The U.S. and Saudis are behind an oil price crash that could topple regimes in Russia and Iran
From Russia to America, and from Scotland to the Middle East, the dramatic fall in the price of oil — down by nearly half in six months — has sparked an economic crisis that threatens to shift the global balance of power in dramatic fashion.
As Russia teeters on the edge of crisis, America and Saudi Arabia are using the depressed oil market to wreak havoc on enemies such as Iran. The repercussions are being felt closer to home, too, with the North Sea oil industry described as being close to collapse.
The good news is that it’s cheaper to fill up your car at the pumps, but what does it mean for Britain’s national security?
Here, the Economist magazine’s Energy Editor EDWARD LUCAS offers a simple guide to these deeply turbulent times.
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The dramatic fall in the price of oil - down by nearly half in six months - means that is that it’s cheaper to fill up your car at the pumps, but what does it mean for Britain’s national security?
RUSSIA IN MELTDOWN
The world has become used to Vladimir Putin giving tub-thumping speeches about the glory of modern Russia. His three-hour press conference last Thursday — by turns bombastic and duplicitous as he deflected questions about his country’s teetering economy — was no exception.
Railing against the sanctions enforced by the EU and America in response to the annexing of Crimea, he warned darkly against shackling the Russian bear and tearing out its ‘fangs and claws’.
During a recent visit to Turkey, however, he was forced to adopt a very different tone, announcing in clipped and petulant terms that his country’s prized new South Stream gas pipeline to Europe would not be going ahead.
The £25 billion pipeline across the Black Sea and the Balkans would have given the Kremlin a stranglehold on the energy supplies of a slew of European countries — Italy, Bulgaria, Serbia, Croatia, Slovenia, Hungary and Austria.
It would also have contemptuously demonstrated Russia’s superiority over the European Union, which had ruled the pipeline plans illegal. (The rules of the European energy market — strongly backed by Britain — say that the same company cannot own both a pipeline and the gas that runs through it because it gives them too much control over supply and pricing.)
But Putin has had to eat humble pie and cancel the whole project.
Putin, pictured, has had to eat humble pie and cancel the planned £25 billion pipeline across the Black Sea and the Balkans
Why? The collapse in the oil price across the world — down by nearly half since June — is emptying the Kremlin’s coffers.
As the third-biggest oil producer in the world, Russia is heavily dependent on a buoyant price, deriving more than half of its budget revenues from oil and gas extraction.
The kleptocrats in the Kremlin rely on oil and gas exports to sustain Russia’s bloated and bribe-ridden bureaucracy, as well as its ruthless aggression against other countries.
But the price per barrel of oil hit a five-year low of $58.50 last week, and though it has recovered slightly, it is still far too low to keep Mr Putin’s regime running at full blast, especially given the economic sanctions the West has imposed.
No wonder the value of the rouble has plummeted, causing panic buying in Russia, the movement of money out of the country and even the jacking-up of interest rates to an eye-watering 17 per cent in a bid to stop the currency sliding further. So these are very bad times for Russia, where no one has forgotten that low oil prices brought down the Soviet Union in 1991 by eviscerating its economy. Today, they could spell doom for Putin’s attempt to recreate that Soviet empire.
He has naively set out his spending plans for the next three years based on an oil price of around $100 a barrel — which now looks wildly optimistic.
But though the Kremlin is weakened, we should not count our blessings yet. For there is a danger that the Russian autocrat will lash out militarily, distracting his hard-pressed people with another foreign policy gambit aimed directly at humiliating Nato in Europe.
With that in mind, some feel that now is the time to go easy on Mr Putin. He has learned a hard lesson from this collision with reality; we should not push him too hard, the argument goes. Instead, we should offer him a face-saving deal on the situation in Ukraine, offer to lift sanctions and prevent the Russian economy from staggering over a cliff.
I disagree. Putin does not want a deal with the West. He wants to rewrite the rules of European security. Only if we accept that countries such as Ukraine are to be consigned to Russia’s control will the hard men of the Kremlin be satisfied.
That is a concession we cannot and should not make. If we concede Ukraine, we signal that might is right. What happens when Mr Putin tries his tricks on another country — perhaps our Nato allies in the Baltic states?
