Daniel Flitton, 02 February 2016

Petrol prices have slumped – and that has profound ramifications for global politics and countries that rely on oil revenue.

Petrol has dipped below $1 a litre in Melbourne, and cheap fuel at the bowser is just the beginning. History might come to regard the past few years as another great global “oil shock”, where volatile fuel prices carry vast repercussions not only for consumers, but the behaviour of countries.

We won’t see long queues at petrol stations as we did in years gone by, because this oil shock isn’t a sudden consequence of supply shortages and a price spike. Instead, the reverse is true: a creeping crisis of excess production and plunging value, but with ramifications for world politics no less profound. The low price for natural gas is exacerbating the fallout, too.

Low oil prices mean a significant transfer of wealth from oil producers to consumers.

The conflict in Syria is a telling example. Russia, Saudi Arabia and Iran are key players in the Syrian war, either directly or by funding proxies, and each has an economy where oil revenue is crucial.

But the price of oil has slumped in recent months to about $30 a barrel, almost half of what it was worth at the same time in 2015. Five years ago, when the civil war in Syria erupted, oil was worth more than three times the price it is today.

That amounts to a huge hit to national budgets, and an income cut of such magnitude can only be sustained for so long before a country’s ability to fund a costly war effort is constrained. The pressure might force rash actions, or retreat.

In October, the International Monetary Fund warned Saudi Arabia could run out of cash in five years – and oil was trading at $50 a barrel then. Iran fares better, perversely a result of years spent under economic sanctions that were lifted recently, but the IMF still puts a break-even price for Tehran at $72 a barrel.

Moscow is also exposed. Close watchers estimate oil and gas contributes between 15 and 18 per cent to Russia’s economy, with price fluctuations also having a heavy impact on the exchange rate. If Vladimir Putin’s belligerence has been fuelled by hydrocarbons, as many have observed, it’s at least fair to ask if the fall in oil prices might curb his ambitions.

Not so for the United States, the other key player in Syria. Washington has much to gain from lower oil prices. You only need to look at the surge in popularity for SUVs and pickup trucks in 2015 to see the American thirst for oil, with the country recording the highest car sales in 15 years. Then add in the US military, the world’s largest user of oil. Low oil prices mean a significant transfer of wealth from oil producers to consumers.

The US has been through a revolution in recent years with what is known as shale oil production, expanding a technology to allow oil to be extracted where previously it could not. “Fracking” is environmentally controversial and costly – the low price of oil will drive many shale oil producers broke. But still, the US has reason to be optimistic cheap oil is here to stay.

“It’s brave to say this is permanent,” says Bob Tyson, a long-serving diplomat and Australia’s former ambassador to Saudi Arabia, Iraq, Russia and Kuwait before retiring last year, “but I reckon it is more than short term.”

Tyson has deep experience in the Middle East and understands the way petrodollars underpin major economies. The common assumption is the Saudis are happy to keep pumping oil, despite the low price, in a bid to drive US shale producers out of the market. This might be the motivation, but it’s costing the Saudi rulers dearly. The IMF estimated Saudi Arabia needed a break-even price of $106 a barrel to balance its budget, which is heavy with subsidies for health, education, transport, water and fuel to satisfy what could easily become a restless population.

But the Saudis must know the shale revolution cannot be undone. Economists talk about cyclical and structural change, and anyone who drives a car regularly is aware petrol costs fluctuate in a rough cycle. Yet the advent of shale oil production has fundamentally changed the rules. Pumping oil from desert sands might be cheaper, but should crude prices rise again, the shale option will once more become commercially viable. Shale technology marks an indelible change to the balance of energy power.

Other shifts are also significant. The US Navy has responded to high oil prices by launching its “Great Green Fleet”, warships that run on bio-fuels. Battery-storage technology is also making remarkable leaps forward, making solar power and other renewable forms of energy viable alternatives to fossil fuels.

But China is the place to watch. It’s tempting to draw a correlation between China’s economic slowdown and the oil slump, given China is now officially the world’s largest oil consumer. This could make Middle East producers more amenable to China’s world view. Yet, the more intriguing question is what China might try with cheap fuel at a practical level, especially in transporting goods.

Will cheaper fuel make trans-Arctic shipments from China to the markets of Europe economically viable, especially with climate change already thinning ice sheets? It was actually an Australian-listed company in 2010 that made the first non-Russian shipment across the northern sea route, transporting iron-ore from Norway to China, and Beijing has beentesting the journey since.

The passage is roughly a third shorter than going the long way south via the Suez Canal – and means less ship traffic in the vexed waters of the South China Sea. Imagine, low oil costs could reduce the strategic tensions between the US and China.

Now, that would be a shock.

Daniel Flitton is senior correspondent at The Age.

Extracted in full from The Age.