/world-africa31802393.
77
Elisha Bala-Gbogbo, “Shell to Chevron Move Offshore as Nigerian Risks Mount,” Bloomberg Business, July 31, 2013, accessed April 20,
2015, http://www.bloomberg.com/news/articles/2013-07-30/shell-flees-to-nigerian-offshore-fields-amid- onshore-woes.
78
U.S. Energy Information Administration, “Maritime Chokepoints Critical to Petroleum Markets,” March 2, 2011, accessed March 1, 2015,
http://www.eia.gov/todayinenergy/detail.cfm?id=330.
79
Youssef M. Ibrahim, "Most Oil Fires Are Out in Kuwait, But Its Environment is Devastated," New York Times, October 19, 1991, accessed
March 3, 2015, http://www.nytimes.com/1991/10/19/world/most-oil-fires-are-out-in-kuwait-but-its -environment-is-devastated.html.
80
J. Tyson Chatagnier, “The effect of trust in government on rallies ‘round the flag,” Journal of Peace Research, September 2012, accessed
April 28, 2015, http://jpr.sagepub.com/content/49/5/631.short.
81
Saudi Arabia led the OPEC decision to maintain production levels despite protests from Algeria, Iran, and Venezuela, leading to accusations of
16
rhetoric.83
Escalation of military activities
The transition from belligerent rhetoric to actual military activity simultaneously reinforces the rallyaround-the-flag effect against an external "other" while demonstrating the state’s capacity to maintain its
military strength despite its vulnerability in a low price environment. The following are examples of such
military action:
● Military readiness: An increase in military readiness, ranging from unit-wide travel restrictions and
leave cancellations to an upgrade of a state's nuclear alert system, signals a state's acknowledgement of a
real or perceived security threat. As an oil-exporter suffers from the destabilizing effects of a low oil price
environment, it may perceive threats more acutely and respond to them more aggressively.84
● War games: Although a state's military will regularly conduct tactical-level exercises regardless of its
threat perceptions, the execution of operational and strategic-level war games may increase in preparation
for conflict. This includes the use of a dedicated opposing force to replicate an enemy state military's
weapons, equipment, tactics, and doctrine. War games can serve as a deterrent; they are often publicized
to demonstrate a state's military might.85
● Shows of force: Shows of force, in which a state intentionally approaches another state's territory or
enters its airspace unannounced, is an attempt to demonstrate the imposing military's capabilities and
intimidate target opposition. While demonstrating military might, shows of force run the risk of
escalation.86
● Troop deployments: The large-scale deployment of troops, especially when staged on a neighbor’s
border, is a dangerous provocation, if not a clear indication of intended military action.87
economic warfare and a U.S.-Saudi conspiracy to cripple their geopolitical rivals. Alex Lawler, David Sheppard, and Rania el-Gamal, “Saudis
block OPEC output cut, sending oil price plunging,” Reuters, November 27, 2014, accessed April 20, 2015,
http://www.reuters.com/article/2014/11/27/us-opec-meeting-idUSKCN0JA0O320141127.
82
Iranian President Rouhani called the OPEC decision "a political conspiracy by certain countries against the interests of the region and the
Islamic world." Mehrdad Balali, “Iranian president blames oil price fall on political conspiracy,” Reuters, December 10, 2014, accessed April 10,
2015, http://www.reuters.com/article/2014/12/10/iran-oil-idUSL6N0TU2U220141210.
83
With a "domestic constituency hungry for a restoration of lost military might, “President Putin has threatened to aim its nuclear weapons at
Denmark's navy if it joins NATO's missile defense system. Coming on the heels of Russia's intervention in Ukraine, Putin's approval rating
remains at historic highs. Paul Sonne, “As Tensions With West Rise, Russia Increasingly Rattles Nuclear Saber,” Wall Street Journal, April 5,
2015, accessed April 20, 2015, http://www.wsj.com/articles/as-tensions-with-west-rise-russia-increasingly-rattles-nuclear-saber-1428249620.
Also: “Russia Threatens to Aim Nuclear Missiles at Denmark Ships if it Joins NATO Shield,” Reuters, March 22, 2015, accessed April 10, 2015,
http://www.reuters.com/article/2015/03/22/us-denmark-russia-idUSKBN0MI0ML20150322,
84
Russia, already threatened by a Western-leaning Ukraine on its doorstep, conducted a "'snap combat readiness exercise'" in the Arctic, with its
navy deploying "38,000 troops, 41 ships, 15 submarines, and 110 aircraft" in response to a planned NATO naval exercise in the region. Eliott C.
McLaughlin, “Amid NATO exercises, Russia Puts Northern Fleet on ‘Full Alert,’” CNN, March 17, 2015, accessed April 10, 2015,
http://www.cnn.com/2015/03/16/europe/russia-arctic-military-exercises/.
85
Iran, for example, touted its February 2015 exercise "Great Prophet 9," wherein the Iranian navy "assaulted a replica of a U.S. aircraft carrier [...]
during large-scale naval drills near the strategically vital entrance of the Persian Gulf." Adam Schreck,“Fake US Aircraft Carrier the Target in
Latest Iranian Drills,” The Associated Press, February 25, 2015, accessed April 10, 2015,
http://www.nytimes.com/aponline/2015/02/25/world/middleeast/ap-ml-iran.html.
86
In an attempt to display the global reach of its military, Russia has begun patrolling the Gulf of Mexico with long-range bombers. Defense
Minister Sergei Shoigu stated, "Under the prevailing circumstances, we need to ensure a military presence in the western Atlantic and Pacific
oceans, the waters of the Caribbean basin and the Gulf of Mexico."In a more dangerous provocation, Russian military aircraft have repeatedly
entered European airspace, turning their transponders and running the risk of collisions with both military and civilian aircraft. Teis Jensen,
“Russian Planes to Patrol in Caribbean, Gulf of Mexico,” BBC, November 12, 2014, accessed April 10, 2015, http://www.bbc.com/news/worldeurope-30028371. Also: Lizzie Dearden, “Full List of Incidents Involving Russian Military and NATO Since March 2014,” The Independent,
November 10, 2014, accessed April 10, 2015, http://www.independent.co.uk/news/world/europe/full-list-of-incidents-involving-russian-militaryand-nato-since-march -2014-9851309.html.
87
As illustrated in the Iraq case study below, the staging of the Iraqi army along Kuwait's border was quickly followed by an invasion, which
prompted a U.S. military response.
17
Framework Application: Country Profiles
The purpose of this section is to apply the framework to the current oil environment in order to examine
how conditions and indicators manifest in an array of oil-producing countries around the world. Beyond
analyzing how the low world market price of oil impacts the political and/or economic stability of each
state, the section explains how these negative consequences affect U.S. priorities in the region.
Iran
Iran possesses the world's fourth largest proven oil reserves.88 Iran is also a key player in the global oil
market, producing 3.6 million barrels per day.89 The country is heavily dependent on its oil sector, and
thus quite vulnerable to oil price fluctuations. Oil accounts for as much as 75 percent of its fiscal revenue
and 80 percent of its total exports.90 These exports have funded a sovereign wealth fund totaling
approximately $62 billion dollars as of April 2015.91 Since the 1979 revolution, Iran's oil industry has
been controlled by the government's National Iranian Oil Company. Although Iran's government has
retained elements of its revolutionary character, it is well-entrenched at home and has been less
aggressive abroad since the 1980s. Despite being only partially democratic, the country is internally
stable, fueled by a robust sense of Iranian nationalism.
Indicators
With a fiscal breakeven price of $127 per barrel, Iran has surely felt the negative effects of the collapse in
oil prices.92 Faced with a growing budget deficit, Iran has withdrawn from its primary sovereign wealth
fund, the National Development Fund, to reimburse contractors active in upstream oil projects.93 Imports
have been significantly curtailed as part of Supreme Leader Khamenei’s “resistance economy,” stressing
domestic self-sufficiency as a way to combat the combined effects of sanctions and the drop in oil price.94
Although Iran has enacted a limited number of austerity measures during the current low oil price
environment, some have been politically controversial. Presented as an alternative strategy to Khamenei’s
“resistance economy,” President Rouhani has “called for conglomerates controlled by Iran’s
Revolutionary Guard Corps and conservative religious foundations to give up their tax-exempt status and
begin pulling their weight.”95 Additionally, Iran has reintroduced the sale of military exemptions to
mandatory military service, a contentious source of revenue not utilized in over a decade.96 Tensions
between Rouhani and Khamenei over the nuclear negotiations with the West, and over how best to
respond to Iran’s constrained revenue stream, have intensified the political infighting.
88
British Petroleum, "BP Statistical Review of World Energy June 2014," June 2014, accessed January 30, 2015,
http://www.bp.com/content/dam/bp/pdf/Energy-economics/statistical-review-2014/BP-statistical-review-of-world-energy- 2014-oil-section.pdf.
89
Ibid.
90
Central Intelligence Agency, "The World Factbook: Iran," April 10, 2015, accessed April 15, 2015,
https://www.cia.gov/library/publications/the-world-factbook/geos/ir.html.
91
"Iran to spend up to $4.8 billion from sovereign wealth fund on oil development," Reuters, February 24, 2015, accessed April 27, 2015,
http://www.reuters.com/article/2015/02/24/us-iran-budget-oil-idUSKBN0LS1I620150224.
92
Steven Mufson, "Plunging oil prices are doing Obama's foreign policy for him," Washington Post, December 16, 2014, accessed March 22,
2015, http://www.washingtonpost.com/blogs/wonkblog/wp/2014/12/16/plunging-oil-prices-are-doing- obamas-foreign-policy-for-him/.
93
Andrew Torchia, "Iran to Draw on Sovereign Fund to Withstand Oil Price Slide," Reuters, November 15, 2014, accessed March 22, 2015,
http://www.reuters.com/article/2014/11/15/us-iran-economy-idUSKCN0IZ0MV20141115.
94
Bijan Khajehpour, "Decoding Iran's 'resistance economy," al-Monitor, February 24, 2015, accessed April 27, 2015, http://www.almonitor.com/pulse/originals/2014/02/decoding-resistance-economy-iran.html#. Also: Matthew M. Reed, “How Iran Is Coping With Sagging Oil
Prices,” Newsweek, January 30, 2015, accessed March 22, 2015, http://www.newsweek.com/how-iran-coping-sagging-oil-prices-303298.
95
Kambiz Foroohar and Ladane Nasseri, "Rouhani Puts Squeeze on Iran's Guards in Power Struggle," Bloomberg, January 2, 2015, accessed
April 27, 2015, http://www.bloomberg.com/news/articles/2015-02-02/pay-your-taxes-iran-s-rouhani-confronts-powerful-corporations.
96
Scott Peterson, “Are falling oil prices pushing Iran to make risky economic choices?,” The Christian Science Monitor, January 27, 2015,
accessed March 25, 2015, http://www.csmonitor.com/World/Middle-East/2015/0127/Are-falling-oil-prices-pushing-Iran-to-make-riskyeconomic-choices.
18
With its economy crippled by international sanctions and low oil prices, Iran lobbied OPEC to cut
production in order to drive oil prices up.97 Saudi Arabia, Iran's chief regional rival, used its influence in
OPEC to maintain production despite Iran's protests and accusations of political manipulation. Although
Iran's internal stability remains intact, despite economic hardships, Iran's rhetoric has remained defiant
and aggressive. The Iranian Revolutionary Guard has published an article in their newsletter "threatening
revenge on the Sunni Gulf kingdoms 'with all the means Iran has at its disposal'" in response to their
refusal to cut production.98 This was accompanied by large-scale military exercises, including the
February 2015 operation "Great Prophet 9," wherein the Iranian navy "assaulted a replica of a U.S.
aircraft carrier [...] during large-scale naval drills near the strategically vital entrance of the Persian
Gulf."99
Implications for the United States
Iran’s regional ambitions are hindered by its economic woes. As a supporter of several regional parties,
including the Assad regime in Syria, Hezbollah in Lebanon, the Houthi rebels in Yemen, and both Shia
militias and the government in Iraq, Iran's foreign policy comes with a large price tag. While the United
States may support Iran's diminishing ability to fund terrorist groups like Hezbollah or expand its proxy
war against Saudi Arabia, Iran's capacity to support Iraq against the Islamic State (IS) may also suffer
from its revenue shortfalls.100
Perhaps the most immediate impact of low oil prices is seen in Iran’s nuclear negotiations with the United
States and other members of the P5+1. With an economy already suffering from international sanctions,
the collapse in oil prices may have added incentive for Iran to accept a nuclear deal with the West.
Although Khamenei continues to prioritize Iran’s sovereign control of its nuclear program over lifting
sanctions, Rouhani has stated that Iranians “can’t have sustainable growth while [they] are isolated.”101
The current low oil price environment may strengthen the United States’ hand in its goal of reaching a
favorable conclusion to the nuclear negotiations, limiting Iran’s ability to field nuclear weapons and
normalizing relations between the two historic enemies.
Iraq
Decreasing oil prices, combined with an ongoing insurgency and political upheaval, have threatened
Iraq’s financial stability and political security.102 With over 90 percent of government revenue coming
from its oil sector, Iraq's ability to run the state is suffering greatly.103 Although bidding was opened to
foreign companies in 2009, the majority of Iraq’s oil industry remains state-run.104 The implementation of
97
Catherine Boyle, "Oil demand seen rising, but Iran calls for cut," CNBC, April 15, 2015, accessed April 27, 2015,
http://www.cnbc.com/id/102587704.
98
Jamie Dettmer, "Iran Accuses Saudis of Oil Conspiracy," Voice of America, January 6, 2015, accessed April 15, 2015
http://www.voanews.com/content/iran-accuses-saudis-of-oil-conspiracy/2587985.html.
99
Adam Schreck, “Fake US Aircraft Carrier the Target in Latest Iranian Drills,” New York Times, February 25, 2015, accessed April 10, 2015,
http://www.nytimes.com/aponline/2015/02/25/world/middleeast/ap-ml-iran.html.
100
Nicholas Blanford, "The Oil Slump is Squeezing Iran's Lebanese Proxy," Business Insider, January 5, 2015, accessed March 22, 2015,
http://www.businessinsider.com/the-oil-slump-is-squeezing-irans-lebanese-proxy-2015-1.
101
Matthew M. Reed, “How Iran Is Coping With Sagging Oil Prices,” Newsweek, January 30, 2015, accessed March 22, 2015,
http://www.newsweek.com/how-iran-coping-sagging-oil-prices-303298.
102
British Petroleum, "BP Statistical Review of World Energy June 2014.”
103
Erin Banco, "Falling Oil Prices are Hurting Iraq's Fight Against ISIS, Threatening Stability," International Business Times, January 6, 2015,
accessed March 22, 2015, http://www.ibtimes.com/falling-oil-prices-are-hurting-iraqs-fight-against -isis-threatening-stability-1774890,
104
Serena Chaudhry, "U.S. Exit From Iraq Unlikely To Deter Investment In Key Oil Producer," Reuters, October 23, 2011, accessed April 15,
2015, http://www.huffingtonpost.com/2011/10/23/us-exiting-from-iraq-unli_n_1027113.html.
19
democratic institutions and rampant Shia triumphalism have isolated Sunnis from the government and
embittered the Sunni minority against the Shia majority. This factionalism was partially responsible for
the rise of the Islamic State and aided IS’s ability to gain support from the Sunni population.
Indicators
With a fiscal breakeven price of $100.60pb and a costly counterinsurgency war against IS, Iraq has faced
many challenges since the collapse in the price of oil.105 Along with Iran, Iraq lobbied to reduce OPEC
production in order to drive prices up.106 To compensate for the lost revenue, Iraq has been forced to
withdraw from its central bank's foreign currency reserves and implement austerity measures, which
include salary cuts across the public sector that employs over 6 million Iraqis.107 Although the election of
Haider al-Abadi as prime minister has partially relieved the factionalism and corruption of the Nouri alMaliki government, it has not helped to erode IS's Sunni support base; civil unrest along sectarian and
ethnic lines also continues unabated.108 Since IS expanded rapidly through northern Iraq, Iraqi oilfields
have become prime targets for attacks, further endangering the Iraqi government's revenue stream. In
June 2014, IS captured Iraq's largest oil refinery at Baiji.109 Although Iraqi government forces have since
recaptured the Baiji refinery, it remains a hotly contested, and an immensely valuable prize.