As the third-biggest oil producer in the world, Russia is heavily dependent on a buoyant price, deriving more than half of its budget revenues from oil and gas extraction. Above, a board in Moscow shows a slump in the country's currency - a knock-on effect from the slide in oil prices
THE HUMBLING OF OPEC
For all our worries over Russia, however, we in Britain should not lose sight of the humiliation of another swaggering and once-mighty force in world politics, the Organisation of Petroleum Exporting Countries (OPEC). When it burst on the world scene 40 years ago, OPEC terrified the wasteful West.
Over the previous decades, we had grown used to abundant oil, bought mostly from Middle Eastern producers — with little global muscle — at rock- bottom prices.
However, OPEC changed that. By restricting supply, the cartel quadrupled the oil price, from $3 to $12.
Saudis remain in a strong position because oil is cheap to produce there. Above, the country's Minister of Petroleum and Mineral Resources Ali Ibrahim Naimi
That is only a fraction of today’s price — but the oil crisis sparked by the rocketing cost in 1974 was enough to lead to queues at filling stations and national panics in the pitifully unprepared industrialised world.
Four decades later, Saudi Arabia has become one of the richest countries in the world, with reserves totalling nearly $900 billion.
But the rest of the world is less at its mercy than it once was. Here in Britain, our energy consumption is dropping remorselessly — the result of increased energy efficiency.
Moreover, many other nations now produce oil. And oil can be replaced by other fuels, such as natural gas, which OPEC does not control.
Also, OPEC no longer has the discipline or the clout to dominate the market, and we in Britain are among the big winners from all this, reaping the benefits of lower costs to fill up our cars and power our industries.
At its meeting in Vienna last month, the OPEC oil cartel — which controls nearly 40 per cent of global production — faced a fateful choice.
Would it curb production and thus, by reducing supplies, try to ratchet the oil price back to something near $100 a barrel — the level most of its members need to balance their books? Or would it let the glut continue?
The organisation’s 12 member countries, including Saudi Arabia, Iran, Iraq, Kuwait, Venezuela and Nigeria, chose to do nothing, proving that its once-mighty power has withered. Oil prices subsequently fell even further.
One central problem is that several of OPEC’s members detest each other for a variety of reasons.
Above all, Saudi Arabia and its Gulf allies see Iran — a bitter religious and political opponent — as their main regional adversary.
They know that Iran, dominated by the Shia Muslim sect, supports a resentful underclass of more than a million under-privileged and angry Shia people living in the gulf peninsula — a potential uprising waiting to happen against the Saudi regime.
The Saudis, who are overwhelmingly Sunni Muslims, also loathe the way Iran supports President Assad’s regime in Syria — with which the Iranians have a religious affiliation. They also know that Iran, its economy plagued by corruption and crippled by Western sanctions, desperately needs the oil price to rise. And they have no intention of helping out.
The fact is that the Saudis remain in a strong position because oil is cheap to produce there, and the country has such vast reserves. It can withstand a year — or three — of low oil prices
The fact is that the Saudis remain in a strong position because oil is cheap to produce there, and the country has such vast reserves. It can withstand a year — or three — of low oil prices.
In Moscow, Vladimir Putin does not have that luxury — and the Saudis know it.
They revile Russia, too, for its military support of President Assad, and for its sale of advanced weapons to Iran.
HOW FRACKING CHANGED THE WORLD
But if geopolitics and ancient enmities are playing a big role in the price of oil, so is modern technology.
Astonishingly, America has now overtaken Saudi Arabia as the world’s largest producer of crude oil.
That comes not from the traditional American oil industry, exemplified by J.R. Ewing in the TV series Dallas, but from fracking — pumping water and sand at high pressure into oil-and-gas-bearing shale rock.
America is a world leader in this technology. Costs are low and the geology is favourable: the regions in America where drilling is done for shale gas and oil are thinly populated — such as Oklahoma and North Dakota.
Not surprisingly, the Saudis are worried by America’s fracking revolution. And the more Westerners switch from oil to other fuels — such as gas or even solar energy — the worse it is for the nations which survive on oil exports.
The truth is that the shale juggernaut will only be slowed, not halted. In time, it will reach other countries, too, including Britain if David Cameron has his way. Above, Mr Cameron tours a shale drilling plant oil depot
Saudis note with alarm the growth in energy efficiency. Every barrel of oil not consumed in the West is profit lost.
So they hope that a low oil price will at least slow the development of fracking in America — and it is true that a low oil price is bringing bankruptcy for the riskiest drillers in the new American exploration fields.
