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Impact of crude oil price on the socio-political environment of global countries

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Impact of crude oil price on the socio-political environment of global countries

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Crude oil is known to have an impact on people’s life of both producers and consumers of crude oil countries. A producer country’s socio-political impact will be different from a consumer country’s socio-political impact. This paper aims to show that crude oil price has a socio-political impact on global countries through descriptive analysis. The study found that there were similarities in the movement of crude oil price and change in GDP of both India and United States and further Russia and Venezuela have had crude oil impact on their respective GDP’s, which has made them take policy reforms. The paper identifies changes in the policy framework due to influence of crude oil price and eventual changes in existing socio-political environment. Taking oil producing countries such as Russia and Venezuela as examples, this paper suggests that policy reforms are the key to having a stable socio-political environment. Russia shows us that having a flexible monetary policy can keep the budget dependence on crude oil reduced in the short term. On the other hand, for oil consuming countries, having a stable supply and moving to new energy sources is the key to tackle the influence of crude oil price on the socio-political environment of global countries.
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Impact of crude oil price on the socio-political environment of global countries
Mr. Johnson Clement Madathil
Dr. Velmurugan P.S.
Abstract
Crude oil is known to have an impact on people’s life of both producers and consumers of crude
oil countries. A producer country’s socio-political impact will be different from a consumer
country’s socio-political impact. This paper aims to show that crude oil price has a
socio-political impact on global countries through descriptive analysis. The study found that
there were similarities in the movement of crude oil price and change in GDP of both India and
United States and further Russia and Venezuela have had crude oil impact on their respective
GDP’s, which has made them take policy reforms. The paper identifies changes in the policy
framework due to influence of crude oil price and eventual changes in existing socio-political
environment. Taking oil producing countries such as Russia and Venezuela as examples, this
paper suggests that policy reforms are the key to having a stable socio-political environment.
Russia shows us that having a flexible monetary policy can keep the budget dependence on
crude oil reduced in the short term. On the other hand, for oil consuming countries, having a
stable supply and moving to new energy sources is the key to tackle the influence of crude oil
price on the socio-political environment of global countries.
Keywords Crude oil, Russia, United States, India, Venezuela, Socio-political environment.
I. Introduction
Events that create excessive pressure on the economy and stress on people’s life can lead
to a change in certain existing socio-political institutions. If we take a look into the history, the
major shifts that occurred in the socio-political environment were due to certain critical events.
For example, the black plague in the 1300’s, 1650’s glorious revolution in England, the 1800’s
industrial revolution etc. and the recent Arab spring started by the Jasmine revolution. Further,
the economic critical events in the history like the great depression of 1929, oil crisis of 1973,
and recession of 2008, have all made changes in the socio-political environment. Each of the
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above-mentioned events played a major role in shifting the existing socio-political structures,
which were prevailing at that point of time. These events have the potential to bring down
governments and economic institutions in the world.
Crude oil is known to have such impact on people’s life for both countries which produce
and/or consume crude oil. A producer country’s socio-political impact will be different from that
of a consumer country’s socio-political impact. In a producer country, increase in crude oil price
will be beneficial for the existing socio-political environment. Whereas for a consumer country
crude oil price increase will create a stress in the existing socio-political environment. The stress
created by crude oil prices will be differently handled by different countries based on their
existing economic and political institutions.
In the oil rich countries, it is observed that there is more political stability, fewer protests
and civil war, for example regimes of Suharto’s in Indonesia, Saddam Hussein’s in Iraq and the
monarchies of the Persian Gulf excluding Iran, Nigeria, Algeria, and Venezuela (Smith, 2004)
same’s the case with Saudi Arabia, and UAE. In each of the cited examples, we can observe
dictatorship behaviours. Oil wealth has an impact on democracy. On an average, it is found that
discovering 100 barrels of oil pulls down a country’s democracy level by almost 20 points.
Discovery of oil will further lead to a political monarchy or dictatorship behaviors (Tsui, 2011).
However, different producer countries are differently influenced by crude oil price on their
political environment (Smith, 2004).