Implications for the United States
IS's captured oil resources, sold on the black market, serve as one of the primary sources of funding for
the insurgency group.110 Although it has been unsuccessful thus far, IS has made concerted, repeated
efforts to capture the territory around Kirkuk, a region with considerable oil reserves.111 With the drop in
oil price, Iraq has been unable to fund its counterinsurgency campaigns, relying on military and economic
aid from the United States and Iran, among others. If Iraq is unable to reverse the tide of IS extremism, it
will continue to destabilize its neighbors, including allies like Jordan and Saudi Arabia, for the
foreseeable future. If IS is allowed to become fully entrenched, it will directly threaten the survival of the
Iraqi government and endanger a vital region to U.S. interests. Still, an increase in oil prices will not only
replenish the Iraqi government’s coffers, it will increase profits for IS as well.
Libya
Suffering from widespread political instability before the oil price dip, Libya has devolved further into
political and economic chaos since the recent price collapse. Libya's oil industry recovered after the fall of
the Gaddafi regime in 2011 to produce 1.6 million barrels per day in 2013.112 However, since the rise of
105
"OPEC: The Cartel is Standing Pat on Production, for Now," Wall Street Journal, November 25, 2014, accessed April 19, 2015,
http://graphics.wsj.com/lists/opec-meeting.
106
Benoit Faucon, Summer Said, and Sarah Kent, "OPEC Members Nearing Compromise on Supply Cuts," Wall Street Journal, November 25,
2015, accessed April 20, 2015, http://www.wsj.com/articles/opec-members-nearing-compromise-on-supply-cuts-1416937145.
107
"Austerity in the Life of Iraqis in 2015," Diplomatic Intelligence, accessed April 15, 2015,
http://98.139.236.92/search/srpcache?p=percent22Austerity+in+the+Life+of+Iraqis+in+2015percent22&hsimp=yhs002&hspart=mozilla&fr=yhs-mozilla-002&ei=UTF8&u=http://cc.bingj.com/cache.aspx?q=percent22Austerity+in+the+Life+of+Iraqis+in+2015percent22&d=4545996703926749&mkt=enUS&setlang=en-US&w=Mb9McVg9masTR73MnKbHCbBRDPdu2YlA&icp=1&.intl=us&sig=JuSUTmFCt5Tw28aBYjZokQ-108
Adam Taylor, "Meet Haider al-Abadi, the Man Named Iraq's New Prime Minister," Washington Post, August 11, 2014, accessed April 14,
2015, http://www.washingtonpost.com/blogs/worldviews/wp/2014/08/11/meet-haider-al-abadi-the-man- named-iraqs-new-prime-minister/.
109
Arwa Damon and Hamdi Alkhshali, "ISIS Targets Iraq's Largest Oil Refinery," CNN, April 13, 2015, accessed April 15, 2015,
http://www.cnn.com/2015/04/12/middleeast/isis-assault-iraq-baiji-oil-refinery/.
110
Janine Di Giovanni, Leah McGrath Goodman, and Damon Sharkov, "How Does ISIS Fund Its Reign of Terror," Newsweek, November 6,
2014, accessed April 10, 2015, http://www.newsweek.com/2014/11/14/how-does-isis-fund-its-reign-terror-282607.html.
111
Yousuf Basil, Jomana Karadsheh, and Laura Smith-Spark, "ISIS launches attack on oil-rich northern Iraqi city of Kirkuk," CNN, January 30,
2015, accessed April 12, 2015, http://www.cnn.com/2015/01/30/middleeast/isis-attack/.
112
Manashil Shah, "Falling Forward: The Ramifications of Libya's Oil Crisis," Berkeley Political Review, March 30, 2015, accessed April 25,
20
militias supporting the rival governments of the secular east and the Islamist west, Libya has entered into
a cycle of economic collapse fueling political unrest and vice versa. Its oil production has since fallen to
988,000 barrels per day.113 Still, Libya possesses the greatest number of known crude oil reserves in all of
Africa at 48.5 billion barrels.114
Libya's economy is extremely dependent on oil revenue; the country has been severely compromised
since the fall in oil prices. Oil accounts for 96 percent of Libya's total government revenue and 98 percent
of export revenue.115 Although Libya's National Oil Company (NOC) is state-owned, it is unclear whether
the secular east or the Islamist west controls it.116 Oil revenues continue to move through Libya's central
bank, "one of the last institutions largely left untouched by the power struggle, [... funding] both sides in
the civil war."117 Since the capture of Benghazi by the Islamist Libyan Dawn extremist group, the
internationally-recognized eastern government has lost control of the NOC's headquarters.118
Indicators
Libya’s current fiscal breakeven price is one of the highest, if not the highest, in the world. At $184 per
barrel, this breakeven price was unsustainable even before the price collapse. Today, it is nearly three
times the world market price of oil.119 Libya has tried to counter the effects of the oil glut by rapidly
"burning through its [foreign currency] reserves," worth $100 billion, and its sovereign wealth fund,
worth $65 billion, "to keep the state afloat."120, 121, 122 Additionally, Libya has implemented austerity
measures, primarily gas subsidy cuts.123 Due to incessant violence and reduced revenue, Libya’s currency
has depreciated by 30%.124
The state’s oil industry has become a primary target in the Libyan conflict, even as oil becomes less
profitable. Islamist militants have attacked the oil-rich region of al-Ghani, forcing 11 oilfields to shut
down and its employees to evacuate.125 Similarly, militants have attacked Libya's oil refineries, most
notably the Zawiya refinery that shut down Libyan oil production at its largest oil field at Sharara, leading
to a temporary rise in the WMP of oil in September 2014.126 Foreign investment has also been negatively
2015, http://bpr.berkeley.edu/2015/03/30/falling-forward-the-ramifications-of-libyas-oil-crisis/.
113
British Petroleum, "BP Statistical Review of World Energy June 2014.”
114
Ibid.
115
Manashil Shah, "Falling Forward: The Ramifications of Libya's Oil Crisis," Berkeley Political Review, March 30, 2015 accessed April 25,
2015, http://bpr.berkeley.edu/2015/03/30/falling-forward-the-ramifications-of-libyas-oil-crisis/.
116
Ulf Laessing, "East's bid to control Libyan oil wealth likely to fail," Reuters, March 23, 2015, accessed April 20, 2015,
http://www.reuters.com/article/2015/03/23/us-libya-security-oil-analysis-idUSKBN0MJ1YL20150323.
117
Ibid.
118
Ibid.
119
British Petroleum, "BP Statistical Review of World Energy June 2014.” Also: Myles Udland, “Libya’s Breakeven Price for Oil is Literally Off
the Chart,” Business Insider, November 28, 2014, accessed March 15, 2015, http://www.businessinsider.com/oil-production-breakeven-prices2014-11.
120
Ulf Laessing, "East's bid to control Libyan oil wealth likely to fail.”
121
"With $100 billion in foreign reserves: Is Libya's central bank monopolizing the country's economic potential?" Albawaba, September, 28,
2014, accessed April 25, 2015, http://www.albawaba.com/business/central-bank-libya-power-struggle-608267.
122
Jenny Anderson, "Libya's Sovereign Fund and Goldman Sachs Clash in Court," New York Times, October 6, 2014, accessed April 24, 2015,
http://dealbook.nytimes.com/2014/10/06/libyas-sovereign-fund-and-goldman-sachs-clash-in-court/?_r=0.
123
"That it should come to this," The Economist, January 10, 2015, accessed March 30, 2015,
http://www.economist.com/news/briefing/21638123-four-year-descent-arab-spring-factional-chaos-it-should-come.
124
Ulf Laessing, "Libya pays heavy economic price as fighting takes toll," Reuters, January 6, 2015, accessed April 29, 2015
http://www.reuters.com/article/2015/01/06/libya-security-budget-idUSL6N0UL29T20150106.
125
Ayman al-Warfalli, "Libya Shuts Down Two Eastern Oilfields for Security Reasons - Official," Reuters, March 10, 2015, accessed April 25,
2015, http://uk.reuters.com/article/2015/03/10/uk-libya-security-oil-idUKKBN0M61OE20150310.
126
Maher Chmaytelli and Grant Smith, "Libya Halts Biggest Oilfield Sharara Amid Rebel Attacks," Bloomberg, September 17, 2014, accessed
April 25, 2015, http://www.bloomberg.com/news/articles/2014-09-17/libya-halts-biggest-oilfield-sharara-amid- rebel-attacks.
21
affected, especially since the recent abduction of nine foreign oil workers by IS militants.127
Implications for the United States
With Libya's principal means of revenue crippled by an underperforming oil industry, rampant political
violence, and low oil prices, the country is teetering on the edge of becoming a failed state. War, high
rates of violent crime, and poverty are spurring refugee flows from Libya to southern Europe, placing
stress on European allies to accommodate new immigrants. 23,556 refugees have fled to Italy in 2015
alone, an increase of nearly 3,000 compared to a year ago.128 In what has been called "the worst maritime
disaster in the Mediterranean since the second World War," 900 Libyan refugees died on their quest to
Europe in April 2015, triggering calls for substantial change to the European Union’s refugee policies.129
The destabilizing effects of the oil price drop are surely not helping Libya’s unlivable environment.
In addition to sponsoring the civil war between the governments of the secular east and Islamist west, and
their respective international allies, the United Arab Emirates and Qatar, Libya is quickly becoming the
principal outpost for the Islamic State outside of Iraq and Syria, which is of great concern for U.S.
interests and priorities.130 "In its Dabiq magazine, IS outlined how Libya's chaos and abundance of arms
made the country 'ideal for jihad.'"131 Both rival Libyan governments have struggled to contain ISinspired violence, a failure that resulted in the execution of 21 Egyptian Coptic Christians, to which the
Egyptian Air Force responded with retaliatory airstrikes.132 Exploiting wide swathes of ungoverned
territory, IS militants could turn Libya into North Africa's principal safe haven for jihadists.
Saudi Arabia
With 266 billion barrels of proven oil reserves and a production average of 11.5 million barrels per day in
2013, Saudi Arabia is rich in oil and it is highly dependent on the resource for income. Oil exports
account for 46 percent of GDP and 86 percent of government revenue.133 Saudi Arabia exercises a high
degree of control over its economy, using its state-owned oil company, Saudi Aramco, to fund its
government operations and financial obligations.134 Given the state’s low production costs and $750
billion in foreign currency reserves, accumulated during the prolonged period of high oil prices, Saudi
Arabia is well positioned to weather the current low oil price environment. In fact, it is probably the state
most resilient to oil price fluctuations highlighted in this report.
Indicators
Like the majority of the world's net-exporter states, Saudi Arabia’s fiscal breakeven price of $106 dollars
127
"Libya Violence: Foreign Workers 'Kidnapped,'” BBC, March 9, 2015, accessed April 25, 2015, http://www.bbc.com/news/world-africa31802393.
128
"The Worst Yet?" The Economist, April 19, 2015, accessed April 25, 2015, http://www.economist.com/news/europe/21648896-another-boatcapsizes-between-libya-and-italy-europe-debates-migration-policy-worst-drowning-yet.
129
Ibid.
130
"Islamic State Heads West," The Economist, January 31, 2015, accessed April 23, 2015, http://www.economist.com/news/middle-east-andafrica/21641307-jihadists-move-libyas-capital-storming-countrys-largest-hotel-islamic.
131
Ibid.
132
"Islamic State: Egyptian Christians Held in Libya 'Killed,'" BBC, February 15, 2015, accessed April 24, 2015,
http://www.bbc.com/news/world-31481797.
133
British Petroleum, "BP Statistical Review of World Energy June 2014. Also: CIA, "Saudi Arabia.”
134
"Fair, stable oil prices to benefit everyone: Saudi oil minister," Reuters, April 27, 2015, accessed April 28, 2015,
http://www.reuters.com/article/2015/04/28/us-saudi-oil-china-idUSKBN0NJ06C20150428.
22
per barrel is well above the current WMP of oil, placing pressure on the government to "cover its federal
spending, including a lavish budget for infrastructure projects.”135 The Saudi government has chosen to
rely on its $750 billion in currency reserves instead of implementing austerity measures, as its political
stability largely depends on providing social programs and offering government employment to placate
much of its population. Despite an expected deficit of about $39 billion in 2015, it is estimated that Saudi
Arabia will be able to operate at its current fiscal budget in a $60pb environment for at least four years.136
Implications for the United States
Due to Saudi Arabia’s high resiliency, prioritization of maintaining oil market share, and political rivalry
with less-resilient oil-producing states such as Russia and Iran, Saudi Arabia has used its status as
OPEC’s swing producer to keep production high and prices low.137 Although the Saudi government
would not refer to its economic policy as a political weapon, its decision to maintain current levels of
production has real political consequences. Iranian and Russian support for the Assad regime will likely
be weakened as they confront falling oil income.138 Furthermore, Iran, already crippled economically by
international sanctions, may be more willing to accept a nuclear deal with the West. All of which Saudi
Arabia would view as positive for their foreign policy priorities.
Given Saudi Arabia's status as an important and strategic regional ally and its "central place in oil markets
and Islam," continued internal stability is of vital importance to the United States.139 If the current price
environment persists for the foreseeable future and Saudi Arabia is forced to cut its costly social
provisions, civil unrest is likely to accelerate amongst its youthful population who are reliant on
government jobs.140 The United States has developed a fairly positive relationship with the current Saudi
government, one that has been relatively amenable to U.S. strategic goals. In order to continue this
mutually beneficial relationship, the Saudi royal family must remain in power. Most alternatives to the
Saudis’ autocratic government would most likely see the end of Saudi Arabia's strategic partnership with
the United States, resulting in a severely weakened position in the Middle East and the global energy
market.141
Nigeria
A member of OPEC since 1971, Nigeria is Africa’s largest oil producing country. The state owes much of
its economic prosperity to the exportation of crude oil and natural gas.142 Despite the country’s vast oil
resources (37.1 billion barrels in proven oil reserves), a fast growing services sector, and being home to
the continent’s largest economy and population, Nigeria continues to face decades-long political and
economic problems.143, 144 The president-elect, Muhammadu Buhari, will inherit economic and political
135
Mark Mazzetti, Eric Schmitt, and David D. Kirkpatrick,"Saudi Oil is Seen as Lever to Pry Russian Support From Syria's Assad," The New
York Times, February 3, 2015, accessed April 20, 2015, http://www.nytimes.com/2015/02/04/world/middleeast/ saudi-arabia-is-said-to-use-oil-tolure-russia-away-from-syrias-assad.html.
136
“Report Notes Strong Saudi Fiscal ‘Buffers,’” Oil and Gas Journal, March 3, 2015, accessed March 16, 2015,
http://www.ogj.com/articles/2015/03/report-notes-strong-saudi-fiscal-buffers.html.
137
Mazzetti, Schmitt, and Kirkpatrick, “Saudi Oil is Seen as Lever.”
138
Ibid.
139
"Keeping it in the family," The Economist, January 31, 2015.
140
Ibid.
141
Ibid.
142
U.S. Energy Information Administration, “Analysis: Nigeria,” February 27, 2015, accessed March 15, 2015,
http://www.eia.gov/countries/cab.cfm?fips=NI.
143
British Petroleum, “BP Statistical Review of World Energy June 2014.”
144
“To the Victor go the Toils”, The Economist, April 4, 2015, accessed April 17, 2015, http://www.economist.com/news/finance-andeconomics/21647666-low-oil-price-has-revealed-grave-problems-africas-biggest-economy.
23
challenges such as crippling corruption, slow economic growth, skyrocketing inflation, quickly depleting
foreign reserves and sovereign wealth funds, fiscal debt, and a recalcitrant and violent insurgency when
he takes office in May 2015.145 Nigeria’s most severe security issues stem from its ongoing
counterinsurgency effort against Boko Haram. Given the declining revenues from oil, the ability of the
state to continue to finance the counterinsurgency is questionable.
