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Plunging Oil Prices Have Unpredictable Impact on Politics, Economics

  • Jim Randle

Global oil prices are falling drastically, and a new World Bank study says they may remain low for a year or more. Lower energy costs can often help boost economic growth. Low prices might also increase political tensions and hurt investments in key energy sectors.

The oil market is seeing a production surge from the United States as new techniques dramatically increase oil output, according to La Salle University economic and political expert Edward Turzanski, who spoke via Skype.

“Transforming the world energy market and also playing a consequential role in geopolitics, " said Turzanski.

Reduced demand

That transformation comes as economists say slowing economic growth in Europe and Asia is cutting energy demand at a time of plentiful oil supplies. That combination is driving down oil prices.

Less money spent on energy leaves families more money to buy other goods and services, boosting economic growth for many nations.

But low oil prices can weaken the economies and the political power of oil exporters like Saudi Arabia, Iran and Russia.

Russia’s economy already is facing economic sanctions to punish Moscow for its role in Ukraine.

Competing interests

An analyst at Strategic Energy and Economic Research said long term low oil prices will complicate Russian President Vladimir Putin's efforts to maintain domestic political power. Michael Lynch spoke via Skype.

“Longer term, the combination of sanctions and weaker oil prices are going to put pressure on him,” said Lynch.

Rising oil production is due to techniques like fracking that collect oil that is missed by other methods, but does so at a higher cost -- between $50 and $80 per barrel of oil.

High costs and low prices may make these techniques unprofitable, according to Standard and Poor's analyst Peter Rigby.

“U.S. oil production could fall if prices drop below break-even levels for expensive shale oil production, causing drillers to stop drilling,” said Rigby.
Renewable energy alternatives to oil also will find it harder to compete for investment dollars if oil prices drop low and stay there.

Lynch said we may be entering a new era of lower energy costs, while S&P's Rigby says oil prices will remain volatile and vulnerable to global economic and financial changes.

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