In 1973, the world comes to recognize that crude oil is an influential political weapon
that can create disruption in oil-consuming economies. In 1972, Arab countries in their
influential position made no less than 15 different threats to use oil as a weapon against their
enemy countries (Akins, 1973). He also says that by looking at the oil reserves of different
countries it is not acceptable to say that there is sufficient oil to meet world oil demands. For a
country like India which meets major part of its oil demand through imports from other
countries, should be concerned about the above statement because as the oil reserves start
depleting, the price will start moving upwards which is going to cause disruption in the
economy. This will also have socio-political disruptions. Like in the 1973 oil crisis, which
created unprecedented inflation in the economy and later led to policy changes due to balance of
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payment crisis. After 1973 crisis, various consumer countries took necessary policy reforms,
which also led India to take the 1991 policy measures and the US to enact the Emergency
Petroleum Allocation Act of 1973 (EPAA). Notably, the oil crisis made changes to the existing
political environment of both US and India. However, the impact of crude oil price is different
for India and the US because of the difference in local socio-political environment, which the
study will be discussing later in this paper.
Oil firms were reporting lesser profits by manipulating or hiding their books of accounts
in order to minimize their political sensitivity and related costs. The main reason to show
decreased profits is to avoid political actions against them (Han & Wang, 1998). The volatility of
crude oil prices is highly sensitive for political institutions. It is found that there is positive
interdependence between crude oil price and world food price index i.e. if crude oil prices
increase there will be an increase in the food prices as well, and for, developing nations which
are net importers of crude oil and net exporters of agricultural goods will lead to trade deficit as
crude oil prices rise (Pala & Mitrab, 2018).
Bentley (2002) said that the world conventional oil peak is 5-10 years away and it shows
after that production will decline at 3 percent per year, if the demand after that is met the prices
will fall and economies will boom, if the demand is not met the prices will rise and chance for
international tensions will arise. It is found that changes in crude oil price have an impact on
political stability, world food index, Inflation, and politics of governments. But there is no
adequate research to show that how countries are socio-politically influenced, by volatile crude
oil prices. To bridge this gap, the paper makes a conceptual study by comparing the
socio-political impact of crude oil in Russia-Venezuela and India-US.
II. Methodology
The paper divides global countries into oil producing countries and oil consuming
countries and tries to study whether there is any difference between the socio-political
environment of oil producing countries and oil consuming countries in their reaction to crude oil
price volatilities. It is identified that there are 97 crude oil producing countries. As crude oil is
consumed by every country there are 195 crude oil consuming countries.
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Table 1.1 Top producers of Crude oil
Producers Metric tonne per year Percentage of world
production
United States 563 12.9
Saudi Arabia 560 12.8
Russian Federation 548 12.6
Canada 237 5.4
Iran 229 5.2
Iraq 225 5.2
China 192 4.4
UAE 178 4.1
Kuwait 149 3.4
Brazil 137 3.1
Rest of the world 1347 30.9
Source: IEA, Key world energy statistics, 2018
Table 1.2 Top consumers of Crude oil
Consumers Million barrels per day Percentage of world
consumption
United States 19.69 20
China 12.79 13
India 4.44 5
Japan 4.01 4
Russia 3.63 4
Saudi Arabia 3.30 3
Brazil 2.98 3
South Korea 2.61 3
Canada 2.47 3
Germany 2.38 2
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Total Top 10 58.31 60
Source: (EIA, 2019)
From the list of oil producing countries, two countries viz. Russia and Venezuela are taken
and from oil consuming countries India and the United States were considered in this study. The
two samples from each of the population were chosen by judgment method. The producer
countries are which, their production of crude oil and their revenues from oil and gas are at least
1/3rd of the country’s total fiscal values. Russia has the highest net trade among all the
producing countries as of 2017 and further Russia is also the second net exporter of crude oil as
of 2016. Venezuela has been one of the most crude oil producing countries in the 1990s and as
of 2016 it stands as the 8th largest net exporter in crude oil. India is the 3rd largest importer of
crude oil in 2016 and United States is number one in crude oil producers as in 2017 and stands
as the 2nd largest importer of crude oil as per 2016 (IEA, Key world energy statistics, 2018). The
United States is the largest producer of crude oil, but it is not the largest exporter of crude oil,
thus it does not fit the producer country status coined by the International Energy Agency (IEA).
The paper attempts to identify how the two producer countries, Russia and Venezuela adapt
to crude oil volatilities and how the two consumer countries, India and United States adapt to
crude oil volatilities.