Estimates from the International Monetary Fund indicate that in 2012, oil and natural gas exports
accounted for 75 percent of government revenue and 96 percent of total export revenue.146 The country
produces approximately 2.3 million barrels per day.147 Although the country’s economic growth has not
been due exclusively to oil sales, the government’s inability to tax other large sectors of the economy,
such as agriculture, has left it reliant on oil revenue.148 The Nigerian National Petroleum Corporation
(NNPC), a state run corporation, regulates the oil and natural gas sectors. Currently, the bulk of Nigeria’s
energy projects are funded jointly through the NNPC and international oil companies where the NNPC is
the majority shareholder. Although not passed yet, Nigeria’s Petroleum Industry Bill proposes many
unfriendly business practices to the oil industry. The ongoing debate and potential passage of this bill has
discouraged FDI in the energy sector.149 Totaling $1.4 billion, Nigeria’s sovereign wealth fund is quite
small, especially in comparison to other major oil-producers.150
One of Nigeria’s most pervasive problems is crippling corruption, which extends to the country’s oil
sector. The most recent controversy revolves around allegations made by the then Central Bank Governor,
Lamido Sanusi. In late 2013, Sanusi wrote to President Goodluck Jonathan alleging that the state oil
company (NNPC) had failed to transfer $20 billion in revenue to the state and submitted more than 300
pages of documentation to the Nigerian parliament as supporting evidence.151 The NNPC denied the
accusations and Sanusi was suspended shortly after; the suspension was seen as an attempt to silence the
“whistleblower.”152 A national audit of the NNPC indicated that money was indeed missing and a $1.48
billion fine was issued, but there was little effort to bring the guilty party to justice.153 Sanusi’s dossier of
evidence detailed three mechanisms through which Nigeria has allowed funds to be siphoned away from
the central bank. Among the receivers of these funds are well-placed government officials and society
heads.154 Corruption and bad governance are consistent problems in Nigeria and were a focal point of the
election campaigns that culminated with a change in Presidential party leadership.155
145
Lindsay Whipp, “Nigeria's Economy in Charts: Buhari's Challenge,” Financial Times: Africa Economy, April 2, 2015, accessed April 17,
2015, http://www.ft.com/intl/cms/s/2/37f8d542-d86c-11e4-8a68-00144feab7de.html#axzz3XbwboPPH.
146
U.S. Energy Information Administration, “Analysis: Nigeria.”
147
British Petroleum, “BP Statistical Review of World Energy June 2014.”
148
Whipp, “Nigeria's Economy in Charts.”
149
U.S. Energy Information Administration, “Analysis: Nigeria.”
150
Sovereign Wealth Fund Institute, “Sovereign Wealth Fund Rankings.”
151
Tim Cocks and Joe Brock, “The Extraordinary Story of Nigeria’s $20 Billion Oil Money Leakage,” Business Insider, February 6, 2015,
accessed April 17, 2015, http://www.businessinsider.com/r-special-report-anatomy-of-nigerias-20- billion-leak-2015-2.
152
Will Ross, “Is Nigeria Serious About Tackling Corruption?” BBC News, March 12, 2014, accessed April 17, 2015,
http://www.bbc.com/news/world-africa-26535530.
153
Godwin Uyi Ojo, “The Fall in Oil Price Could Be a Turning Point for Nigeria’s Economy,” The Guardian, March 5, 2015, April 18, 2015,
http://www.theguardian.com/world/2015/mar/05/the-fall-in-oil-price-could-be-a-turning-point-for-nigerians -economy.
154
The three mechanisms are: the awarding of non-competitive contracts to companies that never supply the services but rather sub-contract them
out; the use of a kerosene subsidy program that fails to transfer the subsidy to the public; and a series of non transparent “swap deals” that may
not be equitable for the state. Swap deals are barter exchanges of one resource for another to be paid in equal value. In Nigeria, crude oil is
exchanged for refined fuel. The problem is that the method used to determine the equivalent value is an opaque. Sanusi alleged that the
transactions were not properly structured and did not have the appropriate oversight or auditing. Tim Cocks and Joe Brock, “The Extraordinary
Story.”
155
Tim Cocks and Joe Brock, “The Extraordinary Story..
24
The electoral defeat of President Goodluck Jonathan reinstated Muhammadu Buhari, who was the
country’s head of state from 1983 to 1985, when the state was under military rule. While some violence
accompanied the election, it is too soon to tell whether or not the election of Nigeria’s former
authoritarian leader will lead to civil unrest or aggravate tensions between the Northern and Southern
regions.156 In part, factionalism between the wealthier southern Christians and the poorer northern
Muslims brought about the formation and radicalization of Boko Haram.157
Indicators
Since the downturn of oil prices in mid-2014, Nigeria has experienced several indicators of increasing
economic strife and political instability. With a fiscal breakeven price ~$123pb, the state may face greater
civil unrest as the government is forced to implement austerity measures.158,159 The ability of the state to
repay legacy debts owed to international trading companies is questionable.160 One of the country’s
largest expenses is its fuel subsidy program, which is unsustainable in the long term if oil prices remain
low.161 In an attempt to curb government spending the Jonathan administration proposed a 50 percent fuel
subsidy cut in November 2014.162 This is not the first time that Nigeria has attempted to do away with the
subsidy program. In 2012, during the last oil price downturn, the government attempted to end subsidies
only to provoke nationwide protests that forced the administration to reinstate the program at a reduced
percentage.163 As revenue has dropped, Nigeria’s currency has depreciated more than 20 percent against
the dollar, suggesting that the country’s ability to balance its budget has been compromised.164,165 The
central bank has tried to buffer the currency’s fall by selling foreign exchange reserves and increasing
interest rates.166
Low oil prices do not bode well for the Nigerian economy in the short term. The government's revenue is
falling which means that it has limited resources to manage political problems. The Nigerian government
has recalculated its budget twice to accommodate an estimated $65 dollars a barrel and cut capital
spending plans to less than 10 percent of their 2015 budget.167,168 This cut to capital spending means
forgoing infrastructure projects and has resulted in major construction industry layoffs. Dependency on
oil revenues is “stirring serious concern throughout the country’s political class. Among other things, a
whole array of government expenditures associated with petroleum play a major role in sustaining the
156
Katy Barnato, “Nigeria Faces ‘Pretty Severe Slowdown’ After Election,” CNBC, March 30, 2015, accessed April 2, 2015,
http://www.cnbc.com/id/102544871.
157
Mohammed Aly Sergie and Toni Johnson, “CFR Backgrounders: Boko Haram,” Council on Foreign Relations, March 5, 2015, accessed April
18, 2015, http://www.cfr.org/nigeria/boko-haram/p25739.
158
Tim Bowler, "Falling Oil Prices: Who Are the Winners and Loosers?," BBC: Business News, January 19, 2015, accessed February 26, 2015,
http://www.bbc.com/news/business-29643612.
159
Benoit Faucon, Sarah Kent, and Summer Said, "OPEC: The Cartel is Standing Pat on Production, for Now," Wall Street Journal, November
25, 2014, accessed March 26, 2015, http://graphics.wsj.com/lists/opec-meeting.
160
Izabella Kaminska, "Nigeria's Oil Minister Opens Door to an Energy Bretton Woods, and More," Financial Times: Alphaville, February 23,
2015, accessed February 26, 2015, http://ftalphaville.ft.com/2015/02/23/2119925/nigerias-oil-minister-opens-door- to-an-energy-bretton-woodsand-more/.
161
Ibid.
162
Yinka Ibukun, "Nigerian President Seeks to Cut Fuel Subsidies After Oil Decline," Bloomberg Business, November 20, 2014, accessed March
16, 2015, http://www.bloomberg.com/news/articles/2014-11-20/nigerian-president-seeks-to-cut-fuel-subsidies -after-oil-decline.
163
John Campbell, “Can Nigeria Endure Falling Oil Prices?” Council on Foreign Relations, December 11, 2014, accessed April 1, 2015,
http://www.cfr.org/nigeria/can-nigeria-endure-falling-oil-prices/p33967.
164
Izabella Kaminska, "Nigeria's Oil Minister Opens Door.”
165
Depreciation of the naira against the dollar leads to higher inflation, a slowdown in GDP growth and a more expensive sovereign debt.
166
Daniel Magnowski, “Nigeria Ends Regular Dollar Sales with Second Naira Devaluation”, Bloomberg Business, February 18, 2015, accessed
April 2, 2015, http://www.bloomberg.com/news/articles/2015-02-18/nigeria-central-bank-shuts-auction-window- as-naira-rates-widen.
167
John Campbell, “Can Nigeria Endure Falling Oil Prices?”
168
Julia Payne, “Exclusive - Nigeria Slashes 2015 Budget as Oil Price Slump Bites,” Reuters, February 4, 2015, accessed April 1, 2015,
http://in.reuters.com/article/2015/02/04/nigeria-budget-idINL6N0VD4UB20150204.
25
cooperating and competing patronage networks that run Nigeria.”169 The ability of the Nigerian political
networks to remain functional with less political grease is uncertain.
Nigeria’s oil industry is primarily located in the southern Niger Delta Region, where it has been a
perennial source of conflict. The two main sources of violence active in disrupting the flow of oil are
Boko Haram, in the north, and the Movement for the Emancipation of the Niger Delta (MEND), a
Christian militant group in the south.170 In addition to years of stunted FDI in the Nigerian oil industry,
competition for the wealth generated from oil sales continues to be a source of conflict for several local
groups, which results in frequent disruptions to supply and attacks on the country’s oil infrastructure.171
Implications for the United States
The fall in oil prices has seriously impacted the Nigerian government’s ability to access resources to
counter threats to the country’s oil infrastructure and combat violent militant groups in both the north and
south.172 New concerns regarding the security of Nigeria’s Niger Delta oil fields have emerged as it
remains unclear whether the new administration will be able to extend the amnesty program implemented
in Goodluck Jonathan’s administration. Instituted in 2009, the amnesty program and contracts for pipeline
surveillance were largely responsible for decreasing MEND’s attacks on the country’s oil and gas
pipelines and reducing “bunkering.”173 The contracts, however, are due to expire in October 2015.
Whether the new government decides to re-up or amend the contracts will likely determine the continued
security of the southern district.174 The amnesty program is likely to continue in some capacity even
though it is a severe drain on the country's monetary resources.175 If the contracts are not renewed, then
the Southern region could see civil unrest return to 2009 levels when oil production was reduced by a
third.176 An increase in militant activity could spur another humanitarian crisis in the country, in which
the United States may be called on to support.
In recent months, the Nigerian government has sought help from neighboring African countries and from
farther abroad to expel Boko Haram.177 Reports indicate that the group has stepped up their attacks,
perpetrating raids and bombings in neighboring countries including Chad, Cameroon and Niger. In
response, Chad has sought support from the U.N Security Council to create an African military force,
comprised of personnel from Chad, Niger, Nigeria, Benin, and Cameroon to fight the insurgents.178 It is
unclear whether Nigeria’s inability to finance its counterinsurgency efforts was one of the reasons behind
the formation of the African military force. Still, the uptick in violence has not only decreased the
169
John Campbell, “Can Nigeria Endure Falling Oil Prices?”
U.S. Energy Information Administration, “Analysis: Nigeria.”
Ibid.
172
Kathleen Caulderwood, “Low Oil Prices Bad for Stability in Nigeria Amid Boko Haram Violence, Upcoming Elections” International
Business Times, December 16, 2014, accessed April 26, 2015, http://www.ibtimes.com/low-oil-prices-bad-stability- nigeria-amid-boko-haramviolence-upcoming-elections-1758668.
173
Bunkering is a term used by local Nigerians for oil theft by using hacksaws and blades to cut into pipes. Jon Gambrell, “Oil Bunkering
Threatens Nigeria’s Economy, Environment,” The Washington Post, July 20, 2013, accessed April 26, 2015,
http://www.washingtonpost.com/national/oil-bunkering-threatens-nigerias-economy-environment/2013/07/18/e38cb4a0-e273-11e2-aef3339619eab080_story.html.
174
Martin Roberts, “Action Against Illegal Bunkering Would Be Most Likely Indicator of Renewed Attacks on Niger Delta Oil Infrastructure,”
IHS Jane’s 360, April 16, 2015, accessed April 26, 2015, http://www.janes.com/article/50766/action-against- illegal-bunkering-would-be-mostlikely-indicator-of-renewed-attacks-on-niger-delta-oil-infrastructure.
175
Ibid.
176
Ibid.
177
Siobhan O'Grady and Elias Groll, "Nigeria Taps South African Mercenaries in Fight Against Boko Haram," Foreign Policy: Passport, March
12, 2015, accessed March 17, 2015, http://foreignpolicy.com/2015/03/12/nigeria-taps-south-african- mercenaries-in-fight-against-boko-haram/.
178
Edith Lederer, “U.N seeks to Endorse Military Action Against Boko Haram” Associated Press, March 18, 2015, accessed March 22, 2015,
http://news.yahoo.com/un-seeks-endorse-military-action-against-boko-haram-153905353.html.
170
171
26
Nigerian government’s stability, but has also displaced thousands of people. The migration of refugees
from northeastern Nigeria could place further stress on the resources of the neighboring countries,
fomenting a need for humanitarian aid activities in the entire region. There is some concern in Nigeria,
perhaps with the declaration of an alliance with ISIS, that the group may divide their attention between
the local fight with the Nigerian government and regional expansion to neighboring states. If this fear
proves valid and the group seeks to seriously expand their regional influence then they may become a
larger global threat. While the U.S has not become heavily involved in the counterinsurgency effort
against Boko Haram, they may take a more active role in the humanitarian aid effort. In addition, the U.S.
may become more involved in the counterinsurgency should the group continue to grow and evolve.
Russia
One of the world’s leading producers of oil and natural gas, Russia’s economy has transitioned from the
centrally-planned, isolated, communist economy of the Cold War era to a more integrated, market-based
economy in the 1990s and first decade of the 2000s.179 As the world’s second largest producer of natural
gas and third largest producer of liquid fuels, the Russian economy is highly dependent on oil and natural
gas exports.180 The country is home to an estimated 93 billion barrels of oil reserves and produces 10.8
billion barrels a day.181 Strong political interference in the economy and external friction both with its
near neighbors and the West have exacerbated the economic impact of low oil prices. The political regime
that governs Russia is centralized, semi-authoritarian, and enjoys high levels of public support.182,183
However, maintaining that support may require the Putin administration to divert public attention away
from domestic economic problems and towards foreign entities, which may create military security risks
for neighboring countries, some of which are NATO allies.
In 2013, approximately 52 percent of the Russian fiscal budget came from energy sales.184 While the
country enjoyed 7 percent GDP growth between 1998 and 2008, difficulties in attracting foreign direct
investment and slowly declining oil prices have created a noticeable slowdown in GDP growth.185
Russia’s national debt stands at 50 percent of GDP compared to the 35 percent of GDP a year ago.186 This
increase in Russia’s debt to GDP ratio suggests that Moscow has had to issue more debt in order to cover
its fiscal budget because oil is not bringing in as much revenue as it did in previous years. “Russia loses
about $2bn in revenues for every dollar fall in the oil price.”187 To compound Russia’s economic and
political problems, sanctions levied by the West on key industries in the wake of Russia’s incursion into
the Ukraine have further decreased Russian growth potential with expectations that GDP will contract 4
percent in 2015.188,189
179
Central Intelligence Agency, "The World Fact Book: Russia," June 20, 2014, accessed March 15, 2015,
https://www.cia.gov/library/publications/the-world-factbook/geos/rs.html.
180
U.S. Energy Information Administration, "Russia: Analysis," March 12, 2014, accessed February 25, 2015,
http://www.eia.gov/countries/cab.cfm?fips=RS.
181
British Petroleum, "BP Statistical Review of World Energy June 2014.”
182
Central Intelligence Agency, "The World Factbook: Russia," June 20, 2014, accessed April 15, 2015,
https://www.cia.gov/library/publications/the-world-factbook/geos/rs.html.