The truth is, however, that the shale juggernaut will only be slowed, not halted. In time, it will reach other countries, too, including Britain if David Cameron has his way .
The truth is, however, that the shale juggernaut will only be slowed, not halted. In time, it will reach other countries, too, including Britain if David Cameron has his way
Indeed, one really big question is how we use the cash windfall that comes with a dramatically lower oil price. Will we take the opportunity to improve Britain’s energy efficiency and diversify our supplies to protect against an eventual rise in the cost per barrel?
WILL THE NORTH SEA CRISIS RUIN SCOTLAND?
The most pressing issue for Britain is the fate of the North Sea basin, where costs are rising as oil and gas fields are depleting and exploration becomes more difficult.
‘It’s almost impossible to make money at these prices — it’s a huge crisis,’ the chairman of the independent oil explorers’ association said last week.
That is bleak news for the tens of thousands of workers employed in our offshore industry and their families.
But it is even worse news for the Scottish Nationalists. Their dreams of an independent Scotland were balanced precariously — ludicrously, some said — on the idea that oil and gas revenues would pay for the lavish socialist spending and bloated bureaucracy they hold dear. Now, their sums simply no longer add up.
If the oil price stays down, Scotland’s only hope is to cling tightly to the security — and subsidies — which the Union with England brings. Above, the Cleeton North Sea oil platform
This week, an Office of Budget Responsibility simulation concluded that Scotland’s North Sea oil revenues would have slumped to just one-fifth of Holyrood’s forecasts within a year of independence if there had been a Yes vote in the recent referendum.
In 2012, The Economist magazine — for whom I am the energy editor — mocked the SNP’s optimistic economics with a cover story which dubbed Scotland ‘Skintland’, renaming the capital city ‘Edinborrow’.
The then SNP leader Alex Salmond said we would ‘rue the day’ that we published this ‘sneering’ piece. His party pals said we were ‘patronising and eccentric’. But we were right.
If the oil price stays down, Scotland’s only hope is to cling tightly to the security — and subsidies — which the Union with England brings.
The SNP's dreams of an independent Scotland were balanced on the idea that oil and gas revenues would pay for the lavish socialist spending and bloated bureaucracy they hold dear. Above, party leader Nicola Sturgeon
SO WHAT OF THE FUTURE?
The good news is that, even as high-cost oil producers are being squeezed by falling prices, it is a different story for consumers.
A $40 fall in the oil price shifts some $1.3 trillion from producers to consumers each year, largely through tumbling prices at the petrol pumps.
The RAC believes that petrol could fall to below £1 per litre — a price not seen since May 2009. That will keep millions of pounds in motorists’ pockets.
But they should not spend it on champagne — at least, not yet.
Oil production still rests on some of the most ill-run and fragile states in the world. Iraq produces 3.4 million barrels a day, and Libya another million.
That is half of the total produced by America. But both countries are precariously balanced on the edge of collapse. Libya is no longer a functioning state, riven by a bloody struggle between parliamentary forces and Islamist militias.
Iraq has already come perilously close to succumbing to the fanatical fighters of the so-called Islamic State.
The big picture is that the world is changing for the better: a number of despotic regimes —notably Russia’s — that depend on looting their country’s natural resources are facing a well-deserved comeuppance.
The question is whether they accept their fate, or whether the power of black gold to spark violent upheaval will see us all sucked into conflicts that could shake the world.