III. Socio-political influence of crude oil on Russia and Venezuela
Russia has used oil as a political weapon to increase its influence within the central
Asian states particularly, Byelorussia and Ukraine, Russia has also taken the initiative to form a
gas cartel jointly with three central Asian republics, namely Kazakhstan, Turkmenistan and
Uzbekistan. Russia’s ability to influence world countries policy making will be based on its oil
reserves compared with other oil producers like Saudi Arabia and Iraq (Gidadhubli, 2003). As
per 2017 US-EIA, Russia stands 8th place in global proven oil reserves with 80,000 million
barrels and Venezuela stands 1st in the global proven oil reserves with 300,878 million barrels,
even though Venezuela is number one in the proven oil reserves, she has not influenced the
world countries politically, as Russia has done. The reason for that is, the two countries have
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different political and social factors pertaining to them. Russia and Venezuela have good
relations with each other since the Soviet Union era onwards, in fact, Russia is Venezuela’s most
important trading and military partner in Latin America after Brazil. If we look at the
socio-economic status of both the countries in Table 1.3 we can see how much distant both the
economies are.
Table 1.3 Socio economic status of Russia and Venezuela
Criteria Russia Venezuela
GDP rank 11th 47th
Population below the poverty
line
13.4 percent 19.7 percent
Public debt 10.6 percent of GDP 38.9 percent of GDP
Foreign reserves 502.7 billion dollars 8.999 billion dollars
Unemployment 4.5 percent 44.3 percent
Ease of doing business 31st rank 188th rank
Source: Wikipedia
Both the countries are producers of crude oil in which Venezuela and Russia have 1/3 of
their revenue from oil and gas. As of oil reserves, Venezuela is number one in the proven
reserves, thus the question arises why this gap between two producer countries of oil. This is due
to their socio-political environment. In 1928 to 1960 the national income of Soviet Union grew
at 6 percent per year, due to industrialization policies. It was the most rapid increase of
economic growth in history till that time. Then the growth started plunging and in 1987 the
Soviet Union crumbled. Even then the Russian economy has managed to grow due to policy
reforms like Gorbachev programs.
In 1908-1935 under Dictator Juan Vicente Gomez, Venezuela was the world's largest oil
exporter and she also gained from the oil booms of 1973, and in 2010 she devalued its currency
to boost revenues from oil exports, what happened in between 1973 and 2010? It may be due to
policy reforms which led to nationalization of petroleum industry. In the late 1990s Venezuela
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was producing around 3.5 million barrels per day, then due to lack of policy measures to support
nationalization of industries the output fell over 400,000 barrels per day between 1997 and 2011.
Due to lack of revenue from oil, there was a 23 fold increase in government spending between
2000 and 2011 which led to rising public debts. Lastly, the political crisis due to their president
death put them in political and economic crisis. When oil prices were tumbling down, Venezuela
has direct impact on sovereign credit swaps, where it has risen from 2000 basis points on
January 2014 to more than 5000 basis points on January 2015 (Chuffart & Hooper, 2019).
Further, Venezuela has been in political pressure due to oil prices. In 1998 Hugo Chavez
campaign was negatively affected, after the collapse of world oil prices, (Hellinger, 2007). Thus
the influence of crude oil prices on Venezuela reflected in its political environment.
Energy crisis of 1973 and 1979 have influenced East-West relations and co-operation
among nations. This crisis was observed as the cause for numerous grandiose plans intended to
connect the two sides (Bösch, 2014). Both the authors opine that when oil prices go down or up,
there were political actions in both the country’s leading to policy reforms. The reason for
change in existing socio-political environment of both countries was due to the pressure created
by volatilities in crude oil price.
If the prices go up the producer economies which get benefited from the revenue,
resorted to tax reforms. For example, in 2012, Russia announced 23 separate reforms aimed at
improving the tax system and streamlining the registration process. On the other hand, when the
prices go down the producer economies will have stress due to the decline of revenues, which
will lead to policy reforms of co-operation, developing new sectors of the economy (Parnes,
2019). OPEC’s members generally don’t comply with their designated quotas even though
OPEC was founded to offset the price risks of oil through the co-operation of oil producer
nations. This is not perceived well for Venezuela.
Figure 1 Crude oil price and GDP’s of Russia-Venezuela
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Source: World Bank data
From figure 1 we can observe that before 1973 there was no similar pattern change in
Venezuelan GDP growth with that of crude oil price. After 1973, the change in Venezuelan GDP
growth had similar pattern change with that of crude oil price. The Russian GDP growth has also
shown similar patterns of change with the crude oil prices. This shows that both Russian and
Venezuela economies had influence of crude oil prices in their respective economies. Russian
policy like National Wealth Funds is recommended in the case of an oil price drop for producing
countries. National wealth fund is split in two, one fund called reserve fund, which is invested
abroad in low yielding securities and used when crude oil prices fall and the other fund named
national wealth fund is invested in riskier and high return securities, thus earning more when the
economy is booming.