183
Mark Adomanis, “Vladimir Putin’s Approval Rate is Still Near an All-Time High” Forbes, October 6, 2014, accessed April 12, 2015,
http://www.forbes.com/sites/markadomanis/2014/10/06/vladimir-putins-approval-rate-is-still-near-an-all-time-high/.
184
U.S. Energy Information Administration, “Russia: Analysis.”
185
Central Intelligence Agency, “The World Factbook: Russia.”
186
Sergei Guriev, "Russia's Downgrade Deepens Political Crisis with Europe," Financial Times: Opinion, January 27, 2015, accessed February
24, 2015, http://www.ft.com/intl/cms/s/0/e62dada8-a591-11e4-ad35-00144feab7de.html#axzz3SinhyxlE.
187
Tim Bowler, "Falling Oil Prices: Who are the Winners and Losers?," BBC News: Business, January 19, 2015, accessed March 14, 2015,
http://www.bbc.com/news/business-29643612.
188
Fitch Rating, "Fitch Downgrades Russia to 'BBB-'; Outlook Nagative," Reuters, January 9, 2015, accessed February 25, 2015,
27
On a broad level, Russia’s economic, political, and social conditions have made the state more vulnerable
to instability in some aspects, while more resilient in others. Uncompetitive alternate industries force the
government to overly rely on oil for the majority of its income. In the oil industry, domestic firms
dominate the majority of Russia’s production; and, the Russian government is pushing for greater control
in private, domestic companies that have sought rights for exploration and development projects. The
energy sector is highly regulated by several ministries, which take interest in several aspects of oil
production and transportation.190 Russian-owned oil companies are calculated to have about $600 billion
in external debt, but because Western sanctions prevent domestic banks from providing financing and
non-banks unable to access global capital markets, the Russian government has had to bail out both the
domestic banks and companies, resulting in a depletion of the country’s currency reserves.191,192
Indicators
In the wake of falling oil prices Russia has exhibited several indicators of economic crisis and possible
political turmoil. It is estimated that Russia’s breakeven price requirement to finance their fiscal budget
ranges between $98.00 and $105 per barrel.193,194 In the latter part of 2014, the ruble suffered from major
devaluation against other hard currencies.195 The Central Bank of Russia (CBR) heavily depleted foreign
reserves in an attempt to defend the ruble but eventually could not maintain its value and allowed the
currency to float in the last two months of the year.196 In an attempt to stop the freefall of the ruble, the
CBR dramatically increased the exchange rate to 17 percent in December 2014 only to then decrease
interest rates to 14 percent in March 2015.197 This currency devaluation is partially due to the fall in oil
prices.198
In the early part of 2015, both Fitch and Moody’s credit rating agencies downgraded Russia’s sovereign
debt to junk status.199, 200 This, in addition to the sanctions imposed by the West, made it more difficult
and expensive to issue debt. In response to the monetary crisis, Russian officials have started to consider
capital controls to shore up the currency’s freefall.201 With the price of Brent Crude hovering between $50
and $60 dollars a barrel, the fiscal breakeven price is well above the world market price, which implies
http://www.reuters.com/article/2015/01/09/fitch-downgrades-russia-to-bbb-outlook-n-idUSFit89012120150109.
189
Combined, US and EU sanctions ban the export of services and technology for oil exploration, and cripple the country’s ability to obtain long
term loans and foreign direct investment. Thus far, it is unclear how stalwart European countries will be in maintaining sanctions against Russian
interests as the EU is heavily dependent on Russian oil and natural gas. “Ukraine Crisis: Russian and Sanctions,” BBC News, December 19, 2014,
accessed April 2, 2015, http://www.bbc.com/news/world-europe-26672800.
190
U.S. Energy Information Administration, “Russia: Analysis.”
191
Chris Flood, “Russian SWFs Look Vulnerable as Sanctions Bite,” Financial Times: Investment Strategy, January 11, 2015, accessed March
22, 2015, http://www.ft.com/intl/cms/s/0/847a72e4-965f-11e4-a40b-00144feabdc0.html#axzz3V7wzEvN7.
192
Gillian Tett, "Russia Sounds a Warning on the Fragilities of Global Debt," Financial Times: Columnists, December 18, 2014, accessed
February 24, 2015, http://www.ft.com/intl/cms/s/0/e12eb590-8561-11e4-ab4e-00144feabdc0.html#axzz3SinhyxlE.
193
Elliot Bentley, Pat Minczeski and Jovi Juan, "Which Oil Producers Are Breaking Even," Wall Street Journal, January 5, 2015, accessed
February 25, 2015, http://graphics.wsj.com/oil-producers-break-even-prices/.
194
Tim Bowler, "Falling Oil Prices: Who are the Winners and Losers?,"
195
Sergey Aleksashenko, "CBR Shows How Not to Intervene," Financial Times: Opinion, December 20, 2014, accessed February 24, 2015,
http://www.ft.com/intl/cms/s/0/f2b0385c-8836-11e4-ac67-00144feabdc0.html#axzz3PzULpETf.
196
Ibid.
197
Nathalie Thomas, “Russia Cuts Rates to 14percent to Boost Growth,” Financial Times: Global Economy, March 13, 2015, accessed March 22,
2015, http://www.ft.com/intl/cms/s/0/53fed2e8-c96f-11e4-b2ef-00144feab7de.html#axzz3V7wzEvN7.
198
Rob Garver, "Oil Drop Further Rocks Putin's Economy," The Fiscal Times, January 13, 2015, accessed February 24, 2015,
http://www.thefiscaltimes.com/2015/01/13/Oil-Drop-Further-Rocks-Putin-s-Economy.
199
Fitch Rating, "Fitch Downgrades Russia to 'BBB-'; Outlook Negative."
200
Ben Levinsohn, "Russia's Corporate Bonds at Risk Now That Moody's Has Junked the Sovereign," Barron's, February 23, 2015, accessed
February 25, 2015, http://blogs.barrons.com/emergingmarketsdaily/2015/02/23/russias-corporate-bonds-at- risk-now-that-moodys-has-junkedthe-sovereign/.
201
Tim Bowler, "Falling Oil Prices: Who are the Winners and Losers?"
28
that the government will have to curb fiscal spending. The loss in revenue from the sale of oil has made it
difficult to balance their budget and continue to fund state run social and military programs. The Russian
government has had to “abandon a number of programs and make certain sacrifices.”202 In December,
President Putin ordered a 5 percent spending cut across all government departments excluding defense.
Earlier in 2015, Russian Finance Minister Anton Siluanov proposed another 10 percent cut to spending in
the same departments.203
On the political side, the Kremlin has adopted stronger policies of interference in the operations of the
nation’s private oil companies. In a public display of power, a Moscow court ordered the privately owned
oil company, Sistema to hand over to the state, its majority interest in the country’s largest private oil
company, Bashneft.204 In late 2014, Moscow ordered state-owned oil-exporters to sell foreign currency
and conduct business in rubles as a way to force adoption of “deoffshorization” policies.205,206 Despite the
forced partial capital controls levied on the state owned companies, the policy has only temporarily
shored up the ruble. These companies are the foundation of the Russian economy and therefore their debts
are “implicit[ly] liabilities of the Russian state since these firms cannot be left to default.”207 While a
number of international companies have secured drilling rights and land, the Russian state-run monopoly,
Transneft, owns the vast majority of pipelines and maintains jurisdiction of all oil exports. In the wake of
low oil prices, the country has seen a decline in new oil exploration projects and delays or cancellations of
long-term drilling deals.208
In what may be an attempt to divert public attention from the economic troubles that the country faces at
home, Russia has stepped up its military exercises; increased its rhetoric against the NATO allies; and
has violated the airspace of Estonia, Finland, and Sweden.209 How far President Putin is willing to go in
asserting his political will over his near and far relations is nebulous. What is clear is that Russia has
become increasingly hostile towards its near neighbors and Western Europe.210
Implications for the United States
Russia’s economy is in distress because of the downward spiral of oil prices. As a result of sanctions,
political decisions, and the currency crisis, the country has found itself as isolated today as it was at the
end of the Cold War.211 However, Russia is still a major player in the global market and its economic
collapse would have negative implications for European nations and the U.S. Because many European
202
Ibid.
Emma Burrows, “Russian Official Calls for 10 percent Cut in Government Spending,” CNN Money, January 14, 2015, accessed April 12,
2015, http://money.cnn.com/2015/01/14/news/economy/russia-spending-cuts/.
204
Courtney Weaver, "Court Rules Sistema Must Return Bashneft Stake to Russia," Financial Times: Energy, October 30, 2014, accessed
February 24, 2015, http://www.ft.com/intl/cms/s/0/30f77bce-6038-11e4-98e6-00144feabdc0.html#axzz3SinhyxlE.
205
Jack Farchy, "Moscow Orders State-Owned Exporters to Sell Foreign Currency," Financial Times, December 23, 2014, accessed February 24,
24015, http://www.ft.com/intl/cms/s/0/09b78bfa-8aa7-11e4-8e24-00144feabdc0.html#axzz3Sia0wuZC.
206
Richard Sakwa, "Plunging Oil Prices Have Rocked Russia, but Putin May Yet Surprise Us," The Guardian, January 8, 2015, accessed
February 24, 2015, http://www.theguardian.com/commentisfree/2015/jan/08/oil-prices-russia-putin.
207
Ambrose Evans-Pritchard, “Russia Faces ‘Perfect Storm’ as Reserves Vanish and Derivatives Flash Default Warnings,” The Telegraph,
January 6, 2015, accessed March 22, 2015, http://www.telegraph.co.uk/finance/economics/11328974/Russia-face s-perfect-storm-as-reservesvanish-and-derivates-flash-default-warnings.html.
208
Christopher Adams, Ed Crooks, and Richard Milne, "Oil Companies put Arctic Projects into Deep Freeze," Financial Times: Oil & Gas,
February 5, 2015, accessed February 24, 2015, http://www.ft.com/intl/cms/s/0/ae302d22-ad1b-11e4-a5c1-00144feab7de.html#slide0.
209
Richard Milne, “Russia Delivers Nuclear Warning to Denmark,” Financial Times: Europe, March 22, 2015, accessed March 22, 2015,
http://www.ft.com/intl/cms/s/0/646064c8-d07a-11e4-a840-00144feab7de.html?siteedition=intl#axzz3V7wzEvN7.
210
Moises Naim, “The Consequences of the Consequences of Low Oil,” About Oil, March 20, 2015, accessed April 3, 2015,
http://www.abo.net/oilportal/topic/view.do?contentId=2403920.
211
Mark Thompson, “Russia’s Slide Toward Economic Crisis - And Why It Matters,” CNN Money, December 16, 2014, accessed April 12, 2015,
http://money.cnn.com/2014/12/16/news/economy/russia-crisis-evolution/.
203
29
banks have lent money to Russia, a debt default in the country would be problematic for the EU because
they would have to write off those debts, which would negatively impact the euro and the global
economy.212
Countries that border Russia have expressed increasing concern about Russia’s military exercises. In early
April, the Estonian President, Toomas Ilves, requested a permanent NATO force to be located in his
country.213 However, the 1997 Nato-Russia Founding Act prohibits the presence of permanent NATO
bases east of Germany.214 Much to Russia’s consternation, several states including Sweden and Finland
(non-members) have increased cooperation with the alliance.215 Estonia, on the other hand, joined the
NATO alliance 11 years ago and should Russia invade the country, the entire Atlantic Alliance including
the U.S. and Britain would be compelled to go to war in its defense.216 In early 2015, NATO quadrupled
the number of fighter jets monitoring the airspace over the Baltic States in response to Russia’s
destabilizing actions in Eastern Europe. NATO leaders promise a deployable task force of 5,000 should
an emergency arise.217 Whether or not the low price of oil will prevent the state from financing further
conflict or encourage the Kremlin to distract its populace from higher food prices and a lower standard of
living with another military conflict remains uncertain.
Venezuela
As an oil producing giant, low oil prices have serious implications for Venezuela’s economic and political
stability. According to the CIA World Factbook, oil accounts for roughly 96 percent of export earnings,
45 percent of budget revenues, and 12 percent of GDP.218 The state-run oil company, Petróleos de
Venezuela, S.A. (PDVSA), controls the world’s largest crude oil reserves. They also generate nearly all of
Venezuela’s hard currency revenue. In 2013, the $78 billion generated in exports from PDVSA accounted
for 96 percent of the country’s hard currency revenue.219 With a very small sovereign wealth fund of
around $.8 billion, the drastically declining oil revenue seriously impacts state operations.220 Even before
the oil prices fell, Venezuela was in the midst of a deep recession. Now, the country is facing a major
economic crisis as it grapples with a looming debt default and the possibility of triple-digit inflation.221
With an approval rating around 20-25 percent, there does not appear to be much popular support for or
confidence in President Maduro.222 Staggering rates of corruption and violent crime are only making
212
Ibid.
“Estonian President Toomas Ilves Seeks Permanent Nato Force” BBC News, April 12, 2015, accessed April 12, 2015,
http://www.bbc.com/news/world-europe-32274170.
214
“Founding Act: On Mutual Relations, Cooperation, and Security Between NATO and the Russian Federation Signed in Paris, France” North
Atlantic Treaty Organization, October 12, 2009, accessed April 12, 2015, http://www.nato.int/cps/en/natolive/official_texts_25468.htm.
215
“Estonian President Toomas Ilves Seeks Permanent Nato Force” BBC News.
216
David Blair, “Sitting Near a Nuclear Tripwire, Estonia’s President Urges Nato to Send Troops to Defend his Country,” The Telegraph, April
12, 2015, accessed April 12, 2015, http://www.telegraph.co.uk/news/worldnews/europe/estonia/11530064/ Sitting-near-a-nuclear-tripwireEstonias-president-urges-Nato-to-send-troops-to-defend-his-country.html.
217
Allied Command Operations, “Enhanced NATO Air Policing Patrols Baltic Airspace” North Atlantic Treaty Organization, January 30, 2015,
http://www.aco.nato.int/enhanced-nato-air-policing-patrols-baltic-airspace.aspx (accessed April 12, 2015).
218
Central Intelligence Agency, “World Factbook: Venezuela,” last modified April 21, 2015, accessed February 2, 2015.
https://www.cia.gov/library/publications/the-world-factbook/geos/ve.html.
219
Alexandra Ulmer and Marianna Parraga, “Its Red Shirts Fading, Venezuela’s Oil Giant Embraces Pragmatism,” Reuters, March 13, 2015,
accessed April 10, 2015, http://www.reuters.com/article/2015/03/13/us-venezuela-oil-insight-idUSKBN0M 90AW20150313.
220
Sovereign Wealth Fund Institute, “Sovereign Wealth Fund Rankings.”
221
Shehryar Sohail, “Oil Prices Pushing Venezuela to Economic Collapse?” Investopedia, March 12, 2015, accessed March 12, 2015,
http://www.investopedia.com/articles/investing/031215/oil-prices-pushing-venezuela-economic-collapse.asp.
222
Franz von Bergen, “Venezuela’s Government Fires Employees Who Refuse to Sign Against U.S. Sanctions, NGO Claims,” Latino Fox News,
March 31, 2015, accessed April 10, 2015, http://latino.foxnews.com/latino/news/2015/03/31/venezuelas- government-fires-employees-whorefuse-to-sign-against-us-sanctions/.
213
30
matters worse.223
Indicators
Lacking a competitive non-oil sector, Venezuela is facing many domestic challenges spurred or
exacerbated by the low world market price of oil. Venezuela’s currency is losing value faster than any
other in the world and its inflation rate is one of the world’s highest.224 The risk of debt default is
considerable. While Maduro insists debt payment is a top priority, he may be forced to reprioritize and
put the immediate needs of the Venezuelans first, especially as the domestic environment deteriorates
further.225
The country requires a fiscal budget breakeven price of $117.50 per barrel.226 As a result of the recent
drop in the price of oil, Venezuela faces a growing budget gap. Possibly most crippling for the people, the
country is seriously lacking hard currency reserves to pay for imports. In response, the government has
been controlling output and cutting imports, resulting in shortages of the most basic necessities ranging
from foodstuffs to medicine.227 In January 2015, President Maduro made a somewhat controversial
decision to decrease gasoline subsidies, raising the price at the pump for the first time in fifteen years.228
Venezuela’s oil sector has not been immune to the country’s economic downturn. Even before the oil
price dip, poor performance was evident in PDVSA operations. The national oil company's oil production
fell from 3.5 million barrels per day in 1998 to 2.6 million in 2013. The number of employees increased
from 42,000 to 111,000 over the same period while productivity decreased by 72 percent.229 Largely as a
result of these poor business decisions and lack of investment, Venezuela began importing oil for the first
time in their one hundred years as an oil-exporter in 2014.230 This will be especially concerning if the
cash-strapped country has to start choosing between importing oil or importing other basic necessities.
