Falling Oil Prices & Regime Stability in Petro-States – A New 'Petro Spring' Rising?
Martha Molfetas explores the possibility of a ‘Petro-Spring’ in countries sufferring from low oil prices.
The drop in oil prices has been a boon for oil importers and consumers, but for some, the drop could be a death knell if they’re dependent on an ever-increasing oil price for regime stability and public services. Maintaining the social contract is essential for regime stability and overall prosperity. For petro-states with GDPs saturated in oil, the drop in price could lead to vulnerable political situations within an already fragile social fabric. In less than a year, oil prices have more than halved from their June 2014 peak, plummeting to roughly $50 per barrel today. Like the rise in wheat prices pre-Arab Spring, the drop in oil price can have a drastic impact on maintaining expected social contracts in governments dependent on high oil prices to finance public services.
The dawn of the first spring
Prior to the Arab Spring, global wheat price began to climb after wildfires, climate change, and droughts impacted key wheat exporting regions of the world. In turn, this diminished supply, restricted export, and increased the price of wheat. Making many states in the Middle East and North Africa unable to cope with the cost of rapidly increasing grain. For Egypt, faced with an unemployment crisis in tandem with a sharp increase in wheat, more and more people relied on government subsidies for bread.
Of the top nine wheat-importing countries of the world, all are in the Middle East, with Egypt as the largest importer of grains in the world. Seven of these countries were struck by the political violence and social upheaval the Arab Spring brought with it. Many were unable to fill the need for increasing food subsidies within their national budgets, forcing some families to spend 35% or more of their incomes on food, compared to the roughly 10% spent by households in developed countries. This increasing discontent led fodder to existing political movements for change in Tunisia, Egypt, and others where rising food prices and dry national coffers created a climate where governments were unable to fulfil their social contract and provide long-established subsidies on bread.
While rising wheat prices were not the sole factor of discontent that led to the regional sweep of political change in 2010-2011, it did increase pressures on already fragile political structures reliant on social complacency in the face of authoritarianism – with the sole trade off being that citizens have access to food, health, and social services. Once government outputs became strained and social contracts were broken, it was inevitable that regime stability would falter. The Arab Spring shows us the importance of maintaining the social contract, and the instability that can ensue when livelihoods become strained and governments are unable to financially respond.
Oil plunge and petro-legitimacy
Governments reliant on commodity exports are vulnerable to price volatility, just as authoritarian states are vulnerable to social discontent in the face of livelihood deprivation. The ability to provide social goods for citizens is a core factor for petro-states across the globe in the face of decreasing oil prices. While some may be able to bolster themselves against the recent drop, others may be less able to cope with these new realities. In the last decade and a half, instability in oil producing countries like Iraq, sanctions on Iran, and increasingly insecure terrains for conventional oil development, all led the crude oil price to it’s peak of $115 per barrel in June 2014. With increased efficiency measures, new tar sands, and a surplus of supply, the oil price has taken a plunge in the last nine months to a low not seen since 2009. While this is great for consumers and countries that import energy, this represents a huge deficit to national budgets for petro-states reliant to riding the high oil price wave to stability.
Countries like Saudi Arabia, Russia, and Iran are all highly dependent on oil and gas sales for their GDP and for funding public services. Sanctions on Iran and Russia add further pressures on national stability in the face of diminishing resource values. For many, there is a fiscal breakeven oil price, where petro-states need the global oil price to be to ensure domestic tranquillity, pay for social programmes, reduce debts, and turn a profit.
In the face of recent oil price drops, Saudi Arabia and other OPEC nations have stood fast to maintain high production levels in the hopes that oil prices will bounce back to highs seen last summer. For Saudi Arabia, global oil prices need to reach a breakeven of $103 per barrel. Last year, petroleum accounted for 89% of national revenue. Unlike other oil producing states, Saudi Arabia has a large Sovereign Wealth Fund (SWF) of $733 billion that can buttress the nation from budget deficits caused by the recent drop in oil price. That said, even with this massive purse, a long-term price plunge would impact Saudi’s ability to maintain expectations and diversify its economy. Saudi Arabia will continue to rely on long-term oil profits for the foreseeable future.