IV. Socio-political influence of crude oil on India and the United States
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India and the United States have different economic background altogether. India is said
to be a developing economy and United States is a developed economy. But both countries are
major oil importing countries in the world. In India, oil was found during the imperial rule of
British. That is in 1820s itself the British have found and started exploration of petroleum in
North East India. The oil reserves of Assam were talk of the country after independence, when
Assam was not interested to share its oil reserves with the country (Saikia, 2011). The India
government, at that time, strongly stated that minerals play a significant role in the development
of a nation. In both India and US, there were politics between the States for oil wealth. In the
United States when the oil prices have gone down, the US administration has but pressure in
Congress to open up the Alaskan wildlife sanctuaries for the purpose of oil exploration and
development (EPW, 2001). Just like in-between nations, the geopolitics can also have an impact
within a nation also, due to the influence that crude oil can play in the socio-political
environment of States. Table 1.4 shows the socio economic status of both countries.
Table 1.4 Socio economic status of United states and India
Criteria United states India
GDP rank 1st 7th
Population below the poverty
line
3 percent 3 percent
Public debt 105.3 percent of GDP 133.10 percent of GDP
Foreign reserves 121.587 billion dollars 429.911 billion dollars
Unemployment 3.7 percent 6.1 percent
Ease of doing business 8th rank 77th rank
Source: Wikipedia
In importing countries like India and the US, the reason for crude oil influence on the
socio-political environment is due to oil prices effect on the macroeconomic variables. For
example, Indian economy responds asymmetrically to positive and negative oil price shocks
(Ghosh, 2016). A 20 percent point shock in oil price has led to a 1.3 percent point increase in
inflation of other commodities, typically after five to seven months after the shock, the impact of
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this shock will persist for about two years after that it reduces considerably, the recovery of this
shock will take place after a year only in India (Bhattacharya & Bhattacharya, 2001). From the
observations of the above two authors, it’s clear that the volatility in crude oil prices will affect
the economy as a whole and the impact in the economy will be felt by common people.
The policies of the government will have to change suitably, as the socio-political
environment of the country changes due to crude oil price. The US economy is not that much
depend on oil imports as in the case of India. The US has the largest crude oil reserves and it’s
also the largest producer of crude oil in the world market. However, the US prefers to import.
This creates the difference between US and Indian economies. For US, it’s a political weapon,
which may have significant implications on future international politics.
Figure 2 Crude oil price and GDP’s of US-India
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Source: World Bank data
From the figure 2 it can be observed that till 1973 there were no similar patterns between
crude oil price and GDP for US and India. After 1973, the changes in the GDP growth of both
countries have similar patterns with that of crude oil prices. This shows that both the economies
are influenced by crude oil price on their respective economies.
Though US is the top global producer of crude oil, still it is not the net exporter of crude
oil. The oil production from the US is projected to be high in the mid 2020s and production
growth will continue to 2025, which will be led by non-OPEC countries mainly by the United
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States (IEA, World Energy Outlook, 2018). However, whether the US will the number one net
exporter of crude oil is uncertain. But the US may reduce its import of oil.
In 1999, India started a new exploration policy where by bidding out oil and gas
exploration acreage and in 2016 Hydrocarbon exploration and licensing policy (HELP), both
these policies aimed at attracting investments and private player to increase exploration for own
oil reserves. Despite pressure from the US regarding usage of Asian clearing union for trading
with Iran in 2010, India still risked to trade with Iran for oil. India in 2012 stated clearly that they
are not willing to stop trade with Iran despite pressures from US and Europe (Mehdudia, 2013).
For India, the demand for crude oil is set to rise and it has to step up its efforts for a steady
supply of oil and not rely on OPEC nations. Further, steps like tapping into the US for its US
shale oil supply should be promoted (Raghavan, 2017).
The reasons for policy changes in both the countries are due to the negative impact of
crude oil on the socio-political environment of both the nations. For example, after the 1973 oil
crisis, India slipped into the huge balance of payment crisis which in turn resulted in major
economic reforms of 1991. Likewise, in the United States the crisis has led to the development
of strategic petroleum reserve in 1975, National energy act in 1978 and tax cutting reforms in
1980 (Nordhaus, 2010). For India, initiating bilateral trade negotiation with oil producing nations
for stable supply of oil, allowing private companies to start distribution and moving into new
innovative energy sources are recommended.