PDVSA has been trimming its workforce, laying off technical, non-technical, and contracted employees;
PDVSA’s management has also been replaced. Many more changes are expected in the industry as
PDVSA seeks to increase output while attracting much needed investment.231
In recent years, Caracas has faced social unrest for reasons related to dissatisfaction with the economy
and the country’s high crime rate.232 The growing list of implemented austerity measures is only
amplifying public grievances and had led to renewed flare-ups between protesters and police. To make
223
David Usborne, “Corruption, Falling Oil Prices, and Talk of a Coup: The End of Chavez’s Socialist Dream in Venezuela, The Independent,
February 20, 2015, accessed March 2, 2015, http://www.independent.co.uk/news/world/americas/corruption-falling -oil-prices-and-talk-of-acoup-the-end-of-chavezs-socialist-dream-in-venezuela-10060576.html.
224
“Five Reasons Why Venezuela May Be the World’s Worst Economy,” CNN Money, February 20, 2015, accessed February 25, 2015,
http://money.cnn.com/2015/02/20/news/economy/venezuela-economy-inflation/.
225
Silvana Ordoñez, “Things that will Happen if Venezuela Implodes,” CNBC, March 25, 2015, accessed April 1, 2015,
http://www.cnbc.com/id/102534656.
226
Elliot Bentley, Pat Minczeski, and Jovi Juan, “Which Oil Producers are Breaking Even?” The Wall Street Journal, updated January 5, 2015,
accessed February 1, 2015, http://graphics.wsj.com/oil-producers-break-even-prices/.
227
Sohail, “Oil Prices Pushing Venezuela to Economic Collapse?”
228
William Neuman, “Venezuela May Meet New Reality at the Pump,” The New York Times, January 20, 2014, accessed February 1, 2015,
http://www.nytimes.com/2014/01/21/world/americas/venezuela-gasoline-prices.html?_r=1.
229
Leonel Prieto, “Understanding the Venezuelan Debacle,” Georgetown Public Policy Review, April 21, 2015, accessed April 25, 2015,
http://gppreview.com/2015/04/21/understanding-the-venezuelan-debacle/.
230
Peter Wilson, “Venezuela, with World’s Largest Oil Reserves, Imports Oil,” USA Today, November 2, 2014, accessed February 20, 2015.
http://www.usatoday.com/story/money/2014/11/02/venezuela/18243787/.
231
Alexandra Ulmer and Marianna Parraga, “Its Red Shirts Fading, Venezuela’s Oil Giant Embraces Pragmatism.”
232
“What Lies Behind the Protests in Venezuela?” BBC News, March 27, 2014, accessed April 1, 2015, http://www.bbc.com/news/world-latinamerica-26335287.
31
matters worse, police were authorized to use deadly force to control protests in January 2015.233 The
following month, a fourteen-year-old boy was shot and killed by police in their attempts to break up antigovernment protests, sparking greater outrage among the civilian populace.234 “From clandestine
meetings to guerilla-style broadcasts, an amorphous and quixotic “resistance movement” has emerged
across Venezuela aspiring to force President Maduro from power and end 16 years of socialist rule in the
OPEC nation.”235 There are also widespread rumors of military dissent.236
Instead of responding to the growing economic crisis with policy reform, the government has largely
responded with intensified human rights abuses, escalating political radicalization, and increased
inflammatory rhetoric. The regime blames the crisis on an alleged “economic war” sponsored by
domestic opposition and foreign powers.237 In what many characterize as a desperate attempt to distract
the people from their country’s dire economic situation, President Maduro has cracked down on
opposition leaders, mainly mayors. 33 of 78 mayors are facing legal charges and several politicians have
been jailed.238 The government arrested executives from a supermarket chain and pharmacy chain,
blaming them for supply shortages.239 In addition, Maduro has accused Spain and the United States,
among others, of “supporting terrorism” in Venezuela and of being behind “an international conspiracy to
overthrow the government.”240
Implications for the United States
Beyond domestic volatility, the economic and political woes of Venezuela have major regional
implications, especially for the future of the PetroCaribe program. Launched in 2005 by Former President
Chavez, PetroCaribe is an energy initiative whereby members purchase oil under preferential terms.
Member countries only pay a small portion of the cost of oil up front, and “they can use anything from
jeans to beans to pay for it.”241 While the bartering system has been an important diplomatic tool for
Venezuela, it has meant less cash reserves for the already cash-strapped country. Concerns regarding the
continuation of this program as well as the ability of members to afford the rising costs of oil imports are
common in the region. A shutdown of PetroCaribe could impact regional stability. According to a recent
report published by the International Monetary Fund (IMF), deficits are expected to increase in Antigua,
Dominica, Grenada, Haiti, Jamaica, and Nicaragua to the extent that governments take over de-funded
social programs and infrastructure projects in the event of a program shutdown. Countries like Haiti and
Nicaragua would be most affected by a closure, as they receive large oil flows and lack alternative
financing sources.242 Several analysts assert that Venezuela’s crumbling economy and the questionable
future of the PetroCaribe program are some of the motivating factors in Cuba’s decision to renew
233
Heather Saul, “Venezuela Shooting: Tensions Rise After 14-year-old Schoolboy is Fatally Shot by Police During Government Protest,” The
Independent, February 25, 2015, accessed February 26, 2015, http://www.independent.co.uk/news/world/americas /venezuela-unrest-14yearoldboy-shot-dead-by-police-during-antigovernment-protest-10069408.html.
234
Ibid.
235
Andrew Cawthorne and Girish Gupta, “Venezuela ‘Resistance’ Movement Struggles to Bruise Maduro,” Reuters, April 2, 2015, accessed
April 15, 2015. http://www.reuters.com/article/2015/04/02/us-venezuela-radicals-insight-idUSKBN0MT1P 520150402.
236
Ibid.
237
Prieto, “Understanding the Venezuelan Debacle.”
238
John Otis, “The 33 Venezuelan Mayors Who Face Charges (And Oppose the President),” NPR, April 8, 2015, accessed April 15, 2015,
http://www.npr.org/blogs/parallels/2015/04/08/398297776/the-33-venezuelan-mayors-who-face-charges-and-oppose -the- president.
239
Prieto, “Understanding the Venezuelan Debacle.”
240
“Spain Recalls Ambassador to Venezuela as Row Deepens,” The Guardian, April 22, 2015, accessed April 26, 2015,
http://www.theguardian.com/world/2015/apr/22/spain-recalls-ambassador-to-venezuela-as-row-deepens.
241
“US Urges Caribbean Nations to Exit Venezuela’s Petrocaribe Oil Subsidy Program,” CCTV-America, January 27, 2015, accessed February 1,
2015. http://www.cctv-america.com/2015/01/27/us-urges-caribbean-nations-to-exit-venezuelas-petrocaribe -oil-subsidy-program.
242
Adrienne Cheasty, “Cheaper Oil in Petrocaribe Countries: Sweet and Sour,” International Monetary Fund, March 18, 2015, accessed March
25, 2015, http://www.imf.org/external/np/blog/dialogo/031815.pdf.
32
diplomatic relations with the United States.243 Other PetroCaribe members have not been so keen on
diversifying either energy suppliers or energy sources. Thus, a shutdown of the program would not only
leave them without a major source of energy, but participating governments would be pushed into public
sector and current account deficits and local currencies would face further downward pressure.244 The
United States could be called upon to provide more economic and humanitarian aid to countries like Haiti
as the program’s closure destabilizes their already weak economies.
Azerbaijan
Crude oil production in Azerbaijan has declined slightly in recent years since reaching a peak in 2010; the
country produced 877 million barrels per day, or just over one percent of total world production, in
2013.245 Despite declining production, oil still accounts for 41 percent of Azerbaijan’s GDP246 and has
funded a sovereign wealth fund totaling just over $37 billion, or approximately 50 percent of GDP.247
Moreover, Baku’s budget is based on oil as the primary source of government revenue.248 Over 90 percent
of all exports from Azerbaijan are crude oil or natural gas, both extracted primarily from offshore fields in
the Caspian Sea.249 Azerbaijan’s oil sector relies considerably on foreign operators. The State Oil
Company of Azerbaijan Republic (SOCAR) accounts for about 20 percent of the country’s oil output; a
BP-led consortium that also includes Chevron, ExxonMobil, Statoil, and Hess, among others, produces
the remaining 80 percent.250 In addition to its role as an oil-producer, Azerbaijan also serves as a transit
hub for oil and natural gas produced in Central Asia and distributed, along with Azerbaijan’s own energy
exports, to Turkey and Southern Europe.251
Despite potential negative economic and fiscal consequences for Azerbaijan, the country’s sovereign
wealth fund remains strong and is likely to help mitigate the near-term negative effects of low oil prices.
Azerbaijan also remains comparatively more insulated from Russia’s economic woes than many other
former Soviet republics, as remittances from Russia equal a much smaller percent of Azerbaijan’s GDP
compared many of its neighbors.252 Additionally, Azerbaijan’s reliance on foreign corporations for 80
percent of its oil output may diminish the localized effects of oil workforce reductions stemming from
declining oil revenue.
Politically, the autocratic Aliyev regime enjoys considerable control over Azerbaijan’s populace as well
as its economic decision-making. This control enables unilateral policy shifts that entail rapid and multisector responses to negative economic outlook. Nonetheless, Aliyev has sought to head off any potential
243
Mimi Whitefield, “Venezuela Oil Might be Behind Cuba’s Pivot to the U.S.,” Miami Herald, December 18, 2014, accessed April 1, 2015,
http://www.miamiherald.com/news/nation-world/world/americas/cuba/article4651707.html.
244
Rory Johnston, “PetroCaribe: More Noose than Lifeline,” Scotiabank, September 4, 2014, accessed March 1, 2015,
http://www.gbm.scotiabank.com/English/bns_econ/isr140904.pdf.
245
British Petroleum, “BP Statistical Review of World Energy 2014.”
246
World Bank, “World Bank Group: Azerbaijan Partnership Program Snapshot,” April 2015,
http://www.worldbank.org/content/dam/Worldbank/document/Azerbaijan-Snapshot.pdf.
247
Sovereign Wealth Fund Institute. “Sovereign Wealth Fund Rankings.”
248
“Azerbaijan Watches for Dissent as Economy Slows,” Reuters, March 3, 2015, accessed March 10, 2015,
http://www.reuters.com/article/2015/03/03/azerbaijan-economy-idUSL5N0W41PT20150303.
249
Central Intelligence Agency, "The World Fact Book: Azerbaijan," last modified April 21, 2015, https://www.cia.gov/library/publications/theworld-factbook/geos/rs.html; U.S. Energy Information Administration, "Azerbaijan: Analysis," August 1, 2014, accessed April 15, 2015,
http://www.eia.gov/countries/cab.cfm?fips=aj.
250
US. Energy Information Administration, "Azerbaijan: Analysis."
251
Ibid.
252
World Bank, “Migration and Remittances Data,” April 2015, accessed April 5, 2015,
http://econ.worldbank.org/WBSITE/EXTERNAL/EXTDEC/EXTDECPROSPECTS/0,,contentMDK:22759429~pagePK:64165401~piPK:64165
026~theSitePK:476883,00.html#Remittances.
33
social consequences of these policy shifts through increased public outreach, including a televised address
in February to explain the country’s changing economic circumstances.253
Indicators
As of early 2015, Azerbaijan has demonstrated several indicators of potential economic instability,
including currency devaluation, changes in bank policy, a reduction in fiscal break-even price in response
to falling WMP, and declining foreign currency reserves. In February, Azerbaijan’s currency was
unpegged from the dollar and later devalued against the dollar by 33.5 percent.254 In April, the stateowned International Bank of Azerbaijan, the country’s largest bank, sought to raise additional funds with
a 30 percent increase in charter capital.255 Increased capital may enable the bank to provide urgent loans
or bailouts to Azerbaijani companies should economic conditions worsen, but comes at the cost of share
dilution.256
In addition to changes in monetary and bank policy, Baku has also sought to revise fiscal policy in the
face of uncertain oil revenue. In April, the central bank of Azerbaijan announced that it would determine
the government’s 2016 budget based on a fiscal breakeven price of $50pb, down from the $90pb figure
used to set the 2015 budget.257 Meanwhile, the country’s foreign currency reserves have fallen 10 percent
in the past year, diminishing the government’s budgetary safety net in the face of declining revenue. 258
Despite these economic indicators, few political-military indicators have yet manifested in response to
low oil revenue. Baku launched surprise military exercises in February amid growing tension with
neighboring Armenia, accompanied by heightened rhetoric and accusations of ceasefire violations aimed
at Yerevan.259 Additionally, the Aliyev regime faced pro-democracy protests as recently as November
2014 and has only tightened its control over domestic media sources in recent months.260, 261 Should
negative economic conditions persist or worsen, increased social unrest could follow.
Implications for the United States
Azerbaijan’s continued economic and political stability is important to U.S. foreign policy in large part
due to Azerbaijan’s role in relation to Russia. This role has two primary dimensions: Azerbaijan’s
capacity to serve as an alternative transit hub for energy bound for Europe from Central Asia and the
South Caucasus, and Azerbaijan’s semi-frozen conflict with Russian-backed Armenia over the disputed
territory of Nagorno-Karabakh.
With regard to energy transport, Azerbaijan plays a critical role in supplying oil and natural gas to
253
Keith Johnson, “Central Asia’s Cheap Oil Double Whammy.”
“Azerbaijan Watches for Dissent as Economy Slows,” Reuters, March 3, 2015, accessed March 10, 2015,
http://www.reuters.com/article/2015/03/03/azerbaijan-economy-idUSL5N0W41PT20150303.
255
“Brief: Azerbaijani Largest Bank’s Capital to be Increased by Almost 30percent” Bloomberg Business, April 3, 2015, accessed April 10, 2015,
http://www.bloomberg.com/research/markets/news/article.asp?docKey=600-201504030001KRTRIB__ BUSNEWS_65219_9562-1.
256
Ibid.
257
Nailia Bagirova, “Update 1 - Azeri Central Bank Says Moves Toward Managed Float of Manat,” Reuters, April 1, 2015, accessed April 10,
2015, http://www.reuters.com/article/2015/04/01/azerbaijan-manat-rate-idUSL6N0WY2AC20150401.
258
“Azerbaijan Watches for Dissent as Economy Slows,” Reuters.
259
“Azerbaijan launches military exercises amid tensions with Armenia,” Radio Free Europe, February 2, 2015, accessed April 5, 2015,
http://www.rferl.org/content/azerbaijan-launches-military-maneures-amid-tensions-witjh-armenia/26826334.html.
260
“Azerbaijani Opposition Rallies Against Crackdown,” Radio Free Europe, November 9, 2014, accessed April 5. 2015,
http://www.rferl.org/content/azerbaijan-opposition-rally/26681925.html.
261
Robert Coalson, “Azerbaijan Tightens Screws on Civil Society, Independent Media,” Radio Free Europe, September 9, 2014, accessed April
3, 2015, http://www.rferl.org/content/azerbaijan-squeezes-civil-society-media/26574692.html.
254
34
European markets via the Baku-Tbilisi-Ceyhan (BTC) and Baku-Tbilisi-Erzurum (BTE) pipelines.262
Both pipelines are key links in broader pipeline networks that bring energy from Central Asia to
Azerbaijan, from Azerbaijan to Turkey, and from Turkey to Southern Europe. By circumventing Russia,
these routes avoid the possibility of major European energy supply disruptions that historically have
stemmed from political disagreement between Russia and Ukraine.263 Large-scale economic collapse or
social unrest in Azerbaijan could potentially threaten operation of the BTC and BTE pipelines,
necessitating a reversion to Russian pipeline networks. This, in turn, would raise the risk of supply
disruptions to European markets and increase Russian leverage over European energy consumers.
