Global oil demand has hit historical lows over the last weeks due to the economic slowdown caused by the Covid19 pandemic. Big producers such as Saudi Arabia and Russia have been bickering over collective production cuts and have engaged in a deadly price war that pushed prices down to 20 dollars per barrel. And while political leaders and oil companies’ CEOs wait anxiously for the results of the extraordinary OPEC+ meeting (initially scheduled on April 6th and then postponed amid new rifts between Saudi Arabia and Russia) few have hopes that any agreement on production cuts can be resolutive. The real problem is demand, which nobody, not even the mighty OPEC+ powers, can artificially boost. A new era of low, stagnant oil prices seems to have begun, and the impact may reveal far deeper in the political sphere rather than in the economic one. To understand why, we need to take a step back and analyze the relationship between oil, rents, and political regimes in numerous countries around the world.
Since the time people – at least most of them – stopped believing in divinely-legitimated leaders, power – especially authoritarian power – has always relied on some sort of rent. Over the centuries and across diverse cultures and continents, leaders have gained their legitimacy in exchange for fundamental goods over which they managed to establish a monopoly. One widespread example is security. Ruling leaders who managed to reestablish order after long periods of social and political chaos have often been able to convince their population that they, and only they, are capable of guaranteeing stability now and in future – and thus they should be left in power indefinitely.
In most cases, however, rents have taken more tangible forms. For example, most post-colonial governments in Africa and in the Middle East managed to stay in power for decades thanks to their ability to provide socioeconomic development through the institutionalization of universal education, medical care, and other basic services previously absent or reserved only to the affluent. By projecting the perception that they were capable – and most likely the only ones capable – of providing such services, in the eyes of their citizens they gained the right to stay in power for entire generations.
In fact, the lack of ability to perpetuate such a perception is one of the main potential sources of instability for any ruling regime around the world. Anywhere, when a regime is not able to guarantee at least the same level of wellbeing that it provided to previous generations (and of course, sometimes people even demand improvement), it is likely to face mounting risks of losing power. In democracy, such a dynamic was solved, at least in part, by giving citizens the faculty to choose a different government every few years. Of course, recent democratic crises even in Europe have shown that if multiple democratically elected governments fail, sometimes people may be tempted to turn to some “strong” leader promising to restore past glories with an iron fist, the same iron fist they usually use to dismantle democratic institutions piece by piece (just to make sure nobody will replace them if they fail too).
However, such crises usually take even more dramatic turns in authoritarian systems. Growing risk perceptions on the part of regimes are often met with increasing securitization of the public space. Protests are met with violence and repression, which in some cases can spiral into chaos and war. In general, only in rare cases can radical change in authoritarian systems occur without a long inter-period characterized by uncertainty and instability.
In an historical phase like the present one, characterized by growing volatility of the world economy and crashing oil prices, these dynamics assume primary relevance in virtue of a simple fact: over the last decades, hydrocarbons have come to constitute, directly or indirectly, the main source of revenue used by regimes around the world to ensure their legitimacy. This is true from Central Asia – where the Kazakh and Turkmen leaderships rely on hydrocarbon revenues to provide high levels of income to their citizens – to South America – where the Venezuelan government’s hold on power began declining following the first significant drop in oil prices in 2015. This is especially true in the Middle East, where many economies, including those not endowed with natural resources, have come to rely, directly or indirectly, on oil revenues.
Gulf monarchies, of course, are the most obvious example. Their wealthy economies, by far the wealthiest of the region, are based on hydrocarbon revenues that local regimes distribute to the population in the form of public jobs, subsidies, and services. Since independence, this legitimacy bargain has seen its costs growing dramatically, along with these countries’ demographic trends. Generation after generation, exponentially growing populations have become accustomed to ever improving levels of income and service provisions, slowly eroding the surplus margins generated by hydrocarbon revenues. As shown in Figure 1, nowadays all the world's main oil producers cannot break even their fiscal budgets at current prices, and all are going to run into deepening budget deficits if the current prices stabilize or decrease even further.
Of course, in the short term the impact may vary significantly from country to country, depending on each nation’s financial reserves and ability to attract credit. Over the past years, countries such as Russia, Qatar, the UAE, and (although to a minor extent) Saudi Arabia have accumulated enough financial reserves to cushion at least the short-term impact of very low oil prices. However, other producers, such as Oman, Iraq, Turkmenistan or Bahrain, are destined to experience serious budgetary problems even in the short run.
In the political sphere, the first impact of persistent budget deficits may be the slow yet continuous decrease of the resources that these states are able to spend for their regional and international projection. Over the last decade, especially the UAE and Saudi Arabia have spent billions to support friendly regimes across the Middle East and protect the region’s authoritarian status quo. Such a strategy, however, may prove increasingly difficult to perpetuate over the coming years.
Even more worrisome is the situation of countries indirectly dependent on the oil revenues generated by exporting countries. For example, the UAE and Saudi Arabia combined generate every year over $80 billion in remittances directed to the countries of origin of the immigrant workers employed in their economies. The first dramatic drop in oil prices in 2015 already led to significant reductions of the number of foreign immigrants employed in Gulf Countries Council states. A further dramatic price shock may lead to the repatriation of thousands more, especially towards Southeastern Asian countries and other Arab countries such as Egypt, Jordan, and Lebanon. Over the last years, these three Arab nations – for which emigrants’ remittances account for over 10% percent of their GDPs – have also become increasingly dependent on financial aid and investments coming from the Gulf – in the case of Egypt and Jordan mostly in virtue of the aforementioned strategy to preserve the authoritarian status quo – which, as well, may see soon a dramatic reduction.
Overall, in the short- to medium-term the effects of the new prices may reverberate directly on the stability of those oil-exporting countries, such as Algeria, Venezuela, Oman or Turkmenistan, that are already struggling to meet their budgetary obligations and have already exhausted most of their financial reserves. Moreover, indirect effects may soon be observed also in several non-oil-producing economies, such as those depending on the remittances of migrant workers.
In regions like the Middle East the impact may prove massive. Over the last years, most Middle Eastern regimes have encountered increasing difficulties in providing their populations with the same level of services, jobs, and welfare enjoyed by previous generations. Since 2011, such difficulties have already caused multiple waves of protests across the entire region. Combined with the current developments in the oil market – and, of course, with the unpredictable social and economic impact of the coronavirus pandemic – they may soon transform into an even more explosive mix, accelerating current crises in countries lacking significant financial buffers, such as Lebanon, Egypt, or Jordan, and causing further episodes of instability across the region.
Similar dynamics may soon be observed also in other parts of the world. For example, Central Asia may be headed towards a period of instability caused not just by decreased availability of petrodollars in exporting countries like Kazakhstan and Turkmenistan, but also due to the likely contraction of the Russian economy and the consequent repatriation of thousands of Central Asian migrants, mostly from Uzbekistan, Tajikistan, and Kyrgyzstan, the region’s poorest economies.
In sum, with the beginning of what is likely to be a new long phase of oil demand stagnation and price war, we may soon start witnessing the slow-motion collapse of authoritarian stability as we have known it in modern times, based on revenues generated by hydrocarbon exports highly concentrated in the hands of few rich producers. Such market concentration is already a memory of the past with the multiplication of producers over the last 20 years. Soon, also those generous revenues that, directly or indirectly, became the lifeline of many authoritarian regimes around the world may soon evaporate, leaving in their place a new era of unpredictable authoritarian instability.
