By Gabriel G. Tabarani
With the dominance of massacres unfolding on the battlefields in Ukraine, Gaza, and Lebanon taking up global headlines, the recent drop in energy prices, which could turn the world upside down, has barely been noticed outside the concerned industries. However, given the frequent role energy prices play as a fundamental factor in shaping global crises, if the recent drop in oil and natural gas prices over the past few months turns out to be a lasting trend rather than a temporary glitch, the world could be on the brink of a geopolitical shock with impacts far more significant than any developments on the battlefields.
Over the past year, a combination of factors—including interest rate cuts by the U.S. Federal Reserve, signs of distress in China’s economy, and concerns over economic growth in Europe—have contributed to a gradual decline in oil prices to $73 a barrel this month, down from a peak of $120 per barrel following Russia’s invasion of Ukraine in February 2022. However, investors and analysts remain uncertain whether this trend will last. Additionally, continued uncertainty surrounding how OPEC member states, particularly Saudi Arabia, will react to the price drop, as well as Russia’s ambiguous role in attempting to bypass U.S. and EU sanctions on its energy sector, means many other factors could lead to further significant shifts in global energy markets.
Arguably, the most significant, yet often underappreciated, change in these markets recently has been the transformation of the U.S. from a net energy importer to a net oil exporter and significant gas exporter in the late 2000s. Whether America’s energy self-sufficiency will grant Washington greater leverage to shift the direction of global energy prices in its favor remains to be seen. However, a scenario in which the U.S. reshapes energy market trends to serve its strategic interests could weaken the ability of Saudi Arabia and other OPEC countries to do so in their favor.
If the current drop in energy prices turns out to be permanent, it will have a massive impact on every region of the world. Furthermore, it will negatively affect three fundamental dynamics that lie at the heart of many of today’s geopolitical crises, as well as broader global political change: authoritarian regimes pursuing expansionist wars, fragile states torn by civil strife, and the technological restructuring driving the transition to green energy in industrial democracies. Rapid declines in oil and gas prices would disrupt the strategic calculations behind all three trends.
The most immediate impact of a permanent decline in energy prices will be felt by authoritarian, oil-exporting regimes pursuing aggressive and costly efforts to expand their influence and, in some cases, their territories—Russia being the clearest example. President Vladimir Putin’s government has become reliant on energy export revenues to fund its war against Ukraine while attempting to maintain peacetime levels of economic prosperity. With the break-even point for Russian oil production estimated to be over $94 per barrel, a prolonged drop in oil prices would complicate Russia’s efforts to balance its surging military output with rising domestic spending designed to shield the Russian population from the social impact of a seemingly endless war.
Just as the drop in oil prices in the 1980s placed immense economic pressure on the Soviet Union, Putin’s regime will face harsh strategic choices that high oil prices had allowed it to avoid. While such a dynamic is unlikely to halt Putin’s obsessive efforts to destroy Ukraine, the economic pressures it will impose on Russia could hinder his ability to continue the relentless war of attrition that currently forms the basis of Russia’s military strategy. Although other social and economic factors are also crucial to the Russian government’s strength, trends in energy markets are a variable that any analysis of Russia’s likely trajectory must consider.
A downward trend in energy prices beyond OPEC’s control would destabilize other aspiring authoritarian states. When oil prices fluctuate between $50 and $60 per barrel, it’s hard to see how Saudi Arabia could continue its highly ambitious city-building and economic transformation program, central to Crown Prince Mohammed bin Salman’s efforts to legitimize his grip on power. Similarly, lower oil prices would make it harder for Iran’s ruling theocracy, already struggling under the weight of U.S. sanctions on its oil industry, to prevent economic turmoil from fueling domestic unrest while also imposing further constraints on its ability to fund proxy militias essential to its regional dominance ambitions in the Middle East.
While declining oil prices could put aggressive authoritarian regimes under severe pressure, they could also destabilize energy-producing countries already weakened by civil strife and corruption. In Libya, a price collapse could worsen the battle for oil and gas infrastructure control between competing armed factions, whose power structures rely on energy sector revenues. With fewer funds available, the pressure to seize control of oil and gas fields—needed to maintain the cash flow required to reward supporters and purchase weapons—is likely to lead to a return of full-scale civil war on multiple fronts across the former Jamahiriya.
Although Libya is unique in many ways, the pressures from falling oil prices could destabilize countries already grappling with economic crises exacerbated by ongoing insurgencies, such as Nigeria and South Sudan. For the Nigerian government struggling to implement reforms and combat insurgents, further revenue declines could impede the state’s ability to maintain order in much of the country. With rampant jihadist insurgencies spreading across West Africa and the Sahel, the consequences of further deterioration in Libya and Nigeria will be widely felt across Africa, Europe, and the Middle East.
While the effects of continued energy price declines will be felt first in oil-producing countries, such a fundamental shift in the global economy will also profoundly impact oil-consuming economies. Though the long-term effects remain unclear, it is hard to see how the transition to a carbon-neutral economy (net-zero carbon) would not be affected by oil and gas prices far lower than policymakers anticipated. Whether it’s the adoption of electric vehicles or the expansion of renewable energy sources, the cost calculations underlying this transition, made when oil was over $100 a barrel, may need to be reassessed in a world where prices head toward $50.
As gasoline prices for the average driver drop below the initially expected levels, policymakers must find new incentives to encourage mass adoption of electric vehicles, which support many key strategic objectives in green transition strategies. Similarly, the broader changes in consumer behavior required to achieve deeper economic transformation will also need more active state intervention in Europe and North America, where energy prices are significantly lower. While many variables are at play in these transitions across the U.S., the EU, and even China, many policy initiatives designed to promote a carbon-free economy are unlikely to survive such a significant shift in cost pressures in their current form.
However, even with a fundamental element of the global economic system like energy prices, anyone studying geopolitical change must avoid the “one big thing explains everything” fallacy, which has led to many failed policies in the past. Many other social, economic, and political variables play equally important roles when it comes to the fate of authoritarian regimes, failing states, or the transition to carbon-free supply chains. A collapse in oil and gas prices will not suddenly halt Putin’s regime’s efforts to invade Ukraine, guarantee a decisive victory for one side in Libya, or completely stop the transition to a carbon-free economy.
Nevertheless, few other structural factors influence as many countries, trends, and crises simultaneously as do oil and gas prices. Because the strategies of every great power are subject to trends in energy markets, sudden shifts in oil prices can turn a seemingly strong political initiative into a house of cards. If the current downward trend in energy prices persists for a long time, the once-invincible strongmen may collapse and face a deep crisis as their intricate plans crumble under the laws of supply and demand.
This article was originally published in Arabic on the Asswak Al-Arab website.
