Impact of falling oil prices on politics in oil-exporting countries

Academic Paper, 2016

4 Pages, Grade: B+


Impact of falling oil prices on politics in oil-exporting countries

The last 18 months were characterized by a dramatic decrease in average oil prices from more than $110 per barrel in July 2014 to less than $31 in January 2016. Such a decline has already resulted in serious economic changes worldwide. However, the decline will also result in substantial political changes in oil-extracting countries because previously established terms of social contract will be undermined while governments will lose most of resources, which enabled them to preserve control, not to mention weakening international position.

One of the most obvious impacts of the ongoing oil market crash on the above-mentioned countries is that their budget revenues start falling dramatically. Governments of many countries such as Saudi Arabia or Venezuela enjoyed a high level of support and loyalty among their citizens because of high living standards. These living standards were fueled by oil revenues. As a result, political opposition (if it existed at all) was effectively silenced while citizens, being dependent on the government, had very incentives to criticize it. It might be argued that such countries established a certain social contract with their citizens, under which a substantial share of oil revenues is provided in return for loyalty. Many GCC countries are bright examples of such a system.

However, when oil prices fall, such a social contract is quickly undermined. When the government loses large oil revenues and runs out of funds, it is forced to cut social spending what often infuriates citizens who used to enjoy higher living standards. A particularly bright example is Venezuela. The socialist government ruled in Venezuela for decades, effectively bribing the majority of voters with free housing, health care and other benefits and, thus, keeping the opposition unpopular. However, the situation changed in 2015 when falling government revenues resulted in shortages of medicines and basic goods as the country's economy faced deepening recession (McHugh). Eventually, the society was affected by the crisis that strongly that for the first time in 17 years the ruling party lost elections while the opposition won two thirds of seats in the parliament (Brodzinsky). In the nearest future, that can result in adoption of free-market policies and the end of Socialist rule in Venezuela.

Political changes can also be driven by the fact that declining oil revenues deprive the ruling regimes not only of their public support but also of resources that could be used for preserving control. Such changes might become particularly noticeable in states that used to rely on strong military and police to control the society and prevent any protests. When budget revenues of oil-exporting countries fall, they might be faced with the inability to preserve previously high level of funding of the security sector. Today, governments of many Middle Eastern countries, including Saudi Arabia, are forced to cut their security and defense spending to reduce budget deficits (Harress). Reduced security spending can make local ruling regimes more vulnerable to domestic and external threats such as riots and protests. Bahrain, for instance, might find it harder to manage the ongoing protests. These protests supported by Shiite majority were caused by recent execution of a famous Shiite cleric (Kaplan). Usually, the ruling regime relied on force to stop protests. However, as oil revenues, which are the main source of its revenues and power decline, it can become more inclined to reach some political compromise.

In addition to domestic factors, governments of oil-exporting countries can face weakening of their international positions what also can force them to change own policies. High oil prices allowed such countries to pursue own domestic and international policies even despite harsh international criticism. For instance, many Middle Eastern countries took advantage of their position to prosecute political opposition and suppress protests without fear of any serious sanctions or other consequences. However, low oil revenues and more competitive nature of global oil market deprive these countries of their privileged status in this market, effectively making them vulnerable. In such conditions, Western nations might gain more opportunities to pressurize Gulf countries and seek political solutions to their sectarian and other conflicts instead of use of force. In a similar way, Russia that used to behave aggressively and invaded Georgia in 2008 and annexed part of Ukraine in 2014, taking advantage of high oil prices, might be forced to change its policies. While oil prices were high, Russia could easily overcome economic impacts of sanctions. However, today increasing military spending has become not affordable for Russia (Oxenstierma 10). Consequently, low oil prices can make Russian government refuse refuse form further military advances.

In conclusion, falling oil prices are likely to result in serious political changes in many oil-exporting countries because reduced incomes can deprive their governments of the ability to maintain generous social spending, effectively undermining domestic support, and security spending necessary to preserve control, not to mention that weakening international position can force such countries as Russia to modify their foreign policy to avoid additional sanctions.


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Impact of falling oil prices on politics in oil-exporting countries
Colorado State University
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Alexander Potako (Author), 2016, Impact of falling oil prices on politics in oil-exporting countries, Munich, GRIN Verlag,


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