The Nagorno-Karabakh conflict is also demonstrative of the key role that Azerbaijan plays in regional
security. This conflict has persisted since the collapse of the Soviet Union; as recently as January 2015, a
border skirmish left two Armenian soldiers dead.264 Social unrest in Azerbaijan could lead the Aliyev
regime to seek a public distraction in the form of heightened tension with Armenia in Nagorno-Karabakh.
Conversely, a protracted period of decreased oil revenue could potentially lead to a reduction in
Azerbaijani military spending, threatening the balance of military power in the region. Escalation of this
conflict could destabilize the South Caucasus and draw in Russia, which maintains an airborne infantry
base in Armenia and historically has backed Armenian claims to the region.265 For the United States and
NATO, a shooting war in Nagorno-Karabakh would mean yet another internal conflict, in the same vein
as South Ossetia or Donbass, that Russia could use as a pretext to flex its military muscle and expand
political influence in regions that increasingly have moved out of the Russian sphere.
High-risk countries
Of the eight major oil-exporting states highlighted, states such as Venezuela and Iraq are presented as
high-risk due to their heavy dependence on oil revenue for all government functions. These two states do
not possess structural resiliencies such as large sovereign wealth funds, and have demonstrated a
significant number of indicators, such as the drawdown of currency reserves and the introduction of
austerity measures. The low price of oil has severely impacted these states on an economic, political, and
social level. Moreover, the continued instability of both Venezuela and Iraq has serious regional
consequences. The further weakening of Venezuela has the potential to destabilize the Latin America and
Caribbean region, especially if Petrocaribe collapses. Increased instability in Iraq could also lead to
increased instability in its respective region. Less oil revenue will hurt the already weak economic and
political environment in the country and will hinder its ability to fight the Islamic State, among other
domestic security threats. While Venezuela and Iraq exhibit indicators of pending crisis on several levels
Russia also warrants further attention. Although Russia has not shown an alarming amount of internal
political instability, the low price of oil has severely impacted the state’s fiscal integrity. Russia’s
economic stability is important because the state’s finances are tied to the European Union and much of
the EU’s energy flows from Russia. While many of the producer sovereignties have shown a large
number of indicators, not all producer states are at the same level of concern. Countries such as Saudi
Arabia and Azerbaijan are low-risk due to their continued demonstration of high resilience to oil price
262
U.S. Energy Information Administration, "Azerbaijan: Analysis."
Andrew Kramer, “Russia Cuts Off Gas Deliveries to Ukraine,” New York Times, January 1, 2009, accessed April 1, 2015,
http://www.nytimes.com/2009/01/02/world/europe/02gazprom.html.
264
“Armenian Soldiers Killed in Border Clash with Azerbaijan,” Reuters, January 23, 2015, accessed April 3, 2015,
http://www.reuters.com/article/2015/01/23/armenia-azerbaijan-conflict-idUSL6N0V225A20150123.
265
Karoun Demirjian, “Armenia Picks Russian Economic Ties but Tries to Keep Foot in the West,” The Washington Post, January 6, 2015,
accessed April 10, 2015, http://www.washingtonpost.com/world/europe/armenia-picks-russian-economic-ties- but-tries-to-keep-foot-in-thewest/2015/01/05/96072414-8627-11e4-abcf-5a3d7b3b20b8_story.html.
263
35
fluctuations, even as some oil-related indicators manifest. These states will be able to ride out the low
price of oil longer than other states that are mentioned in this report.
Case Studies
The case studies of Iraq and the Soviet Union serve as historical evidence of the destabilizing effects of a
low oil price environment for producing countries. In the case of Iraq, an economic meltdown,
exacerbated by falling prices from the oil glut of the 1980s, led to its invasion of Kuwait and U.S. military
involvement in the Middle East region. For the Soviet Union, the fall in oil prices during the 1980s
compounded the effects of poor fiscal management, which led to overwhelming state financial problems.
The resulting economic crisis metastasized into a political crisis and led to the eventual fall of the Iron
Curtain. Both cases provide examples of worst-case scenario events precipitated by low oil prices. The
team relied on historical examples such as these to derive many conditions and indicators.
Case Study: Iraq
A Geopolitical Oil Crisis: Iraq’s Invasion of Kuwait
On August 2, 1990, Iraqi forces crossed the border into Kuwait and soon after established control of the
country. Prior to the invasion, Iraq had incurred approximately $86 billion in post-war debt to foreign
countries that had provided loans to finance its war with Iran. $40 billion of this debt was owed to Gulf
states, including Kuwait.266 Low oil prices resulting from the 1980s oil glut, which was fed by Kuwait’s
overproduction of petroleum, kept Iraqi oil revenues down. Iraq’s resentment toward Kuwait’s oil policies
and its hope that possession of Kuwait’s oil would enhance its resources were two important factors that
contributed to the invasion. Iraq’s inability to finance its budget following the drop in oil prices; the
country’s introduction of austerity measures; its increase in belligerent rhetoric; its pleas to Kuwait for oil
production cuts; and the movement of Iraqi troops to its border with Kuwait were key indicators of the
crisis.
Initially, the U.S.-led coalition force responded to Iraq’s hostile action with crippling economic sanctions.
Then in January 1991, they began Operation Desert Storm, which included aerial and naval
bombardment, as well as the deployment of ground forces to expel Iraqi forces from Kuwait. The
coalition drove Iraqi forces back to their territory in February 1991.
Setting the Stage: Iraq’s Financial Meltdown
The Iran-Iraq War left the small Iraqi economy overburdened with unemployment, inflation, and a
damaged oil infrastructure. This damage, coupled with the 1986 oil glut, led to a massive decrease in oil
revenues. Oil income in 1988 was $11 billion, compared to $26 billion in 1980.267 Oil accounted for 90
percent of export revenues and 61 percent of GDP.268 A 9 percent decline in GDP in 1989 worsened the
economic situation and led to the adoption of an austerity program, which included a 7 percent drop in
government spending and a 50 percent government staff cut.269 In addition, the $40 billion in outstanding
loans from Gulf States loomed over the country. Saddam Hussein requested the United Arab Emirates
266
Alnasrawi, Abbas. The Economy of Iraq: Oil, Wars, Destruction of Development and Prospects, 1950-2010 (Connecticut: Greenwood Press,
1994).
267
Alnasrawi, Abbas. “Oil, Sanctions, Debt, and the Future,” Arab Studies Quarterly 23 (Fall 2001): 1-14.
268
Arts, Paul. “Oil and the Gulf War,” Middle East Report 171 (1991).
269
Alnasrawi, Abbas, The Economy of Iraq.
36
and Kuwait write off the debt, arguing it had protected the Arabian Peninsula from Iranian expansionism,
but they refused.
Iraq’s economic liberalization and privatization program, coupled with excessive military spending,
compounded its financial distress. “What the economy needed at that particular juncture was an increase
in the supply of goods to dampen inflation and restore some of the living standards that were severely
eroded during the war. In order to achieve these objectives the government had only one option–to raise
oil revenue.”270
OPEC Production Quotas
Low oil prices in the 1980s led OPEC countries to adopt a quota system that would set the price of oil at
$18 per barrel.271 However, several countries, including Kuwait, did not comply with these quotas, and
prices continued to fall. Market conditions improved in January 1990, but Kuwait and other noncomplying OPEC countries raised their output to a level that wiped out a major portion of Iraq’s oil
income. “In the case of Iraq, a decline in the price of $6 per barrel meant a loss of $6 billion in oil revenue
per year, which was a loss that Iraq could not afford. The Iraqi president characterized oil actions leading
to above quota production and lower prices as causing damage to the Iraqi economy that was similar to
the economic damage inflicted by conventional wars.”272
Previous border disputes existed between Iraq and Kuwait prior to the invasion, many of which centered
on the Rumaila oilfield. Approximately 90 percent of the oilfield is located in Iraqi territory while the
remainder lies in Kuwait.273 Prior to the invasion, Iraq accused Kuwait of diagonal drilling into its portion
of Rumaila. Hussein’s stepped up his bellicose rhetoric by threatening the use force if OPEC nations did
not curb their production. In July 1990, Iraq moved 100,000 troops to its border with Kuwait.274
Response
Several scholars argue Iraq’s invasion of Kuwait was a quick fix to its economic crisis. Abbas Alnasrawi
specifically cites remarks made by Iraq’s Deputy Prime Minister for the Economy; the Deputy Prime
Minister stated, “Iraq will be able to pay its debt in less than five years; that the…new Iraq would have a
much higher oil production quota; that its income from oil would rise to $38 billion; and that it would be
able to vastly increase spending on development projects and imports” if Iraq invaded Kuwait.275
Lawrence Freedman and Efraim Karsh also correlate Iraq’s economic situation as an incentive for the
invasion, stating, “Adding Kuwait’s fabulous wealth to the depleted Iraqi treasury might slash Iraq’s
foreign debt and launch the ambitious reconstruction programmes [Saddam Hussein] had promised his
people in the wake of the war with Iran.”276 Javad Mansuri acknowledges the role Kuwait’s oil played in
270
Alnasrawi, Abbas, “Oil, Sanctions, Debt, and the Future.”
Declining world oil demand and increased non-OPEC production caused OPEC to cut oil output in the first half of the 1980s in order to
defend its official price. However, in late 1985, Saudi Arabia increased production and moved to increase market share. Other OPEC members
also increased production and flooded the world market, causing crude oil prices to fall in early 1986. In 1986, the price of oil dropped to $10 per
barrel from a high point in 1981 of $35 per barrel. U.S. Energy Information Administration, “Petroleum Chronology of Events 1970-2000,” May
2002, http://www.eia.gov/pub/oil_gas/petroleum/analysis_publications/chronology/petroleumchronology2000.htm#T_10_. Also:Georgiou,
George C. “Oil Market Instability and a New OPEC,” World Policy Journal 4 (1987): 295-312.
272
Alnasrawi, Abbas, “Oil, Sanctions, Debt, and the Future.”
273
Pierre Terzian, “The Gulf Crisis: The Oil Factor: An Interview with Pierre Terzian.” Journal of Palestine Studies 20 (1991): 100-105.
274
Yergin, Daniel, The Prize: The Epic Quest for Oil, Money, and Power (New York: Free Press, 2008).
275
Alnasrawi, Abbas. “Oil, Sanctions, Debt, and the Future.”
276
Freedman, Lawrence and Efraim Karsh, The Gulf Conflict, 1990-1991: Diplomacy and War in the New World Order, (Princeton: Princeton
University Press, 1993).
271
37
Iraq’s decision to invade, “Iraq in this context attempted to acquit itself from repayment of debt to Kuwait
and at the same time, utilize the [oil] money so collected from Kuwait for reconstruction of damages
sustained during its war with the Islamic Republic of Iran.”277 However, Daniel Yergin attributes Iraq’s
decision to invade Kuwait to Saddam Hussein’s quest to maintain regional hegemony by acquiring an
additional 10 percent of the world’s oil reserves. With this acquisition, Iraq would hold 20 percent of the
world’s oil reserves, a level of ownership matched only by Saudi Arabia. 278 Additional justifications for
the invasion include Iraq’s historical claims to Kuwait.279
In response to the invasion, the U.N. Security Council adopted Resolution 661 on August 6, 1990. The
resolution included a ban on trade, an arms and oil embargo, a financial asset freeze, banned financial
transactions with Iraq, and suspension of international flights.280 Failed attempts at a diplomatic resolution
resulted in the creation of a U.S.-led coalition consisting of 39 nations to push Iraq out of Kuwait in
January 1991. Iraq was expelled from Kuwait the following month.
Case Study: The Soviet Union
With a poorly managed economy that prevented the Soviet Union from financing its balance of payments
deficit before the glut, and growing instability associated with the Gorbachev era reforms, the 1985-1986
drop in oil prices was the final straw that pushed the Soviet Union to collapse. The USSR’s lack of hard
currency not only meant the country could not meet its debt obligations, but it also severely compromised
the Kremlin's ability to make policy decisions that could have salvaged the economy, rectified popular
grievances, and preserved the Soviet Union. Economic decline eventually delegitimized the communist
leadership and ideology. By 1991, the Soviet Union reached bankruptcy and finally collapsed.
Soviet Economic Mismanagement: The Economy Before the Glut
Even before the 1980s oil glut, poor economic policy decisions rendered the state unable to finance its
deficits, a problem only made worse by the oil price drop. For decades, the USSR’s command economy
emphasized quantity of goods over quality, which prompted a decline in demand for Soviet finished
products.281 This lack of demand forced the state to rely on raw material exports, of which oil was a major
component, to generate revenue and balance its budget.282
Chronic food shortages played an important role in the collapse of the Soviet Union. In the early 1960s,
the USSR reached its production capacity for grain when it ran out of new arable land to cultivate. At the
same time, its population was growing rapidly, forcing the government to import increasing amounts of
grain to feed its citizens. The state relied heavily on gold reserves to finance its imports, spending a third
277
Mansuri, Javad, “Persian Gulf Crisis and its Political and Economic Implications,” Pakistan Horizon 44 (January 1991): 9-18.
Daniel Yergin, The Prize.
279
Iraq’s claims to Kuwait have varied over the years, however, it originates from Kuwait being a district of Basra province under the Ottoman
administration system prior to Britain’s decision in 1899 to establish Kuwait as a British protectorate.
280
Alnasrawi, Abbas, “Iraq: Economic Sanctions and Consequences, 1990-2000,” Third World Quarterly 22 (April 2001).
281
Command economy: A system where the government, rather than the free market, determines what goods should be produced, how much
should be produced and the price at which the goods will be offered for sale. The command economy is a key feature of any communist society.
China, Cuba, North Korea and the former Soviet Union are examples of countries that have command economies. Source: "Command Economy
Definition," Investopedia, October 31, 2010, accessed April 28, 2015, http://www.investopedia.com/terms/c/commandeconomy.asp#ixzz3Y9ht5y5g.
282
Yegor Gaidar, American Enterprise Institute, "The Soviet Collapse: Grain and Oil," last modified April 2007, accessed April 18, 2015,
https://www.aei.org/wp-content/uploads/2011/10/20070419_Gaidar.pdf. Also: Robert W. Strayer, Why Did the Soviet Union Collapse?
Understanding Historical Change (Armonk, NY: M.E. Sharpe, 1998): 58; and Ofira Seliktar, Politics, Paradigms, and Intelligence Failures:
Why so Few Predicted the Collapse of the Soviet Union (Armonk, NY: M.E. Sharpe, 2004): 206.
278
38
on grain alone in 1963.283 Despite oil price hikes from 1975-1980, the USSR could not finance its
required grain imports. It imported about 100 times as much grain as it produced, which was one of the
many reasons why the USSR consistently ran a balance of payments deficit throughout this time
period.284 By 1981, Soviet debt to Western creditors had ballooned to approximately $31 billion dollars,
reducing its resilience before the onset of the glut.285
In the 1960s and 1970s, Soviet economic growth and consumption declined; high defense spending
robbed the civilian economy of investment capital; and the command economy artificially preserved
inefficient industries while inhibiting economic transition from extensive to intensive growth.286 A vibrant
black market emerged and official corruption grew rampant, compounding the Soviet Union’s economic
troubles.287 In 1985, President Mikhail Gorbachev attempted economic reform as part of a failed
restructuring program known as perestroika. Gorbachev’s drive to modernize the machine tool industry
led to increased importation of machine tools at the expense of consumer goods. This resulted in
widespread shortages that cost the government 8.5 billion rubles of lost revenue.288 Perestroika led to
rising prices and unemployment and it weakened the Soviet central planning mechanism without
instituting an effective market replacement, thus further contributing to its weak and unstable economic
environment.289
Politically, perestroika shifted authority away from the Politburo, the institution that held the Soviet
Union together. The combination of perestroika, glasnost and democratization, unleashed pent up
political grievances including anti-communist and nationalist sentiments.290, 291 Successive reform efforts
failed to address the continuing Soviet economic decline. Between 1987 and 1989, demonstrations and
acts of political violence increased, fuelled by discontent with the communist system and the perception
of a declining quality of life, signaling greater political instability.292 Already facing systemic turmoil, the
1986 oil price drop was an exacerbating factor that pushed the Soviet Union toward collapse.
