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Jodi Liss: Farewell to the Year of Oil Power

As we stagger into 2009, the financial and economic world of the past 30 years is crumbling and in chaos. Where is the bottom of this mess? How much more pain? No one knows and all dread the answer. It is not just the United States; it is a global shift. Whatever the world comes to think about the United States and its debunked Washington Consensus, last year was, if anything, the Year of Oil Power. The radical plunge in prices we’re witnessing now may change the global balance of power even more in the other direction this year. Whether due to speculation or wishful thinking, in 2008, geopolitics seemed to hinge on commodities in a positively unnatural way, especially among those who knew better. Anyone familiar with the boom-and-bust cycle of oil (and gas) so memorably captured in Daniel Yergin’s The Prize knows that for every delirious rise, the oil busts, such as those of the 1930s and the 1980-90s, have been long, painful, and hard for the producers to end. Last year started with the fear of starvation in the developing world, as farmers sold their grain for biofuel instead of food. But this was quickly dwarfed by the helium-filled oil and gas prices. Our panic over the $4 per gallon gas now looks irrational, almost amusing. Oil bounced from around $100 per barrel at the beginning of 2008 to $147 in July to around $40 now. Whatever the fallout from stock and mortgage speculations, the political and economic fallout from the overreach of most resource-rich countries will be proportionately worse. Tying a country’s well-being—and especially its projected budget—to its natural resources invariably leads to a phenomenon known as the resource curse and its accompanying financial disaster. A new wave of economic hardships awaits. Here are five oil-producers’ scenarios that may affect the global balance of power this coming year. RUSSIA. History repeats itself. In January 2006, Russia imposed a short-lived gas embargo against Ukraine (and thus a good chunk of the rest of Europe). This January, they did it again. (Always in the dead of winter, of course.) However, this time there’s the added force of greatly increased and obvious political displeasure behind the closing of the taps. As anyone familiar with Shakespeare knows, when you consider yourself important, being taken down a peg does not necessarily make you more humble or docile. There is every reason to think that Russia will use every maneuver possible to continue its regional oil and gas supremacy as long as possible. The resource curse takes different shapes in different countries. Saudi Arabia’s version has resulted in sclerotic, repressive government and an educated population with insufficient employment. Nigeria’s manifests itself in corruption, conflict, and environmental degradation. Russia has depended on oil and gas to renew its political power and reach, and keep a feeling of prosperity at home. Now, as the price of oil falls, it is hearing the first rumblings of public unrest with protests and rising unemployment. As I write this, Russia and Europe are negotiating the fine print on a way out of the current gas impasse. But this debacle is ultimately a loser for Russia. Europe may want the heat but even more importantly, Russia needs the money. With the value of the ruble rapidly weakening, foreign currency reserves shrinking (in shades of 1998), and a possible huge bailout of the gas monopoly Gazprom (whose total share value has fallen more than 70 percent this past year) in the offing, Russia is entering what could be a long, sad, and painful period. America can play rough by aggravating the situation with Ukraine and Georgia, but this is not the moment to be meaner than necessary. It’s counterintuitive, but a certain amount of diplomatic finesse would work well at this moment. If the Bush years have taught us anything, it is that arrogance makes America look really, really ugly. VENEZUELA AND ITS WOULD-BE ALLIES. Venezuelan president Hugo Chávez has spent the past few years nationalizing his oil industry and using petrol power and an anti-American message to make a bid for global recognition. He has used his country’s oil supplies to attempt to create a power bloc with Russia and Iran and to develop client and friends in Bolivia and Cuba. Venezuela is Russia’s fastest growing trade partner and has purchased millions in Russian-made arms. Chávez has maintained his popularity at home with assistance programs for the poor (though these are arguably of limited success). But, since Venezuela has based its budget on the assumption that oil would level off at $60 per barrel, its ambitious agenda will probably see some curtailment. Inflation is over 30 percent now, Venezuela’s oil fields are aging, and output is declining. Living standards are eroding. How will Chávez deal with the diminishing ability to pay for his social programs or assistance to client states? CHINA AND THE DEVELOPING WORLD. Over the last decade, China’s cultivation of unsavory regimes like Sudan, Angola, and Zimbabwe and other governance-challenged, resource-rich countries in its quest to ensure a steady supply of resources has been a source of continued conversation and concern in the United States. But with China’s own economy slowing, its demand for oil is diminishing as well. Will it cut back on its policy of handing out excessive payouts and generous goody packages to African nations (roads, phone systems, loans, soccer stadiums, etc.) now that those resources are no longer needed? Or will these relationships become more political than economic? If China lessens its involvement in these countries, how will that change those countries’ economic capacity or political viability? DUBAI, IRAN, AND THE MIDDLE EAST. The Middle East has seen this all before. That’s why they spent a good deal of effort in the recent past looking for ways to avoid a repeat. Dubai’s building boom is a perfect example of the attempt to expand an economy beyond oil? But commodity economies are inherently not that stable. Saudi Arabia, for example, is facing 30 percent unemployment and a diminishing welfare state, along with the rising inflation experienced by many other Arab countries—the last thing the volatile region needs. Iran, for its part, reportedly needs oil at $90 per barrel to balance its budget. Price fluctuations will not stop Iran’s nuclear program, but how will the ever-increasing economic hardship felt by the Iranian people affect the country’s presidential elections this coming summer? OUR ALLIES UNDER THE OBAMA PLAN. One question that must be considered by those charting the new course of U.S. foreign policy is whether or not Obama’s promise to wean America off foreign sources of energy within 10 years is a good idea geopolitically. It’s popular, to be sure, as most Americans blame the Saudis for the surge in gas prices rather than the market. But not every country that sells the United States oil is a producer of Al Qaeda terrorists. If the United States pulls out of the global market for oil and gas, what will that mean for our relations with such countries as Nigeria, Ecuador, or even Iraq—all of which depend on the export of oil for much of their annual budgets? As a new president comes to power in Washington, a new, dire tide is already turning. Jodi Liss is a former consultant for the United Nations, the United Nations Development Programme, and UNICEF. She has worked on the "Lessons From Rwanda" outreach project and the Post-Conflict Economic Recovery report. Her article, "Making Monetary Mischief: Using Currency as a Weapon," appeared in the winter 2007/8 issue of World Policy Journal.

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