Few of us will miss 2008. Stock markets tanked. Government budgets bled as billions went to bail out banks. Thousands lost their jobs or their homes, or both. Yet amid the gloom there was one reason to celebrate as the year ended: filling your car with gas got cheaper with each day. After hitting a high of $147 a barrel in July, world oil prices have crashed to their lowest levels since 2004. By Jan. 7 the cost of oil for February delivery was around $43 a barrel — less than half the price of a year earlier. Goldman Sachs last month predicted that the price could sink to as low as $30 by March. For car owners, airlines and any person or company that uses a lot of fuel, plunging gas prices provide a financial break just when it is needed most
But not everyone is applauding the return of cheap oil. Oil-producing nations that raked in billions over the past few years now face a reckoning. Governments that didn't set aside any of their windfall, or shortsightedly budgeted on sky-high prices — and more than a few fall into both categories — are grappling with tumbling revenues. The reality of lower oil prices for countries such as Iran, Nigeria, Russia and Venezuela in 2009 is likely to include political unrest, massive cuts in public spending, and rocketing inflation and unemployment. "The brutality and speed of the price decline is a huge shock economically and politically for some of these countries," says Didier Houssin, director of energy markets and security for the International Energy Agency in Paris.
That shock is just starting to hit the world's fourth-biggest oil producer, Iran. The price crash has pummeled Iran's foreign earnings, 85% of which come from its shipments of 3.8 million barrels of oil a day. Last summer the country was garnering about $300 million a month from oil and natural gas. This month it's likely to make just $100 million, according to Saeed Leylaz, an economist in Tehran who edits the business newspaper Sarmayeh.
For many of Iran's 65 million people, responsibility for the downturn has settled on one man: President Mahmoud Ahmadinejad. International sanctions have tightened during Ahmadinejad's fiery presidency, resulting in oil exports dominating Iran's economy even more than normal. According to energy analysts and economists, Ahmadinejad has also spent billions of dollars from Iran's Oil Stabilization Fund, which is supposed to act as a safety net during an oil crash, to pay for social programs for his millions of supporters, most of whom are poor — though there is little public accounting for where the money has gone.
Iranian budget deficits have soared and inflation is now a hefty 25% a year, according to Cliff Kupchan of risk consultancy Eurasia Group in Washington. Government officials are "digging a deeper hole, spending money they do not have," Kupchan says. Last November, 60 Iranian economists sent Ahmadinejad a letter warning him that his policies threatened economic ruin. "We have nothing because Mr. Ahmadinejad has spent it all," says Leylaz, who did not sign the letter, though he is a fierce critic of the President. "Mr. Ahmadinejad's economic policy has an absolute lack of financial discipline. His priority is making people satisfied now, not to have money for the future."
After months of upbeat assurances, Ahmadinejad finally admitted last month that economic problems had compelled him to recalculate the 2009 budget to reflect an oil price between $30 and $35 a barrel rather than $60. He also drafted a bill to scrap lavish fuel and electricity subsidies, which give Iranians some of the world's cheapest gas (just 36¢ a gallon), even though it has to be imported from foreign refineries. The move is a high-stakes gamble for the President, who is up for re-election in June and is already cast by his opponents as the cause of the Iranians' deepening poverty. "Mr. Ahmadinejad will spend as much money as possible to make people happy," Leylaz says. "Then immediately after the election we will face the collapse."
Halfway around the world, Venezuela's President Hugo Chávez is confronting a similar predicament. Two years after Chávez won his third term, Venezuela faces a deep recession. The price Caracas gets for its oil has dropped some 70% since July to about $31 a barrel. That has left Chávez with about half the money he budgeted to spend in 2009, and doesn't take into account the millions of dollars Venezuela will lose each month if it abides by recently agreed OPEC production cuts.
Despite all that, Chávez vows to keep spending, especially on social programs such as public housing and health. He has also flaunted his petro-wealth over the past few years, by giving money and free oil to allies like Bolivia and Cuba. Such generosity may be unsustainable, as Chávez is discovering. He provided cheap heating oil to poor Americans in New York, Massachusetts and elsewhere until last week, when Venezuela's financial meltdown forced him to scrap the program.
