The U.S. shale boom and plummeting oil prices will curtail Russian President Vladimir Putin’s acerbic foreign policy, Sen. Bill Cassidy and a panel of experts said Thursday. But when that will happen is anybody’s guess.
Falling oil prices have taken a chunk out of the Kremlin’s budget, over half of which is funded by oil and gas revenue. Cassidy, a Louisiana Republican, likened the weakening economies of Russia, Venezuela, Iran and other American geopolitical rivals to photos of decaying Soviet Union tanks as the former communist nation headed toward its spending-fueled collapse.
“Those tanks didn’t rust over night. That lack of maintenance occurred over several years,” Cassidy said at an event hosted by the American Enterprise Institute. He pointed to unrest in Venezuela, which needs higher oil prices to balance its budget, as the potential future for Russia. “They just may be a little further in the process than some other countries.”
At about $60 per barrel, oil is now fetching half of what it did in June. Venezuela has pleaded with Saudi Arabia to curtail production to raise prices. Many see Western sanctions on Iran coupled with falling crude prices as bringing that nation to the table for negotiations over its nuclear policy, as oil revenues has been cut in half from pre-sanction levels.
“Those geopolitical rivals are going to be undermined,” Cassidy said. “This clearly weakens their position relative to ours.”
Russia, however, has continued its aggressive maneuverings unabated. Ukraine has accused the Kremlin of aiding separatist forces in eastern Ukraine, though Russia has denied involvement. Russia and Ukraine reached a ceasefire agreement two weeks ago, but fighting continues in eastern Ukraine. And state-owned Russian oil and gas giant Gazprom has threatened to cut off energy supplies to its neighbor this week unless it gets more money.
Putin’s bullishness rests on rocky ground, said Derek Scissors, a resident scholar of Asian studies at the American Enterprise Institute.
“The Russian economy is probably more screwed up than any economy you can find,” Scissors said.
Falling oil prices have been caused by two main factors: the U.S. shale boom that has turned America into the world’s top oil and gas producer, and the Organization of Petroleum Exporting Countries’ decision against cutting output to buoy prices, in essence ceding its market intervention role, if only temporarily.
Middle East oil is projected to maintain its market share despite the competition from U.S. shale, said Sara Vakhshouri, president of consulting firm SVB Energy International. But it won’t increase its slice of the pie because demand in the region is rising as petrochemicals industries soar and fuel subsidies encourage waste.
And while the U.S. has demonstrated that it is less reliant now on oil from the region, that is not likely to reduce its involvement in the Middle East, said Dan Blumenthal, director of Asian studies with the American Enterprise Institute. That’s because the U.S. has an interest in reducing oil price volatility. The recent price plunge is case in point, as U.S. drillers in high-cost shale regions have scaled back operations.
“So far the answer is we’re very involved in the Middle East despite a shale revolution,” Blumenthal said. “That’s for a variety of reasons, and one is that we’ll always [want to] have a stability in the price.”
The global implications of reduced Chinese demand that contributed to an oil oversupply have been overlooked, Blumenthal added.
If China views the U.S. shale boom as a harbinger of revival just as the Chinese economy cools, it could affect a number of geopolitical implications from the world’s biggest economy, Blumenthal said. That opens up questions as to what kind of role China will play in counterterrorism efforts and a whole host of other issues, Blumenthal said.
“This era of both great Chinese growth as well as the Chinese demand shock … is coming to an end,” Blumenthal said, saying that for China’s geopolitical dealings “it means it’s not at the same frenetic path.”
