The $100 question - Security implications of rising oil prices

Oil prices have been steadily rising since 2004, evoking comparisons with the two oil price shocks of the 1970s. Prices surpassed the USD100 per barrel mark on 2 January for the first time in history and are currently near the inflation adjusted peak of USD101.70 per barrel reached in April 1980, posing significant risks to the global economy. However, the prospect of a sustained oil price environment also offers the prospect of mounting security risks as governments struggle to address the implications of higher energy prices.

Rising oil prices will have differing security implications for countries that are net oil importers or net oil exporters. For oil exporters, higher revenue flows could bolster authoritarian regimes, reducing domestic political risk while potentially increasing international belligerence. For oil importers, the rising cost of imports will put heavy pressure on government and consumer accounts. For the wealthier economies this will result in only minor disruption to the population, potentially increasing political risk. However, for more marginal economies the financial burden could put heavy pressure on incomes, increasing the risk of social unrest.

With oil prices approaching USD100 per barrel, oil producers are receiving significantly higher revenues than they had originally budgeted for. For those governments that depend primarily on oil revenues to fund their budgets, such as Iran and Venezuela, this represents a significant windfall and can be used to bolster the government's domestic and international standing.

The impact for Iran is obvious, as the country's growing power as an oil exporter gives it significant leverage on the international stage. Not only will high oil revenues compensate to some extent for the impact of United States-imposed economic sanctions, but Tehran will calculate that such demand for oil will reduce the political will of other countries to back US calls for unified action on Iran. This would therefore increase Iran's confidence, or belligerence, when negotiating either bilaterally or multilaterally.

Similarly, increased oil wealth will fuel the belligerent rhetoric of Venezuelan President Hugo Chàvez, who has founded his left-wing, anti-US political agenda on the promise of oil-fuelled social spending programmes. Despite the impact of a worsening business environment, mounting economic asymmetries and political polarisation, rising oil revenues have allowed high social spending, shoring up his regime.

However, while rising revenues in the short term may bolster authoritarian regimes, the oil windfall may create security risks of its own. In Iran, even rising spending has failed to satisfy expectations, which were raised by President Mahmoud Ahmadinejad's 2005 election pledge to improve the distribution of oil wealth among voters. His promises remain unfulfilled for most Iranians, although Iran has seen its oil revenues surge in the past five years. Despite the rising revenues, Iran's economy is struggling under high unemployment and mounting inflation, not to mention US sanctions. Moreover, the country was shaken by unrest in June 2007 when the government introduced petrol rationing, leading to long queues and arson attacks on petrol stations in Tehran and elsewhere. For now the revenue from high oil prices can keep the economy afloat, ensuring regime security. Yet, the real threat will come if prices start to trend downwards, emphasising the mismanagement prevalent in the Iranian economy.

Image: An oil installation south of Basra, Iraq (Jane's/Patrick Allen) 530 of 4,403 words