Oil and the Soviet Economy
Oil revenue was an important source of income for the USSR. In 1982, oil was responsible for over 50
percent of the Soviet Union’s hard currency revenue with arms being the next most important source by
comparison at 17 percent.293 The limited access to hard currency inhibited the USSR from properly
maintaining its oil industry. Hard currency was necessary to afford the Western technologies needed for
283
Gaidar, 2.
Gregory Grossman and Ronald L. Solberg, The Soviet Union's Hard-currency Balance of Payments and Creditworthiness in 1985 (Santa
Monica, California: Rand, 1983): 10, 56, 58.
285
"Foreign Trade" in Soviet Union: A Country Study, ed. Raymond Zickel (Washington, DC: Library of Congress, Federal Research Division,
1991, http://rs6.loc.gov/frd/cs/sutoc.html.
286
According to Robert Strayer, extensive growth involves using more inputs to increase output, whereas intensive growth involves using inputs
more efficiently and using technological innovation to increase output. Strayer, Why Did the Soviet Union Collapse?, 57-58.
287
Strayer, Why Did the Soviet Union Collapse?, 57-60, 66-67.
288
Marshall Goldman, "The Effort Collapses," In The Soviet System: From Crisis to Collapse, edited by Alexander Dallin and Gail Lapidus, Rev.
ed. (Boulder, CO: Westview Press, 1995), 339.
289
Strayer, Why Did the Soviet Union Collapse?, 114, 116, 120, 133.
290
Strayer, Why Did the Soviet Union Collapse?, 102-104. Also: "Fall of the Soviet Union," Cold War Museum, February 1, 2001, accessed April
23, 2015, http://www.coldwar.org/articles/90s/fall_of_the_soviet_union.asp.
291
Glasnost: According to the Encyclopedia Britannica, Glasnost was a policy of open discussion of political and social issues. See: Encyclopedia
Britannica Online, s. v. "Glasnost", accessed April 28, 2015, http://www.britannica.com/EBchecked/topic/234864/glasnost.
292
Central Intelligence Agency, "Rising Political Instability Under Gorbachev: Understanding the Problem and Prospects for Resolution: An
Intelligence Assessment," last modified 1989, accessed April 23, 2015, https://chnm.gmu.edu/1989/archive/files/cia,-raisinginstability_4b36a35d0d.pdf.
293
Erik Brynjolfsson, "Soviet Oil: Behind the Pipeline," Harvard International Review 4 (1981): 18-20. Also: Jan Vanous, "The Impact of the Oil
Price Decline on the Soviet Union and Eastern Europe, “The Energy Journal 4, (1983): 12,
284
39
oil exploration and extraction.294 As the reserves became more scarce, oil exploration and extraction
levels fell, resulting in decreased oil production, which limited the country’s main income source.
At the onset of the oil glut, the Soviet Union faced declining oil revenue, shrinking currency reserves, and
a ballooning debt it could not afford, among other equally pressing issues. In 1985, Saudi Arabia’s
decision to increase oil production forced a 67 percent drop in oil prices, which cost the Soviets $20
billion annually in lost revenue.295 With pre-existing deficits, declining GDP growth rates, military
overstretch, and massive defense spending totaling 22-27 percent of GDP, the USSR could not afford this
loss.296 The contracting oil industry forced the Soviet Union to rely even more heavily on borrowing,
raising its debt from approximately $26 billion in 1985 to almost $60 billion by 1989.297 This diminished
its credit rating until commercial banks would no longer loan it money.298
To make matters worse, Soviet oil production declined further after 1988 due to lack of investment, and
because they ran out of new, large oil fields to exploit.299 In an attempt to shore up much needed money
and avoid greater hard currency loss, the Soviet Union required fellow members of the Council of Mutual
Economic Assistance, a trade bloc that included eight other countries, to pay for energy in hard cash.300
The member states, also lacking hard currency, simply reduced fuel usage, further reducing Soviet oil
revenue.301
Meanwhile, some of the Soviet satellite states stopped their contributions to the central budget and began
to distance themselves from the USSR. In 1989, the Soviet Union devalued the ruble by 90 percent to
recapture hard currency from the black market. At the same time, the USSR experienced unprecedented
levels of instability as the 1989 Revolutions unfolded.302 In an attempt to save the country from economic
ruin, Gorbachev drew down cash reserves from western banks, increased gold sales, and implemented
budget cuts (e.g. a 6 percent reduction in defense spending), none of which helped to alleviate the
economic burden bringing down the state.303 Gorbachev, facing mounting anti-communist sentiment and a
294
Brynjolfsson, “Soviet Oil: Behind the Pipeline,” 18-19.
Gaidar, “The Soviet Collapse: Grain and Oil,” 5. Also: Russell Gold, "Back to the Future? Oil Replays 1980s Bust," Wall Street Journal,
January 13, 2015, accessed April 23, 2015, http://www.wsj.com/articles/back-to-the-future-oil-replays-1980s-bust-1421196361; and: Ibrahim
Oweiss, "Demand for Oil and Excess Supply Since 1980" in "Petrodollars: Problems and Prospects" (Address before the Conference on The
World Monetary Crisis, Columbia University, New York, NY, March 1-3, 1974), faculty.georgetown.edu/imo3/petrod/since.htm.
296
Dimitri K. Simes, "The Beginning of the End," in After the Collapse: Russia Seeks Its Place as a Great Power (New York, NY: Simon &
Schuster, 1999), https://www.nytimes.com/books/first/s/simes-collapse.html. Also: Ronald Hilton, "The Collapse of the Soviet Union and
Ronald Reagan," World Association of International Studies, August 10, 2004, accessed April 23, 2015,
http://wais.stanford.edu/History/history_ussrandreagan.htm; also: International Monetary Fund, A Study of the Soviet Economy (Paris:
International Monetary Fund, 1991), 11.
297
U.S. Government Accountability Office, Former Soviet Union: Credit Worthiness of Successor States and U.S. Export Credit Guarantees
(Washington, DC: DIANE Publishing Company, 1995), 59 and Nicholas Eberstadt, The Poverty of Communism (New Brunswick, NJ:
Transaction Books, 1988), 95.
298
Gaidar, “The Soviet Collapse: Grain and Oil,” 5-6.
299
Luis De Sousa, "Peak Oil and the Fall of the Soviet Union: Lessons on the 20th Anniversary of the Collapse," The Oil Drum, May 27, 2011,
accessed April 23, 2015, http://www.theoildrum.com/node/7878. Also: Thane Gustafson, "Putin’s Petroleum Problem.”
300
For a list of the members of the USSR, see the Encyclopedia Britannica: Encyclopedia Britannica Online, s. v. "Union of Soviet Socialist
Republics", accessed April 28, 2015, http://www.britannica.com/EBchecked/topic/614785/Union-of-Soviet-Socialist-Republics. For a list of
CMEA members, see: Glenn Curtis, "The Council for Mutual Economic Assistance," The Council for Mutual Economic Assistance
(CMEA/Comecon), January 1, 1992, accessed April 28, 2015, http://www.shsu.edu/~his_ncp/CMEA.html.
301
De Sousa, "Peak Oil and the Fall of the Soviet Union: Lessons on the 20th Anniversary of the Collapse," 5.
302
Michael Parks, "Kremlin Plans to Sharply Devalue Its Currency: Soviet Union: The Ruble Will Lose 90 Percent of Its Value in Some
Transactions. Officials Hope to Curb the Black Market in Money," Los Angeles Times, October 26, 1989, accessed April 23, 2015,
http://articles.latimes.com/1989-10-26/news/mn-855_1_soviet-union.
303
Central Intelligence Agency and Defense Intelligence Agency, "Beyond Perestroyka: The Soviet Economy in Crisis," in The Soviet System:
From Crisis to Collapse, ed. Alexander Dallin and Gail Lapidus, Rev. ed (Boulder, CO: Westview Press, 1995): 325-327 and Gaidar, “The Soviet
Collapse: Grain and Oil,” 6.
295
40
bankrupt state, resigned as President of the Soviet Union in 1991.
Lessons Learned
In the USSR case study, the oil glut accelerated the demise of a state that was already spiraling toward
collapse. Although an extreme example, the Soviet case illustrates a worst-case scenario that an oilproducing country might face in a low oil price environment. This is particularly pertinent to those states
that lack major alternative revenue sources besides oil. In addition to being heavily dependent on oil
revenue to support state operations, the USSR failed to address their declining economic status in a
timely, successful manner.
Even though today’s oil-exporting states are not operating communist-style countries similar to that of the
USSR, they still suffer from similar oil dependencies and are confronting similar economic setbacks as a
result of the drop in oil price. While some countries are resilient enough to ride out the “storm” that is low
oil prices, others will have to implement policy corrections and reform in order to prevent an economic
demise similar to that of the Soviet Union.
Oil-Consumers: Vulnerabilities in a High Oil Price Environment
Just as oil-producing countries may face heightened instability as prices decline, net-importing countries
may face similar, albeit less severe, consequences when prices rise. Though estimates vary as to the
duration of the current low-price environment, organizations such as the Energy Information Agency
predict that prices will increase by more than one-third within the next year.304 An increase in oil prices
may carry a range of negative economic and political consequences for consumer states, stemming both
from the inherent drawbacks of higher prices for consumers as well as from short-sighted policy decisions
consumer states may choose to implement when prices are low.
Structural dependencies, including high oil import spending as a percentage of GDP (illustrating
import dependence), high oil consumption as a percentage of GDP (oil intensity), and high fuel
consumption per capita, necessitate oil for a state’s economy to function and speak to a state’s degree of
economic risk in the event of a supply shortage or interruption.305 These metrics also show the potential
impact of oil price fluctuations on a country’s budget and private sector capital supplies. When a
country’s net oil spending and import dependence is high, its public and private sectors may enjoy
economic benefits when oil prices are low, but face disproportionate costs as prices rise.
Consumer states also face policy-induced vulnerabilities. Countries with undiversified energy sources
and/or suppliers face more acute negative effects of price hikes than countries with diversified energy
sectors. Similarly, if a state relies on a very small pool of suppliers for its oil imports, or relies on oil
imports that must traverse unstable geographic bottlenecks, it is more vulnerable to supply disruptions or
coercive politics from its suppliers.306 Related to this is the size of domestic oil reserves,307 which can
304
U.S. Energy Information Administration, “Short-Term Energy and Summer Fuels Outlook.” April 2015,
http://www.eia.gov/forecasts/steo/pdf/steo_full.pdf.
305
Identified as structural conditions in: Securing America’s Future Energy, “Oil Security Index,” October 2013. Import dependence was also
noted as a risk factor in: International Energy Agency, “The IEA Model of Short-term Energy Security (MOSES),” 2011.
306
Gal Luft and Anne Korin, “Energy Security Challenges for the 21st Century: a Reference Handbook,” (Santa Barbara: Praeger Security
International, 2009): 10-11.
307
U.S. Energy Information Administration, “China,” last modified February 4, 2014, accessed February 10, 2015,
41
allay the ramifications of a price shock or supply crisis by permitting countries to continue somewhat
typical consumption patterns, or reduce consumption only gradually. Likewise, a country’s fuel subsidy
programs serve to insulate a state’s public and/or military from shifts in global oil price, but at the cost of
government reserves or revenue. Consumer countries may seek to eliminate subsidies when oil prices are
low and the public can tolerate marginal price increases, but this raises political risks when prices rise
again.
The following cases illustrate historical and modern-day instances of world market price increases and the
effects of such increases on security and stability for consumer countries:
INDIA: During the 1970s, the world experienced a period of decreased oil supply,
accompanied by steep oil price shocks. The oil price increase made transportation costs
skyrocket in countries like India, whose citizens responded to the public transportation
price hikes with mass protests and riots.308 Commodity prices also rose sharply with the
increase of oil prices as food and other goods became more expensive due to increased
transportation costs.309 India lacked robust energy resources domestically and relied heavily
upon oil imported from the Near East,310 rendering it vulnerable to supply shortages and
price shocks due to a lack of diversification in energy suppliers and energy alternatives,
problems that continue to this day.311 The unstable oil price exacerbated preexisting
political crises, including challenges to the legitimacy of the existing government. The
instability became so severe that the government declared a state of emergency in 1975 and
implemented authoritarian rule that continued for a year and a half.312
INDONESIA: Historically, fuel subsidies have played an important role in Indonesia’s
social and political stability. Amid the Asian financial crisis of the late 1990s, the Suharto
regime, then in power for more than three decades, sought to offset declining government
revenue by reducing fuel subsidies.313 This move, in combination with economic downturn
and widespread uncertainty, led to popular protest against the government.314 The regime’s
growing unpopularity, driven by key events such as a brutal police crackdown at Trisakti
University on students protesting the rise in fuel prices, led to Suharto’s resignation in
1998.315 Today, in an environment of low oil prices, newly-elected President Joko Widodo,
popularly known as Jokowi, has aggressively cut fuel subsidies by one-third across the
board while simultaneously raising interest rates to prevent resultant inflation.316 Jokowi
http://www.eia.gov/countries/analysisbriefs/China/china.pdf.
308
About 70 percent of the population made at or less than $2 USD per day and reliant on public transportation and subsidized fuel to keep
transportation prices affordable. Kesava Chandra Varigonda, “An Assessment of the Impact of Energy Insecurity on State Stability in India,”
Energy Policy 62 (2013): 1114-1116.
309
Ibid.
310
This condition of extreme dependence continues to exist with India importing around 20 percent of its oil from Saudi Arabia alone, and 62
percent coming from the Near East region overall. U.S. Energy Information Administration, “Country Profile: India,” last modified June 6, 2014,
accessed February 8, 2015, http://www.eia.gov/countries/analysisbriefs/India/india.pdf.
311
India’s main suppliers are Saudi Arabia, Iraq, Nigeria, Angola, Venezuela, Iran, and a handful of other Near Eastern and African States. Ibid.
312
Varigonda, “An Assessment of the Impact of Energy Insecurity on State Stability in India,” 1116.
313
Hamish McDonald, “No End to Ambition,” The Sydney Morning Post, January 28, 2008, accessed April 10, 2015,
http://www.smh.com.au/news/world/no-end-to-ambition/2008/01/27/1201368944638.html.
314
Keith Richburg, “Suharto Resigns, Names Successor,” The Washington Post, May 28, 1998, accessed April 5, 2015,
http://www.washingtonpost.com/wp-srv/inatl/longterm/indonesia/stories/resignation052198.htm
315
“Students rally for Trisakti tragedy,” The Jakarta Post, May 13, 2008, accessed April 5, 2015,
http://www.thejakartapost.com/news/2008/05/13/students-rally-trisakti-tragedy.html.
316
Fitri Wulundari, Eko Listiyorini, and Sharon Chen, “Widodo makes biggest change to Indonesia’s fuel subsidies,” Bloomberg, December 30,
42
also has vowed to increase oversight of the country’s energy sector to combat smuggling
and corruption.317 While these policy changes may be politically viable in today’s low oil
price environment, they could become a future source of political risk and instability. The
removal of the subsidies could erode popular support for Jokowi when global prices rise
again and domestic prices are no longer restrained by artificial pricing.
CHINA: China is the second largest oil-consumer in the world behind the U.S. and is a netimporter of crude oil and refined petroleum.318 In 2013, China’s spending on oil imports
was approximately 2.5 percent of its GDP, ranking 11th out of 13 on the 2013 Oil Security
Index (the lower ranking reflecting lower oil security).319 While undoubtedly benefiting
from the recent dip in oil prices,320 a potential price increase would make it more expensive
for China to continue using fuel at its present rate.321 In recent months, China has been
purchasing oil at low prices to increase its strategic oil reserve, which is predicted to reach
~500 million barrels by 2020, in order to secure its supply.322 A large domestic oil reserve
helps alleviate supply disruptions and can mitigate the effects of a short-term price shock.
