29 November 2008

The Decline of Petro-Diplomacy and Needed Gasoline Tax

The Russian resurgence, Venezuelan bellicosity, Iranian nuclear ambitions, and strengthening of ties between these disparate nations and also the nations of Nicaragua and Cuba, have been greatly fueled by the high oil prices of the last four years. This aggressive posturing and petro-diplomacy is now in decline though as oil prices drop towards $50 per barrel. In the two charts below we see (1) the price of crude over a 12 year period and a general increase in price during the last 6 years (excluding the latter half of 2008) and (2) use of the phrase "petro-diplomacy" in news articles for that same time period. Notably, we see that the phrase comes into use coinciding with oil profits increasing.

For oil-producing nations all over the world, the precipitous drop in oil prices during the last 5 months from its $147 high in July, has spelled disaster for their government budgets. For countries such as Iran, Venezuela, and Russia which depend on such easy revenue to support their regime and foreign policy ambitions, these times have been particularly tough. If these nations are to maintain a balanced budget, oil prices of $115, $90 and $70 are respectively needed. With prices below these thresholds, government spending must be cut. These regimes which have purchased societal compliance and party support through social services and other government run programs will now suffer. As such, this cheaper oil has not only directly benefited the U.S. economy but has also supported democratic state building. If we wish to continue strengthening our foreign policy it would be wise to pursue measures to both keep oil prices down and reduce oil demand/consumption. This can be accomplished through implementation of carbon tax or similar program worldwide. Such an instrument would keep oil prices artificially high (or really correctly valued!) and would depress demand. I must stress that the program be global in scope, otherwise the reduction in domestic demand would only be offset by increased consumption elsewhere as the price decreased. And such leadership on this important climate initiative would do wonders for the respectability and reputation of America around the world which would further support the United States and its agenda.


Wanda Lust said...

Good idea - if we were smart we would use this relief from high gas prices to get ready for the next inevitable rise. Given the history of oil and gasoline pricing, the uncertainty of the world financial health, ever increasing demand for energy, and political tensions over oil and gas, it makes sense to take out a large insurance policy against the future of enrgy supplies and costs.

I am curious as to what forces caused the rapid rise and equally rapid drop in petrol prices. What "free market" forces lead to such volatile fluctuations on a commodity of such inelasticiity od demand. Do you have any insight into this puzzling phenomenon?

Wanda Lust

Nomor Greenback said...

I agree with Wanda, we need to move agressively in developing alternative sources of energy. Go to Washington and get the new administration to act on this issue. They need some actionable analysis

Nomor Greenback

Philip Buster said...

I like the graph - we can see the recent wild fluctuation against the background of a steady increase. I am betting the price will be back around $70 in the near future and continue to rise slowly aversged over time.

Professor Philip Buster