Home > News > Falling oil prices, more peace?
175 views 8 min 0 Comment

Falling oil prices, more peace?

- December 3, 2014

Smoke rises from the Beiji oil refinery during clashes between the Islamic State and Iraqi government forces in Beiji, northern Iraq, on July 30, 2014. (STR/EPA/Landov).
The fall of 2008 was a banner time for oil-exporting countries to flex their muscles. Russia invaded neighboring Georgia. Venezuela’s Hugo Chávez expelled the U.S. ambassador and threatened to cut exports to the United States. With Iranian backing, Hamas launched rocket attacks on Israel. Khaled Mashaal, the chairman of the Hamas Political Bureau, would later say that Iran had played a “big role,” providing money and moral support. Perhaps not coincidentally, oil was trading at over $100 per barrel, the highest prices seen in over two decades.
Fast forward to 2014: Russia is headed into recession and the target of Western sanctions, Venezuela is experiencing urban unrest and shortages of basic goods, and observers are starting to question Iran’s resolve in ongoing nuclear talks. Perhaps not coincidentally, oil is trading at below $70 per barrel, the lowest prices seen in four years. Some observers believe $50 per barrel oil is in sight. Consumers are rejoicing, producers are getting nervous, and financiers are revving up their forecasting divisions to determine just how bad budget shortfalls (and demand for credit) in exporting countries will be.
Do high oil prices embolden aggressive behavior by exporting states? Thomas Friedman’s First Law of Petropolitics holds that high oil prices embolden producing countries to adopt more confrontational foreign policies. In a recent working paper, I put this conjecture to the test. The results are clear: high prices are associated with more frequent militarized disputes in oil-exporting states, but have no systematic effects in non-exporting states. If past trends hold, a low-price future will be one of less aggressive behavior on the part of exporters. However, a low-price future may also be one of growing domestic unrest in oil-exporting states, where oil revenues are key pillars of social stability.
Why would high prices lead to more aggressive behavior in oil-exporting states? Oil is a contestable resource: because it’s fixed geographically, anyone who can control oil-rich territory can exploit its riches. Thus, oil-rich countries may be attractive targets for conquest, as Kuwait learned the hard way.
Oil exporters tend to have large, technologically sophisticated militaries (and police forces), which may be perceived as more threatening by their neighbors and major powers. Oil exporters may be more conflict-prone because their pursuit of security provokes security dilemma dynamics – or just a powerful position from which to bully neighboring countries.
Alternately, oil producers may be more conflict-prone because they expect to face less grave consequences for saber-rattling behavior. Precisely because oil is a strategic resource, major powers respond harshly to activities that roil international markets: the U.S.-led response to Iraq’s invasion of neighboring Kuwait was executed under the auspices of a U.N. Security Council binding resolution. Perhaps leaders in oil-exporting states view this implicit security guarantee as a form of insurance against retribution, and thus become more casual about the use of force to resolve their disputes. This is a form of moral hazard – the idea that insurance against bad behavior paradoxically makes that bad behavior more likely.
These dynamics – outsized militaries, implicit security guarantees – may be more empowering to some leaders than others. Jeff Colgan’s work on oil and conflict demonstrates that oil-exporting states led by revolutionary leaders – like Chavez – are particularly aggressive.
Less is known about price effects.
All of the mechanisms outlined previously should be amplified by high prices. High prices increase value of ownership of these resources, potentially making oil-rich countries more attractive targets. The moral hazard dynamics engendered by major powers’ import dependence should be greater. Military expenditures and state coffers will be more bloated. For these reasons, higher prices should be associated with more conflictual behavior, which is precisely what I find: oil-exporting countries are 30 percent more likely to be involved in militarized disputes – military actions short of actual war – when oil is trading at where it is now (~$67 per barrel) than when oil trading at roughly $24 per barrel (as it was in 1994). Thomas Friedman’s First Law of Petropolitics finds considerable support.
I also find the relative bellicosity of oil-exporting to non-oil-exporting countries is price-contingent: above $77 per barrel, oil-exporting states are significantly more dispute-prone than non-oil countries. Below $33 per barrel, oil-exporting countries are less dispute- prone than non-exporting countries, though this lower-end finding is not statistically significant. Moreover, I find strong (though circumstantial) evidence to suggest this relationship is not due to conflict behavior driving up prices.
What about the effects for non-oil exporters? The theoretical effects are ambiguous: Low oil prices translate to lower mobilization costs. Modern armies are incredibly energy-intensive: the U.S. Army, for instance, consumed an average of 47.7 million liters of fuel per day in 2006, roughly equal to the daily consumption of Sweden. All things held constant, low fuel costs translate to lower costs of engaging in conflict. High fuel costs, however, raise the present discounted value of control of oil supplies, thus increasing the attractiveness of oil exporters as targets. Per the moral hazard logic, high prices should also increase the incentives for major powers to act preemptively to deter military action against oil producers. Theoretically, the effects should cancel one another out. Empirically, there is no relationship.
It’s tempting to interpret these findings as suggesting a future of lower oil prices will be one of greater international peace and cooperation, with Russia abandoning its ambitions in Ukraine, Venezuela normalizing relations with the United States and Iran coming to the bargaining table in a more credible fashion.
Weighing against this beneficial effect is the fact that in many exporting states, oil revenues constitute the central pillar of government spending that has placated (or repressed) the citizenry. The differential outcomes of Arab Spring protests across the Middle East and North Africa (resource-poor Egyptian and Tunisian governments toppled while resource-rich governments weathered the storm) highlight this. Low prices, therefore, can imperil domestic political stability in exporting states and create spillovers, such as the vacuum that is currently empowering the Islamic State.
Is it too much to ask for a happy medium?
Cullen Hendrix is assistant professor at the Josef Korbel School of International Studies at the University of Denver and nonresident senior fellow at the Peterson Institute for International Economics. With Marcus Noland, he is the author “Confronting the Curse: The Economics and Geopolitics of Natural Resource Governance.”