Low Oil Prices Part 2: Geopolitical and Socio-political Impacts

The importance of oil prices to businesses cannot be understated, and neither can the planning difficulties created by their volatility: as recently as June 2014 the Brent spot price for a barrel of oil was more than USD115, but throughout 2016 flirted regularly with the USD30 per barrel (/b) mark. For governments, meanwhile, volatile oil prices mean unpredictable budget outcomes and potentially untenable current accounts. This briefing highlights the potential impact of continued weak oil prices on the global business operating environment in relation to geopolitical and socio-political risks. (The economic implications are covered in our accompanying paper "Low Oil Prices, Part I: Economic Implications".)

'Resource Curse' is a well-recognised phenomenon. Academic studies link high levels of wealth generated from commodities, such as oil, to poor governance and a corrupted political system, citing countries such as Russia, Venezuela, Iraq, and Saudi Arabia. Based on this argument, lower oil revenues should see a restructuring of the political system with better governance in the longer term. However, there is liable to an intermediate period of chaos which can have far-reaching unintended consequences. For example, the civil wars in Iraq and Syria have resulted in the refugee crisis in Europe, which is polarising political debate, thereby boosting support for extremist parties, as well as having a direct (albeit at present limited) impact on supply chains.

In the oil-rich countries of the GCC (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the UAE) the authoritarian regimes have been underpinned by an informal contract which essentially states that, in return for supporting the regime, the populace expects high standards of living. In the past five decades this has been made possible by the government recycling the huge inflows of oil revenues accruing to the national oil companies. Thus, well-paid public-sector jobs were virtually guaranteed for all citizens, subsidies of basic necessities kept a lid on the cost of living, and huge infrastructure projects resulted in GDP per capita exploding. Indeed, Qatar's GDP per capita is one of the highest in the world, at over USD93,000.

Download Report