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There have been four major recessions in the West since the mid-1970s and each has followed a spike in the oil price. All downturns have their own peculiarities, but one common thread links the stagflation of the seventies to the mega-crash of 2009: dearer crude. The opposite also applies. A low oil price was a vital ingredient in the post-war Golden Age, and a falling oil price lubricated the strong and sustained growth of the 1990s. Logically, therefore, the 25% decline in the cost of crude since June should mean higher levels of activity.
For that to happen, however, the oil price will have to fall a lot further, to somewhere around $50 a barrel. At $115 a barrel the price was consistent with rip-roaring levels of demand.
In the meantime there will be winners and losers. The winners are the large net importers of oil and those that have high inflation rates, such as Turkey and India. Business costs will fall and consumers’ incomes will stretch further.
The losers are oil producers, which will see growth fall and budget deficits swell. Iran, subject to a crippling western embargo, needs an oil price of more than $140 a barrel to make its budget break even. Anything below $120 a barrel spells trouble for Venezuela and Nigeria. About $105 a barrel is Russia’s cutoff point. At today’s price even Saudi Arabia, the world’s biggest producer, is starting to feel the pinch as it has used a high oil price to fund generous public spending. It needs $93 a barrel to balance the books.
The problems are magnified for many of these countries because high oil prices have stunted the development of other sectors of the economy. In Russia, oil and gas accounts for 70% of exports. The country’s struggling manufacturing sector relies heavily on orders from energy companies.
Falling oil prices are the result of a glut of supply and an easing of demand from a slowing global economy. Saudi Arabia could try to arrest the decline by cutting production, although a similar ploy was notably unsuccessful in the mid-1980s. Despite having youth unemployment of above 30%, Riyadh would probably live with $80 barrel oil prices if it thought it would discourage Vladimir Putin from turning off the taps to the west.
This is where the economics of oil mesh with geopolitics. One theory is that lower oil prices will force Russia to adopt a softer line over Ukraine, and Iran to come to terms over its nuclear programme. But a sharp dose of economic pain in countries that are highly volatile could have the opposite effect.