V. Conclusion
This paper is aimed to identify whether changes in crude oil price has any socio-political
impact on global countries. For this, the paper took two oil producing countries viz. Russia and
Venezuela and two oil consuming countries viz. India and the United States. The paper identifies
that both Russia and Venezuela had the impact of changes in crude oil price on their respective
GDP which forced them to take policy reforms. Among oil exporting nations, Russia had
comparatively more growth than Venezuela, in spite of being number one in oil reserves. Since
2014 the net income from oil and gas has fallen by 70 percent in the case of Venezuela, which
has caused wide-ranging consequences on the economy. Russia’s revenues also largely depend
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on oil and gas which accounts for around 40 percent of fiscal revenues. But, after the fall in oil
prices Russia managed to sustain its growth due to its tax reforms in 2012 and innovative
financial instruments like sovereign wealth funds in 2008, National wealth fund and flexible
monetary policy. Thus we can see that crude oil has been an influence in the existing
socio-political environment of producer countries.
The oil consuming countries have long time complaining about the OPEC policies to cut
short production and tampering with the invisible hand in the market. The paper took two oil
consuming countries which were India and the United States. The study found that there were
similarities in the movement of crude oil price and changes in GDP of both India and United
States, thus inferring that crude oil has been influencing the GDP of both countries. Though the
economy of these two countries are different, they have taken certain policy measures after the
1973 oil crisis to restore their economy in growth trajectory. Policy reforms like Energy
Independence and Security Act of 2007 in US which encourages usage of electric vehicles and
aims to increase average gas mileage by 35 mpg by 2020 is a major policy intervention in the
economy. Recent developments in India like the report of zero emission vehicles: towards a
policy framework, 2018 by Niti Aayog (a think tank institution of the Indian government)
proposed the sale of only electric vehicles by 2030 shows the negative influence of crude oil.
The change in the policy framework tells us that crude oil influence has led to changes in the
existing socio-political environment of consuming countries.
VI. Implications and Suggestions
The paper suggests with an example of Russia and Venezuela that policy reforms are key
to having a stable socio-political environment as Russia shows us that having a flexible monetary
policy can keep the budget dependence on oil revenue reduced in the short term. For oil
consuming countries having a stable supply and moving to new energy sources is key to tackling
the influence of crude oil on the socio-political environment of global countries.
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India has imported its first shipment of shale oil from the United States, the fastest-growing oil producer in recent years. This is a significant step for India as it will now be less dependent on oil from West Asia, opening access to more risk-free oil and better prices. Yet concerns remain. India is consuming oil at a fast rate, while domestic production is falling. It will continue to be dependent on oil imports for its energy security, and will have to further diversify its sources of oil imports.
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General discussions on the Indian macroeconomy have centred on two things in the recent past: the impact of depreciation of rupee and the effects of falling world oil prices. Using the structural vector autoregressive approach, the dynamic relationship between movements in oil prices and exchange rates with macroeconomic variables like price, output, interest rate and money are investigated. Additionally, a comparative analysis is conducted to show how each of these structural shocks has historically affected price, output and exchange rate. The results show strong link among these variables. Three results have important policy implications: (i) the world price of oil has a great potential to affect India's output, (ii) targeting depreciation of rupee to expand output may not be an effective policy tool for the RBI, and (iii) variation in rupee's value can have medium- to long-term impact on world price of oil.
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In the last quarter of the 19th century, Assam's oilfields became part of the larger global petroleum economy and thus played a key role in the British imperial economy. After decolonisation, the oilfields not only turned outto be the subject of intense competition in a regional economy, they also came to be identified with the rights of the community, threatening the federal structure and India's development paradigm. This paper is an attempt to locate the history of Assam's oil in the large imperial, global and national political economy. It re-examines the science and polity of petroleum exploration in colonial Assam.
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Under Vladimir Putin Russia has followed an aggressive energy policy enhancing the contribution of the oil and gas industry in the domestic economy. But as private companies gain dominance through mergers and foreign collaborations, a conflict of interest may emerge between the state and oil barons. Russia has become a major player in the world energy sector and has used oil as a weapon to achieve its foreign policy objectives through energy pipelines.