Vladimir Putin, the 60-year-old former president and current prime minister of Russia, has cultivated a swashbuckling public image over the past several years. He has piloted firefighting planes, darted whales, driven race cars, and taken a submersible 1,400 meters (4,600 ft) below the surface of Lake Baikal. Putin was forced to step down from the presidency in 2008 due to a constitutional limit on more than two consecutive terms. However, he remains the most influential figure in Russian politics, and has a strong hand in the "tandem rule" he shares with current president Dmitri Medvedev. The next presidential election takes place in March of 2012, and indications are that both Medvedev and Putin are planning to run, though neither has officially announced his candidacy. Gathered here are some of the more interesting photos taken of Vladimir Putin during his tenure as Russia's prime minister over the past few years. [34 photos]
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A picture released on March 6, 2010 shows Russian Prime Minister Vladimir Putin taking a horseback ride in the Karatash area, near the town of Abakan, during his working trip to the Republic of Khakassia, on February 25, 2010. (Alexei Druzhinin/AFP/Getty Images)
Russian Prime Minister Vladimir Putin wears a helmet and the uniform of the Renault Formula One team before driving a F1 race car on a special track in Leningrad region outside St. Petersburg, on November 7, 2010. (Alexei Druzhinin/AFP/Getty Images) #
Vladimir Putin test drives a Renault Formula One team car at a racing track near Leningrad, on November 7, 2010.(Reuters/Ria Novosti/Alexei Nikolsky) #
Vladimir Putin holds a five-year-old tiger's head as scientists put a collar with a satellite tracker on the animal in the academy of sciences Ussuri reserve in Russia's Far East, on August 31, 2008. (Reuters/RIA Novosti/Kremlin/Alexei Druzhinin) #
Russian Prime Minister Vladimir Putin holds a judo training session at the Top Athletic School during his working visit to St Petersburg, on December 18, 2009 (Alexei Druzhinin/AFP/Getty Images) #
Vladimir Putin prepares to dive during a visit to an archeological excavation of an ancient Greek port on the Taman Peninsula, about 1150 kilometers (720 miles) south of Moscow, Russia, on Wednesday, August 10, 2011. Ancient Greek colonies were located on the peninsula and served as trading posts with the steppes of what is now southern Russia and Ukraine.(AP Photo/RIA Novosti, Alexei Druzhinin) #
On August 10, 2011, Russian Prime Minister Vladimir Putin carries two pieces of archaeological trophies he discovered during diving near an archeological excavation of an ancient Greek port on the Taman Peninsula. (AP Photo/RIA Novosti, Alexei Druzhinin) #
This picture taken on September 19, 2009 shows Russian Prime Minister Vladimir Putin looking at a leopard as he visits the National Park in Sochi. (Alexei Druzhinin/AFP/Getty Images) #
Yana Lapikova, a new personal photographer of Prime Minister Vladimir Putin, taking pictures during an official event in Moscow, on June 16, 2011. The Russian government sought on June 17 to douse a frenzy of Internet comment after it hired Lapikova, an attractive former model and "Miss Moscow" finalist, as personal photographer to Putin. (Alexander Nemenov/AFP/Getty Images) #
Russian Prime Minister Vladimir Putin on a boat on Lake Ladoga, as he visits the Spaso-Preobrazhensky Monastery on Valaam island, northern Russia, on August 14, 2011. During the visit to Valaam he took part in the Sunday service in the upper church of the Transfiguration Cathedral. (AP Photo/RIA-Novosti, Alexei Druzhinin) #
Vladimir Putin participates in an arm-wrestling contest during a visit at a summer camp run by the Nashi youth group at Lake Seliger in the central Tver region, on August 1, 2011. Thousands of young activists from 84 regions of Russia gathered in the camp for the annual forum in Russia. (Alexei Nikolsky/AFP/Getty Images) #
Russian Prime Minister Vladimir Putin attempts to bend a frying pan with his bare hands during his visit to the summer camp of the pro-Kremlin youth group "Nashi" at lake Seliger, some 400km (248miles) north of Moscow, on August 1, 2011.(Reuters/Yana Lapikova/RIA Novosti) #
Vladimir Putin drives a snowmobile at Russia's ski resort Krasnaya Polyana near Sochi in southern Russia, on January 3, 2010.(Reuters/RIA Novosti/Kremlin/Dmitry Astakhov) #