China has also been diversifying its oil imports by engaging in pipeline partnerships with
Russia, Kazakhstan, and Myanmar, in order to help avoid a potential supply bottleneck in
the Straits of Malacca, through which 84 percent of China’s imported petroleum travels.323
Adaptation is Key
The ability of a consumer-state to adapt is key when assessing the consequences of a rise in oil price.
Higher oil prices may encourage the creation or expansion of efforts to develop alternative energy sources
to insulate states from the sharpest price shocks. Both Brazil324 and Colombia325 have developed or have
promoted greater usage of oil alternatives to offset the economic costs of higher oil prices.326 States may
also seek to develop domestic production capabilities and invest in foreign oil production ventures, as was
the case in India, to ensure greater supply security once oil prices rise. High domestic demand may
undermine adaptation by consumer-states if demand outpaces the effects of energy diversification in type
and supply. Some consumer-states, like China, have focused on diversification rather than development of
2014, accessed April 5, 2015, http://www.bloomberg.com/news/articles/2014-12-31/widodo-makes-biggest-change-to-indonesias-fuel-subsidysystem.
317
Ibid.
318
U.S. Energy Information Administration, “China.”
319
Securing America’s Future Energy, “Oil Security Index,” October 2013.
320
Suzanne O’Halloran, “Cheap oil winners: China and India maximize lower oil prices,” Yahoo Finance, 16 January 2015, accessed on April 28,
2015, http://finance.yahoo.com/news/cheap-oil-winners-china-and-india221250754.html;_ylt=A0LEVjbFNEBVaf0A07UnnIlQ;_ylu=X3oDMTEzNTlqaHY3BHNlYwNzcgRwb3MDNwRjb2xvA2JmMQR2dGlkA1lIU
zAwM18x.
321
Higher oil prices, in the triple figure range, could limit China’s growth. “How High Oil Prices Will Permanently Cap Economic Growth,”
Bloomberg Business, 23 September 2012, accessed on April 28, 2015, http://www.bloomberg.com/news/articles/2012-09-23/how-high-oil-priceswill-permanently-cap-economic-growth.
322
U.S. Energy Information Administration, “China.”
323
U.S. Department of Defense, Annual Report to Congress: Military and Security Developments Involving the People’s Republic of China 2014.
http://www.defense.gov/pubs/2014_china_report_final.pdf.
324
Brazil developed ethanol fuel in 1919, but promoted the use of ethanol to increase energy independence starting in 1964 and in response to
rapidly increasing oil prices of the early 1970s. Sarah L. Stattman, et al., “Governing biofuels in Brazil: A comparison of ethanol and biodiesel
policies,” Energy Policy 61 (2013), 22-30, 25-26.
325
Colombia has come to rely more upon biofuels to supplement transportation costs by reducing dependence upon oil. Monica J. Valencia,
Carlos A. Cardona, “The Colombian biofuel supply chains: The assessment of current and promising scenarios based on environmental goals,”
Energy Policy 67 (2014) 232-242, 232-233.
326
U.S. Energy Information Administration, “India,” last modified June 26, 2014, accessed February 10, 2015.
http://www.eia.gov/countries/analysisbriefs/India/india.pdf.
43
alternatives due to the inability of domestic production and current imports to meet growing demand.327
Oil is Power
Possessing one’s own supply of oil has many benefits. Such a country does not have to divert as much
money to oil imports, and the country is less reliant on foreign oil supply. Oil can be used as a coercive or
antagonistic policy tool or as a tool for leverage; no state wants to be on the receiving end of such
policies. There are quite a few risks that come with heavy reliance on imported oil, and there are a lot of
benefits that result from its possession or control. Recognizing both the power and revenue connected to
controlling this black gold, consumer (and producer) states may seek to assert sovereignty over
unexplored and unclaimed reserves. As oil prices rise, these areas become even more valuable both as a
domestic supply source and a revenue source. The following areas represent a few non-exhaustive
examples of geographic areas that may become even greater sources of contention and aggression when
oil prices rise.
The East and South China Seas
Despite efforts toward energy diversification, China’s oil import dependence and need for secure
oil supply should not be understated. China has found itself embroiled in territorial and maritime
disputes for years. China may become more aggressive in territorial claims of the East and South
China Seas when oil prices rise, as it seeks to control the lucrative oil supply source in addition to
gaining other benefits that come with asserting sovereignty over those areas.328 The EIA predicts
that there may be as much as 200 million barrels of oil in the East China Sea.329
The South China Sea (SCS) is another source of contention in the region. The EIA predicts it may
have as much as 11 billion barrels of oil and 190 trillion cubic feet of natural gas.330 About one third
of global crude oil trade travels through the South China Sea, a significant majority through the
Straits of Malacca.331 As oil prices rise, these reserves become increasingly valuable, and a state in
the region could begin pushing more assertively for its territorial claims as sovereignty provides not
only the ability to extract the valuable resources, but the ability to restrict trade or freedom of
navigation in those areas as well.332,333,334
Energy-related clashes are not unprecedented in the area. Just last year, the Chinese National
Offshore Oil Corporation launched the Haiyang Shiyou 981 oilrig 120 miles off the coast of
Vietnam.335 Both China and Vietnam lay claim to this area of the South China Sea. The waters are
within the 200-mile exclusive economic zone claimed by Vietnam under the UN Convention on the
Law of the Sea, to which China is a party. However it is also in close proximity to the Paracel
327
Ole Odgaard, Jørgen Delman, “China’s energy security and its challenges towards 2035,” Energy Policy 71 (2014): 107, 109-111, 113-117.
Consumer access concerns are one of the pathways for oil to lead to war in: Jeff Colgan, “Fueling the Fire: Pathways from Oil to War,”
International Security 38 (Fall 2013): 147-180.
329
U.S. Energy Information Administration. “East China Sea.” Last modified 17 September 2014, accessed February 10,
http://www.eia.gov/countries/regions-topics.cfm?fips=ECS.
330
U.S. Energy Information Administration. “South China Sea.” Last modified 7 February 2013, accessed February 10,
http://www.eia.gov/countries/regions-topics.cfm?fips=SCS.
331
Ibid.
332
According to the UN Convention of the Law of the Sea, a state has the authority to restrict trade and freedom of navigation in territorial seas
that lie within a state’s Exclusive Economic Zone. See U.S. Energy Information Administration “South China Sea.”
333
Colgan, Jeff. “Fueling the Fire.”
334
U.S. Energy Information Administration. “South China Sea.”
335
Brian Spegele and Vu Trong Khanh. “China Moves Oil Rig from Contested Waters.” Wall Street Journal, July 16, 2014,
http://www.wsj.com/articles/chinas-cosl-moves-oil-rig-from-contested-waters-1405472611.
328
44
Island chain, which both China and Vietnam claim as their own. In addition to China and Vietnam,
other stakeholders such as Brunei Darussalam, Malaysia, the Philippines, and Taiwan also lay
claims to various parts of the South China. If oil prices rise, these disputes could become more
hostile and destabilizing for the region.
Eastern Mediterranean/Levant Basin
The Eastern Mediterranean and Levant Basin represent another potential case of increased
contention and instability, especially when oil prices rise. In 2010, a U.S. Geological Survey
indicated there may be reserves of 1.7 billion barrels of oil and 122 trillion cubic feet of natural gas
in the Eastern Mediterranean.336 This region has potential to become a strategically important
reserve for Israel, Turkey, Cyprus, Syria, and the Gaza Strip.337 With the exception of Syria, these
countries are import-dependent for their energy needs. A key source of vulnerability is that the area
is already home to several intractable border and territorial disputes, including the Arab-Israeli
conflict and the dispute between Turkey and Greece regarding Cyprus.
Hydrocarbon discoveries in the Eastern Mediterranean could have large geostrategic and economic
impacts for the states in the region that are fairly import-dependent and economically weak,
especially in light of an increase in oil prices. States in the region may seek control over these
resources to use as a buffer against rising oil prices, and thus growing oil import costs. They could
also gain a new source of revenue by selling the oil abroad.
Conclusion
The world market price of oil remains volatile, and fluctuations will continue to affect the economic and
political stability of importers and exporters alike. In the current low-price environment, oil-producing
countries already have faced a range of negative consequences, and many show indicators of impending
or potential crisis. The dynamic analytical framework presented in this report may be used to assess those
consequences and related indicators, with the goal of improving U.S. awareness of, and responsiveness to,
security crises spurred by low oil prices.
As the framework demonstrates, key political, economic, and social conditions determine a country’s risk
or resilience to oil price volatility and subsequent instability. Those countries at greatest risk to instability
in a low oil price environment will exhibit indicators of crisis. While oil-exporting countries suffer the
destabilizing effects of such an environment, oil-consuming countries are in an advantageous position to
use cheaper oil to fuel economic growth. Consumer countries may also use this low price period to
diversify their energy sectors, buffering themselves from oil price shocks when prices do rebound.
Conversely, in a high oil price environment, the winners and losers are reversed. As prices rise, oilproducing states will likely enjoy revenue surpluses while oil-consuming states will face growing costs.
As highlighted in this report, the degree of impact of a high oil price on oil-consuming states will largely
be contingent on their oil dependency and the diversification of their energy portfolio, among other
factors.
336
Laura El-Katiri and Mohammed El-Katiri. “Regionalizing East Mediterranean Gas: Energy Security, Stability, and the U.S. Role.” Strategic
Studies Institute, United States Army War College (December 2014), ix.
337
Ibid, 1-3.
45
Ultimately, the world market price of oil matters both to regional security and vital U.S. interests. It yields
winners and losers at different oil price points, resulting in varying consequences for all parties involved.
Today, abundant supply and slower-than-expected demand leave many energy exporting countries in
precarious economic and political situations. Depending on how long the current low oil price
environment lasts, and how low the price falls, these unstable situations may only get worse. With this in
mind, it is important to utilize and build upon the dynamic analytical framework outlined in this report to
monitor and anticipate security crises exacerbated, accelerated, or spurred by the low price of oil.
46
Appendix A: Historic Crude Oil Price Graph
Source: BP Statistical Review 2014.
47
Appendix B: Country-Specific Statistics
Source: BP Statistical Review, 2013.
Source: BP Statistical Review, 2013.
48
Appendix B: Country-Specific Statistics
Source: BP Statistical Review, 2013.
Exports
Country
Total Exports
Oil Exports (mbbl/d) (est.)
Oil as % of Exports
Azerbaijan
34.46
.5344 (2010)
90 (incl. gas)
Iran
61.22
.3308 (2010)
80
Iraq
91.99
.0038 (2010)
84
Libya
38.45
.0119 (2010)
--
Nigeria
93.55
.0188 (2010)
95 (incl. petro products)
Russia
515
2.968 (2013)
--
Saudi Arabia
376.3
1.471 (2010)
90 (incl. petro products)
United States
1575
2.311 (2012)
--
Venezuela
91.78
.0684 (2010)
--
China
2210
.0612 (2013)
--
India
313.2
1.380 (2013)
--
Indonesia
178.9
.1424 (2010)
--
Sources: CIA World Factbook, 2013; Trading Economics, 2015.
49
Appendix B: Country-Specific Statistics
Imports
Countries
Total Imports (billion
USD$)
Oil Imports (bbl/day)
(est.)
Oil as % of Imports
Azerbaijan
10.68
449 (2010)
.85
Iran
61.25
180, 400 (2010)
0
Iraq
62.34
172, 600 (2010)
.51
Libya
16.08
575, 700 (2010)
0
Nigeria
52.79
151, 700 (2010)
3.06
Russia
323.9
28, 040 (2013)
6.94
Saudi Arabia
162.2
196, 700 (2010)
0
United States
2334
2, 071, 000 (2010)
8.2
Venezuela
50.34
16, 660 (2011)
0.2
China
1949
1, 236, 000 (2013)
13.77
India
508.1
312, 000 (2013)
29.78
Indonesia
166.7
473, 400 (2011)
5.5
Sources: CIA World Factbook, 2010-2014; Observatory of Economic Complexity, 2012.
Revenue
Countries
Total Revenue (billions
USD$/yr.)
Oil as % of Revenue
% of GDP in Oil
Rents
Azerbaijan
27.61
74 (incl. gas)
33.9
Iran
47.84
32
30.6
Iraq
99.52
97
43.5
Libya
41.54
91
39
Nigeria
23.85
70
13.4
Russia
439
28
13.6
Saudi Arabia
302.6
90
43.4
United States
2849
0
0.9
Venezuela
103.4
45
20
China
2118
--
1.2
India
181.3
--
1.2
Indonesia
137.5
--
2.4
Sources: CIA World Factbook, 2013; Natural Resource Governance Institute, 2010-2011.
50
Appendix B: Country-Specific Statistics
Countries
Sovereign Wealth Fund (billions USD$)
Azerbaijan
37.3
Iran
62
Iraq
18
Libya
66
Nigeria
1.4
Russia
181.8
Saudi Arabia
762.5
United States
No federal/state only
Venezuela
0.8
China
1488.3
India
--
Indonesia
0.3
Source: Sovereign Wealth Fund Institute, 2015.
51
Appendix C: Country-Specific Indicator Chart
Indicators
Economic Indicators
1. World market price average falls
below a state’s fiscal budget breakeven price
2. State chooses to decrease sovereign
wealth fund totals or foreign currency
reserves
3. State chooses to implement
dramatic currency devaluation
policies
4. Dramatic increases in sovereign
debt sales
5. Debt default
6. Introduction or increase of
austerity measures
Oil-Industry-Specific Indicators
1. OPEC chooses to
increase/maintain oil production
while world demand stagnates or
declines
Iran
Iraq
Nigeria
Russia
Venezuela
Libya
Saudi
Arabia
Azerbaijan
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
2. Oil imports increase
3. Cuts in spending, staff, and
dividends
4. Share price falling and / or
investors selling stock
5. Decline in remittances
6. Migrants return to home country
7. Merging of oil companies
8. Company restructuring
9. Bankruptcy
2. Implementation of / rise in
repressive measures
3. Attacks on oil infrastructure
4. Increase in aggressive rhetoric,
threats
5. Escalation of military activities
X
X
X
X
X
Social Indicators
1. Upsurge in civil unrest
Political-Military Indicators
1. Increases in political infighting
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
52
Appendix D: Acronyms and Oil Industry Definitions
General Terms
Bpd:
Barrels per day, a measure of oil production.
GDP:
The gross domestic product of a country, which is a measure of the market value of a
country’s aggregate production and a gauge of overall economic performance.
NOC:
A national oil company, i.e., an oil company that is wholly or largely owned by a national
government.
Pb:
Per barrel.
SWF:
Sovereign wealth fund, a government-controlled reserve fund typically maintained
through profits from the sale of oil or other commodities. SWFs provide a safety net to
commodity-dependent governments that are especially vulnerable to market volatility.
WMP:
The world market price of oil, herein based on the benchmark price for Brent crude.
Organizations and Infrastructure
BTC:
The Baku-Tbilisi-Ceyhan pipeline, which runs from the Caspian Sea through Georgia to
southern Turkey.
BTE:
Baku-Tbilisi-Erzurum pipeline, which runs from the Caspian Sea through Georgia to
eastern Turkey.
CBR:
The Central Bank of Russia.
EIA:
The U.S. Energy Information Administration, a U.S. government agency that collects and
analyzes energy information to support U.S. policymakers.
IEA:
The International Energy Agency, an autonomous intergovernmental organization that
collects and analyzes information about the energy sector and serves as a policy adviser
to member states.
MEND:
The Movement for the Emancipation of the Niger Delta, a militant group based in
Southern Nigeria.
NNPC:
The Nigerian National Petroleum Corporation.
OPEC:
The Organization of Petroleum Exporting Countries, an organization of twelve major oilexporting states that collectively have significant influence over global crude prices.
PDVSA:
Petróleos de Venezuela, S.A., the state-run oil company of Venezuela.
SOCAR:
The State Oil Company of Azerbaijan Republic.
53
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