Decreasing Oil Prices as a Tool of Coercion
By Morgan GreenePublished November 9, 2014By Morgan Greene, 11/09/14
Gasoline prices are at their lowest levels in years, with crude oil prices below $90 a barrel. While consumers and businesses in the U.S. rejoice at the dramatic decline in transportation and production costs, the economies of Russia and Iran have received a harsh blow. Both economies, centered on oil exports and weakened by recent Western sanctions, are struggling to stay on their feet. This outcome, whether deliberate or a derivative, has important implications for American foreign policy.
Oil is necessary for the functioning of every modern economy and society. For this reason oil sanctions are among the most effective, as militaries, governments, and businesses break down without fuel. Many Middle Eastern countries gain their power and wealth from oil reserves. Budgets are based on exports of oil at high prices, $100/barrel in Iran. By reducing oil prices in Iran and Russia by 25 percent, the economic stability of these countries has been shaken, forcing leaders to search for income substitutes. Iran and Russia have fallen back on their oil wealth as a means of resisting Western sanctions; without this defense concession may be more likely.
Although Russia has avoided acknowledging damage caused by Western sanctions, recently Anton Siluanov, Russia's Finance Minister, expressed needs for budget cuts and the potential for a recession. Oil revenues account for almost half of Russia's budget revenue, an area that can afford no losses in the context of sanctions. The Economy Minister said "there is a risk of a negative economic growth and declining investment if the current oil price of around $83 per barrel stays for some time. " The price drop could cause a 2 percent drop in Russia's GDP, which is exacerbated by Russia's inability to borrow from the international community. Russia's financial reserves and floating rouble should be able to alleviate immediate consequences. However, if the combined effort of sanctions and low oil prices persist beyond a year or two, Putin's regime could be at risk.
While not a mirror image, Iran has experienced similar economic pains at the hands of decreasing oil prices and increasing sanctions. Despite attempts to diversify its economy, oil and gas remain at the epicenter, with oil revenues making up more than 65 percent of government revenues. A government spokesman Mohammad Baqer Nobakht said "some so-called Islamic countries in the region are serving the interest of America and (other) arrogant powers in trying to squeeze the Islamic Republic." He refers to the belief that Saudi Arabia has agreed to accept the economic consequences of lower prices. This could be an attempt with the West to weaken Russia and Iran to compel concessions with regard to Ukraine's sovereignty and Iranian nuclear talks.
Saudi Arabia claims that its increasing exports of oil that have driven down prices have no coercive goals. Whether the action was intentional or not, the results have set a precedent for future policy moves. It is unclear if this newest attack at Iran and Russia's economies will have the intended coercive effects, yet the damage looks promising. Oil revenues are funneled largely into government income; thus this is a more effective economic move than sanctions, which can negatively affect the innocent populous. If oil prices remain low, it is likely that Iran and Russia will be pressured into concessions of some kind, creating a model for future manipulation of international oil prices.