As the world’s second largest oil producer, Saudi Arabia would see a government deficit of roughly 14% of GDP this year if oil hovers around $60 per barrel. If oil prices do remain low, Saudi Arabia may have to cut the social programmes instituted post-Arab Spring that were intended to quell unrest and social dissatisfaction with the regime. If Saudi is forced to cut these new social programmes and other social services, rising social discontent could give credence to conservative religious leaders and liberals alike in a time of political transition for the Kingdom, as a new King begins his reign. While the SWF may help as a budgetary stopgap, it will not be enough to cover the long-term cost of Saudi’s social contract obligations with national revenues 89% dependent on oil.
Less reliant on oil than Saudi Arabia, 22% of Iran’s GDP comes from oil. After years of sanctions led by the US over Iran’s nuclear ambitions and after the Iranian Hostage Crisis, Iran’s large oil reserves have been historically under-produced due to a dearth of places to export resources. In the last few years, export has spiked to countries like India and China. In spite of the smaller GDP margin of oil, Iran needs a high breakeven price of $131 to cover existing deficits and respond to high unemployment. Roughly 20% of those under 30 are unemployed, with roughly 60% of Iran’s population under the age of 30. Recent government inabilities to cope with past budget issues has led the government to redirect subsidies on water, bread, and energy directly to households in 2014 as an attempt to improve economic performance. Iran’s new president is poised to act on the economic hurdles that have plagued the nation for years, but the drop in oil price could lead these hoped policies astray as less and less revenue comes in. Iran’s Oil Ministry plans to slash their budget from the $13 billion spent last year, to $3 billion this year – leading the ministry to significantly cut jobs and projects for the predominately state-run sector.
Between sanctions, the drop in oil prices, budget cuts, and high youth unemployment; Iran is likely to see continued pressures on their national budget and ability to aid citizens through social programmes. Further adding fuel to potential civil unrest in the face of growing uncertainty for Iranians, for Iran’s regime stability, for Iran’s national budget, and for the fate of Iran’s fragile social contract.
The drop in oil price particularly strikes the largest producer of oil and gas. It is estimated that for every dollar the price per barrel drops, Russia looses approximately $2 billion in state revenues, reaching $21 billion in the last few months alone. For Russia to balance the books, oil needs to be $105 per barrel. While Russia’s economy is more diversified than Saudi Arabia, 45% of GDP still comes from oil, accounting for 70% of total exports. If oil remains under $60 per barrel, the Russian economy could shrink by as much as 4.5% this year. Adding insult to injury, recent US and European sanctions on Russia since turmoil began in Ukraine have made Russia increase interest rates to 17% in an effort to discourage Russians from currency trading. Last year, after the Russian Rouble reached an all-time low of 41R to the dollar, the national bank spent $7 billion to increase the currency’s value.
All of this will have a compounding effect on social welfare and services for Russians, weakening the social contract, and potential runaway inflation on goods. These realities could foster discontent and civil unrest towards Putin’s regime as livelihood insecurity rises and Russian social contracts are broken.
With such a large share of these economies reliant on high oil prices, the volatility caused by the last nine months will be difficult to adjust for, even if prices return to summer-2014 peak levels. While some states may be able to buttress themselves against the price plunge, they will not be able to do so forever. If low-oil prices become the new normal as our global economy transitions to low-carbon technologies, and more actions are taken to address climate change; an ever-decreasing price of oil may be here to stay. If this is so, where will it leave authoritarian petro-states whose legitimacy is tethered to high oil prices that can finance their social contract? Like the Arab Spring before it, increased pressures on governments to provide services may be the last nail in the coffin for regimes tied to high oil prices. As social contracts already begin to be torn in Iran and Russia, and as these governments are forced to let issues like unemployment and welfare go by the wayside, a new ‘Petro-Spring’ may be on the rise.
Martha Molfetas is a Researcher and Writer currently based in London. Her work focuses on conflict, climate change, natural resources, and livelihood development. She completed an MSc in Comparative Politics – Conflict Studies at the London School of Economics in 2011. For more on her work, check out her professional website.