Low oil prices are good for democracy and peace

One of the few positive features of the coronavirus pandemic is that oil prices have fallen to lower levels than at any time since 1999. Low oil prices are good for democracy, peace and economic growth.

From the Gulf War in 1980 until 2000, oil prices were low, lingering around $18-$20 per barrel. This was a wonderful period. The world went through the third wave of democratization, as Samuel Huntington named it. This democratization started in southern Europe independently of the oil prices. But in the 1980s the Latin American military dictatorships collapsed in external debt crises caused by low commodity prices, and from 1989-1991 democratization took off in Eastern Europe and the Soviet Union.

But how do low oil prices breed democracy? By and large, rich states are democratic with good rule of law, but there are exceptions. The seven steady exceptions of relatively rich countries that are authoritarian are Russia, Saudi Arabia, the United Arab Emirates, Kuwait, Qatar, Brunei and Singapore. Singapore is a tiny anomaly, led by an authoritarian leader who appears to have been honest and wanted to do good for his people, while the other six are typical authoritarian kleptocracies, where the ruler thinks of only himself and his relatives. 

Concentrated oil incomes breed authoritarianism. Part of the explanation is that after they have been established, oil revenues require little work, making it is easy for a ruler to seize oil rents. To the extent that a dictator distributes oil rents to his underlings, it appears charitable. People all too easily accept that oil rents belong to the monarch. If a government is being financed through taxes on the citizens, people demand much more from the government.

The empirical evidence is strong. In 2017, the authoritative non-governmental organization measuring democracy, Freedom House, reported that it was “the 12th consecutive year of decline in global freedom. …Over the period since the 12-year global slide began in 2006, 113 countries have seen a net decline, and only 62 have experienced a net improvement.” When oil prices are high, authoritarian kleptocracies thrive and consolidate their power.

Fortunately, commodity prices do not stay high forever. Commodities move in long-term cycles of 25-35 years. From 1981-2000, oil prices were low, but then they rose and stabilized at a high level from 2001-2014. Finally, in 2014 oil prices collapsed and now they are likely to stay at a low level for a decade or so regardless of what OPEC does. 

The world experienced a massive commodity boom from around 2000 until 2014. The underlying condition was China’s enormous investment in infrastructure that consumed 30-50 percent of major raw materials. Admittedly, China’s share of oil consumption is less, but China’s big investment drive propelled the global demand for most commodities. Today, no similar demand for commodities is apparent, suggesting that oil and other commodity prices are likely to stay low for years. 

A long-lasting low oil price will have major global consequences. It is a destabilizing force. When oil prices fall, fragile authoritarian kleptocracies tend to collapse. At present, quite a few relatively developed and diverse but authoritarian oil states look vulnerable, notably Venezuela, Iran, Iraq and Russia. The destabilization of any of these authoritarian states would probably be good for democracy. 

The weakening of the oil states would also be good for peace, because few spend as much on armaments or pursue as aggressive a foreign policy as they. If oil price stays low, would Russia and Iran be able to afford the wars in Syria? Or would Saudi Arabia continue its unsuccessful but very cruel war in Yemen. And would the many involved parties really care about fighting in Libya if its oil is no longer valuable? Probably not. All the aggressive parties, Saudi Arabia, Iran and Russia would have fewer resources to pursue such foreign wars.

Lower oil prices would also have beneficial effects in the West. In the United States, the oil billionaires overwhelmingly oppose climate change. If a few of them go bankrupt, they would not be able to spend all that much money on their opposition to climate change policies, and the U.S. would be likely to adopt more sensible climate policies. It is argued that higher oil prices would reduce the consumption of oil, but that is not quite true. The oil importing countries in Europe have far higher oil prices than the United States because of high oil taxes. If the U.S. oil lobby is weakened, the United States could introduce carbon taxes, which would reduce the U.S. usage of fossil fuels.

Low oil prices are also good for economic growth. High oil prices breed rents, and rents usually go to vainglorious conspicuous consumption of the very rich rather than to investment, taxes, public expenditures and public goods.

The obvious policy conclusion is that the United States must not bail out Big Oil. At present, several proposals are being discussed, all of which run against ordinary free market principles. One idea is to regulate the transportation and thus production of oil, giving an advantage to the production of expensive oil. Why would anybody do that? Another bad idea is to prohibit the importation of oil or introduce high import tariffs. Why should ordinary Americans suffer in order to further enrich the wealthy oil barons? A third proposal is to bail out the big loss-making oil companies, as might already be the case. The richest and most harmful should not receive public funding or any other form of state protection. Public funds should go to people, the poor and unemployed, not to wealthy or inefficient corporations.

Thus, let us hope for a decade of low energy prices.

Anders Åslund is a senior fellow at the Atlantic Council. His latest book is “Russia’s Crony Capitalism: The Path from Market Economy to Kleptocracy.”