What do Russia, Exxon Mobil, and ISIS have in common? Not much, except that they’re all grappling with an inconvenient but incontrovertible truth: a sudden, significant, and prolonged shift in the price of oil changes the world.
That truth was on display in 1974, and it’s on display again now. Over the course of just a few months in 1973-1974, the price of oil surged from $3 to $12 per barrel. The new price created new global economic powers: oil-producing countries primarily in the Middle East and North Africa. It also dealt a severe blow to the economies of the United States, Europe, Japan, and other oil importers. The oil shock altered power relations between the world’s main geopolitical players and created new ones. Higher oil prices had many unexpected consequences—from breeding oil wars to fueling the
international spread of Islamic fundamentalism thanks to funding from newly super-rich countries like Saudi Arabia. Today’s drop in crude-oil prices, which began in the summer of 2014, may be as disruptive as the quadrupling of oil prices that created the oil shock of 1974.
Some of the effects of this decline in oil prices have been clear and immediate; picture happy Americans at gas stations and frantic government officials in oil-exporting countries forced to cut public budgets and consequently risk social and political turmoil.
In Russia, for instance, the ruble has suffered a steep devaluation, stock-market prices have fallen, the Central Bank’s reserves are shrinking, capital is fleeing the country, export revenues are down, and foreign investment has practically dried up. Russia’s sovereign bonds have been downgraded to junk status by credit-rating agencies. All of this largely stems from contracting oil and gas revenues (which account for 68 percent of Russia’s total export revenues and 50 percent of its federal-budget revenues) and economic sanctions imposed by the United States and Europe as a result of the Kremlin’s behavior toward Ukraine. Some fear that a belligerent Vladimir Putin could stir trouble abroad to distract from the deteriorating economic situation at home.