Russia's Prime Minister Vladimir Putin, wearing headphones, sits in the cockpit of a firefighting plane in Ryazan region August 10, 2010. The plane later dropped water on a blaze southeast of Moscow, state media reported. (Reuters/Ria Novosti/Alexei Nikolsky) #
Vladimir Putin hugs a Bulgarian shepherd dog, after receiving it as a present from Bulgaria's Prime Minister Boiko Borisov in Sofia, on November 13, 2010. (Reuters/Oleg Popov) #
Russian Prime Minister Vladimir Putin rides with motorcycle enthusiasts during his visit to a bike festival in the southern Russian city of Novorossiisk, on August 29, 2011. Putin kicked off an election campaign on Monday revving up his three-wheeled Harley Davidson at the head of a bikers motorcade. (Reuters/Alexei Druzhinin/RIA Novosti) #
Vladimir Putin talks to a member of the "Lena-2010" Russian-German scientific expedition on Samoilovsky Island in Far Eastern Federal District, on August 23, 2010. Putin traveled beyond the Arctic Circle on Monday to look into evidence on climate change after a record heatwave devastated central Russia this summer. (Reuters/Ria Novosti/Alexei Druzhinin) #
Prime Minister Vladimir Putin looks at a bear while visiting the South Kamchatka Federal Sanctuary at Russia's Pacific Kamchatka peninsula, on August 24, 2010. (AP Photo/RIA Novosti, Alexei Druzhinin) #
Russia's Prime Minister Vladimir Putin rides a horse in southern Siberia's Tuva region, on August 3, 2009.(Reuters/RIA Novosti/Alexei Druzhinin) #
Vladimir Putin swims in a lake in southern Siberia's Tuva region, on August 3, 2009. (Reuters/RIA Novosti/Alexei Druzhinin) #
Russia's Prime Minister Vladimir Putin signs autographs for kids outside Khabarovsk, on August 27, 2010 during a visit in the region.(Alexei Druzhinin/AFP/Getty Images) #
Vladimir Putin aims at a whale with a crossbow, to take a piece of its skin for analysis on the Olga Bay, some 240 kilometers north-east of Nakhodka, on August 25, 2010. (Alexei Druzhinin/AFP/Getty Images) #
Russia's Prime Minister Vladimir Putin attaches a satellite tracking tag to a Beluga whale named Dasha during his visit to Chkalov island, some 700 kms northeast of the city of Khabarovsk, on July 31, 2009. (Alexei Druzhinin/AFP/Getty Images) #
Russian Prime Minister Vladimir Putin plays piano during a charity concert in Saint Petersburg, on December 10, 2010.(Alexei Nikolsky/AFP/Getty Images) #
Vladimir Putin feeds a young moose at the national park "Losiny Ostrov" in northeast Moscow, on June 5, 2010.(Reuters/RIA Novosti/Alexei Druzhinin) #
In this Monday, August 29, 2011 photo, Russian Prime Minister Vladimir Putin talks to leader of Nochniye Volki (the Night Wolves) biker group, Alexander Zaldostanov -- also known as Khirurg (the Surgeon) -- at a bikers' festival in the Black Sea port of Novorossiysk, Russia. (AP photo/RIA Novosti, Alexei Druzhinin) #
Russia's Prime Minister Vladimir Putin steers a boat near a bear on the shoreline, at the South Kamchatka Sanctuary outside Petropavlovsk-Kamchatsky in the Far East of Russia, on August 24, 2010. (Alexei Druzhinin/AFP/Getty Images) #
Vladimir Putin walks through brush in southern Siberia's Tuva region, rifle in hand, on August 15, 2007.(Reuters/RIA Novosti/KREMLIN) #
Russia's Prime Minister Vladimir Putin sits inside a T-90AM tank during his visit an exhibition in the Urals town of Nizhny Tagil, on September 9, 2011. (Reuters/Alexei Druzhinin/RIA Novosti/Pool) #
Vladimir Putin strikes iron as he visits "Talsy" Architecture and Ethnography Museum in the Irkutsk Region of eastern Siberia on August 1, 2009. (Alexei Druzhinin/AFP/Getty Images) #
Russian Prime Minister Vladimir Putin takes part in a training session for young ice hockey players before the start of the "Golden Puck" youth tournament finals in Moscow, on April 15, 2011. (Reuters/Alexei Nikolsky/RIA Novosti) #
Vladimir Putin takes part in an expedition to Ubsunur Hollow Biosphere Preserve to inspect the snow leopard's habitat in Tyva Republic in the Siberian Federal District, on October 29, 2010. (Reuters/Ria Novosti/Alexei Druzhinin) #
A video grab shows Russia's Prime Minister Vladimir Putin looking through the porthole of the "Mir-2" mini-submersible in Lake Baikal, on August 1, 2009. Putin dove into the depths of the lake aboard the mini-submersible on Saturday, descending 1,400 meters (4,600 ft) below the surface of the world's deepest lake to inspect valuable gas crystals. (Reuters/RIA Novosti/Kremlin) #
Russian Prime Minister Vladimir Putin adjusts his sunglasses as he watches an air show during MAKS-2011, the International Aviation and Space Show, in Zhukovsky, outside Moscow, on August 17, 2011. (Dmitry Kostyukov/AFP/Getty Images)