WASHINGTON—Crude oil prices have dropped more than 25 percent from their summer peak of $78.40 a barrel, a development that's welcome news for American consumers.
But a continuing decline could spell trouble for oil-producing countries, especially for Iran and Venezuela, which have used their oil wealth to stick a finger in the eye of U.S. foreign policy.
Experts say crude prices would have to drop much further before Iran and Venezuela would begin to face difficult budget choices. The two countries have set aside huge foreign-currency reserves in recent years, thanks to high oil prices. Venezuela has $15 billion in savings, and Iran has amassed reserves estimated at $50 billion.
"The price of oil would have to fall really a long way to really cut seriously into their budgeting plans," said Gary Sick, who was a national security staffer for Presidents Ford, Carter and Reagan and is now an Iran expert at Columbia University in New York. "They're a long way from being against the wall as far as prices are concerned."
Still, with oil prices seemingly on the decline, critics of the two countries' leaders are beginning to contemplate what kind of trouble the countries might face should oil prices drop below $50 a barrel and stay there, or, in the extreme, reach the levels of three years ago, when prices were less than $30 a barrel. Oil prices have been hovering just under $60 on the New York Mercantile Exchange.
Both Venezuela's Hugo Chavez and Iran's Mahmoud Ahmadinejad have used their countries' burgeoning oil revenues to expand populist public spending programs and government salaries. An extended drop in oil prices would have an impact, analysts say.
"The worsening of the economic situation may not change the government's behavior, but it certainly is going to change the structure and prosperity of the Iranian economy," said Jahangir Amuzegar, who was Iran's finance minister during the regime of the shah and is now a consultant.
Amuzegar said oil accounts for 30 percent to 32 percent of Iranian gross domestic product, the broadest measure of a nation's economy, up from 15 percent before the 1979 revolution, which brought in Iran's current theocratic leadership.
Ahmadinejad has used oil revenues to expand popular programs such as low-cost mortgages. The expansion is at least in part responsible for his popularity at home.
"Almost everything that is consumed by the masses is subsidized, and all subsidies, absolutely every subsidy, comes out of the (oil) money," Amuzegar said. A continued drop in prices is "going to affect the purchasing power and the standard of living of the masses," Amuzegar said.
The story's similar in Venezuela, where oil accounts for about a third of the economy. But the decline of oil prices may already be having an effect. Data from Venezuela's central bank show that the government has run a deficit of nearly $2.3 billion through August this year, reflecting high government spending and falling oil revenues.
"Chavez has built in some very high expectations of government wage growth and social programs. So much of his popularity depends on his populist programs," said Saad Rahim, an energy analyst at PFC Energy in Washington.
Chavez has promised to keep government salaries growing faster than inflation, which in Venezuela, like Iran, runs around 15 percent. With those salaries accounting for 18 percent of government spending already, it's an expensive pledge.
Chavez has also used oil wealth to win friends abroad, buying up Argentina's debt and pledging to spend $3 billion on oil tankers from Brazil. He's also provided oil to Bolivia, Nicaragua and Cuba at below-market prices.
If prices continue to fall, Chavez, who's favored to win re-election in December, might be forced to choose between spending at home or abroad.
"If the price goes to $45, or $50, he would run into trouble," said Luis Giusti, who spearheaded the modernization of the state oil company, Petroleos de Venezuela, before Chavez came to power.
Andreas Faust, an economist with Banco Mercantil in Caracas, said he believes Venezuela has enough of a cushion to ride out several years of low oil prices. "If it's drastic, they won't build the refinery in Brazil ... all the spending is very discretionary," he said.
Of course, guessing where oil prices will go is hardly a science. Many energy experts believe that high oil inventories, a tame hurricane season and fewer global conflicts are likely to send oil prices lower in months ahead.
Continued demand from China and India, however, will help support prices, just as it was responsible for driving prices from their 2003 average of $27.56 a barrel to July's high of more than $78.
The Organization of Petroleum Exporting Countries also has taken steps to bolster prices, decreeing a cut in production on Oct. 19. But few analysts expect OPEC to stick to a production cut, with Venezuela and Iran among the top picks to violate their new quotas.
One country unlikely to be affected by a continued decline in oil prices is Russia, the world's second-biggest oil producer and exporter. Russia also sits atop the world's largest reserves of natural gas.
Russian President Vladimir Putin has seized the nation's largest private oil company, Yukos, and his government this year effectively began taking back drilling and production concessions it had granted to global oil giants such as Royal Dutch Shell and BP.
Putin has used oil and natural gas to extend his influence over Europe, which depends on Russia for about a quarter of its natural gas needs. He's also bullied his neighbors, including the Ukraine and Georgia, cutting off pipelines during political disputes.
Even if today's drop in oil prices becomes a plunge, Russia will be OK because it's made strides to be more than just a producer of oil.
"The budget balances at $41 (a barrel). They have a cushion. To me, Russian petro-power is secure," said Clifford Kupchan, a Russia expert at the consultancy Eurasia Group and a former State Department official. "They're moving into marketing, building more refineries—more of the value-chain, so they're not solely dependent on oil prices."
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(c) 2006, McClatchy-Tribune Information Services.
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