As with Ahmadinejad, the Venezuelan leader's political future hangs on a looming vote: a referendum on Feb. 15 to decide whether to amend the constitution to eliminate term limits that would allow Chávez to run for President indefinitely. "The government is in a hurry," says Ricardo Hausmann, a former Venezuelan Minister of Planning who's now director of the Center for International Development at Harvard University. "It has to approve the constitutional amendment before it is forced to cut subsidies and depreciate the currency."
Hausmann predicts inflation and unemployment will both spike this year, leading to a full-blown economic crisis. While social spending is high, Venezuelans have protested the government's failure to deliver fully on promises of cheap housing and plentiful jobs. Now the country's income has plunged, that anger is sure to increase, says Hausmann. "The train is running at 150 miles an hour and it has a big brick wall ahead of it," he says. "We are heading toward a crash and the pilot is not stepping on the brake."
In Russia, an oil-driven recession has also sparked protests. Late last month hundreds of demonstrators poured onto the streets in several cities after the government announced a 30% tariff on imported cars, a measure designed to protect the country's struggling domestic auto industry.
Unlike Iran and Venezuela, Russian officials squirreled away at least $600 billion in cash reserves during the years of soaring energy prices. But Russia's economic growth has fallen from 7% to about 2%, its stock index is down by some 70%, and investors have withdrawn $190 billion since last August. Zeljko Bogetic, the World Bank's chief economist in Moscow, warned investors last month that if the oil price drops to $30 a barrel and stays at that level through 2010, Russia would be forced to empty the rest of its cash reserves and borrow money abroad. "Clearly we are in the middle of a major growth recession in Russia," Bogetic said.
As Russia spends its savings, its power abroad could ebb. Russia has worked for years to reassert itself as a major international player. It has exported large quantities of arms (often to anti-Western allies like Iran and North Korea), cut off gas exports to Europe (most recently two weeks ago), and hosted the G-8 summit in St. Petersburg. But Russia's clout, built on its growing oil wealth, could now crumble, says James Hickey, Russia expert at London-based think tank Chatham House: "Everything Russia does in foreign policy is about them looking for respect, wanting to be treated as a major player. But that is hugely undermined now. At $50 a barrel this is a very different Russia."
Markedly lower oil prices are devastating not just to those countries that benefited from $147-a-barrel crude. Unlike in Russia, the oil boom barely touched the lives of most people in Africa's most populous nation, Nigeria. About two-thirds of Nigeria's 146 million people still live on about one dollar a day, according to the World Bank. As prices crashed last year, Nigeria's production slumped, too, due to rebel attacks on pipelines in the oil-rich Niger Delta. Last October, Nigeria's central bank governor Chukwuma Soludo announced there was almost nothing left in the country's rainy-day fund because production halts had forced the government to spend its savings on government salaries. With oil prices heading lower, Soludo warned, there was little to protect Nigerians from greater hardship. "Everybody will be affected one way or another," he said.
In Nigeria at least, cheap oil could have an upside: with revenues dwindling, government officials may be forced to exercise greater financial discipline, says Pat Utomi, professor of political economics at Lagos Business School. Utomi points out that the 1980s oil crash led to much-needed privatization of state-run industries in Nigeria, strengthening the economy overall. "Nigerians say they have never benefited from oil," Utomi notes. "Progress is probably best with lower oil prices."
If that's the case, then ordinary Nigerians are in luck. Energy analysts say oil prices are likely to remain low until the recession ends — probably not before 2010 at the earliest. Scrambling to prevent further price drops, the 11 OPEC oil ministers voted in December to pump 2 million fewer barrels a day — the biggest production cut in the organization's 48-year history. But even this may fail to push prices up, since it is the dramatic slowdown in global growth, and not an oil glut, that is driving the cost of oil lower. It is this cold truth and its consequences that have leaders from Ahmadinejad to Chávez so rattled.