The Upside of the Financial Crisis

The collapse of the U.S. sub-prime mortgage market has spiraled into a credit crunch and full-blown global financial crisis. While some have been hit harder than others, no nation is immune to the disastrous effects. Analysts and politicians alike have compared the current state of the economy to the great depression. Hundreds of billions of dollars have been earmarked to rescue banks worldwide. Yet amidst all this turmoil, one positive trend has emerged: a sharp decline in energy prices, which has temporarily weakened some of America’s adversaries.

As global prosperity has waned, so too has the demand for oil, which in turn has driven down prices. Oil now trades for roughly $65 a barrel – a far cry from its peak in July of over $145 a barrel – and should continue to fall. OPEC’s recent cut in production has so far failed to stem the tide. Michael Lewis, commodity strategist at Deutsche Bank, forecasts, “Production cuts will not rescue the oil price over the coming year. We target WTI (West Texas Intermediate) crude hitting $50 a barrel next year.”

Oil producing nations, unsurprisingly, have taken a financial hit. Many of them depend on relatively high oil prices to fuel their domestic economies and project power and influence on the world stage – both of which are momentarily undermined by the international economic climate.

U.S. foes, Iran and Venezuela, who have been among the most vociferous advocates of the OPEC slash in supplies, will be particularly vulnerable if this trend continues. Iranian President Mahmoud AhmadiNejad campaigned three years ago on redistributing his country’s vast oil wealth to the poor. Although his economic policies, notably the pressuring of banks to offer cheap loans, have led to skyrocketing inflation, he has still utilized oil windfalls to preserve his positive image among the downtrodden.

But the decrease in energy receipts may force him to reevaluate – just in time for the looming presidential election. As Iran analyst, Ali Ansari, asserts, “The one thing that will sabotage AhmadiNejad’s chances of re-election is the economy. It’s his Achilles heel that he has not delivered during this oil boom.”

Whether or not the price of oil will dip down to the dangerous level of $55 a barrel, upon which the Iranian budget relies, remains to be seen. Yet the political vulnerability of AhmadiNejad and the country’s over-reliance on energy exports have been exposed.

In Venezuela, President Hugo Chavez has gone on a similar spending spree in order to endear himself to his poverty-stricken constituency. With oil prices hovering above $100 a barrel, he could spend like a drunken sailor. He can no longer afford to do so.

Given the country’s extreme dependence on energy funds - oil constitutes almost 95 percent of total exports – Chavez could find himself in dire political and economic straits if oil prices do not rebound dramatically. Failing to diversify the economy, while at the same time scaring away many foreign investors, Chavez has ensured that the country’s energy dependence will continue.

Exacerbating these conditions, Caracas is having trouble even maintaining current oil production levels. Venezuela’s state-led energy group, PDVSA, cannot keep up, largely due to a dearth of new and efficient technology, which would normally be provided by foreign investors. If new resources are not tapped, the country’s economic lifeline will be jeopardized. All these factors point to the need for Chavez to adjust his statist economic model and may trigger his eventual demise.

Economic troubles at home would refocus these two regimes - and other prominent oil exporting countries such as Russia - away from the international scene. And without the financial and political bravado provided by high energy prices, their aggressive international forays, which are often contrary to U.S. interests, would likely subside. It is unfortunate that it took an economic meltdown, leaving many people hurting across the globe, to highlight these opportunities.

Energy prices fluctuate; the recent drop will not last forever. The world still needs oil, and nations such as Iran and Venezuela are more than happy to provide it. Yet recent events offer a preview of the tangible benefits that U.S. foreign policy could reap if Washington did finally take steps to achieve energy independence.