In the past, low oil prices have been seen as a boon, particularly at the gas pump. They’ve been credited with boosting economies and stirring growth. But recently oil prices have dropped so low that warning bells rippled through global markets, and they remain volatile. What does all this mean for countries and companies? How big is the risk?
For answers, I talked to Ian Bremmer, president of Eurasia Group and author of Superpower: Three Choices for America’s Role in the World. An edited version of our conversation is below.
HBR: Do you see sustained low oil prices as a risk? How so, and how large?
Bremmer: Markets have been diving on low oil prices recently not because the traditional understanding is broken; it is still true that low oil prices are good for the U.S. economy as well as for Europe, China, India. All of these consumers are going to benefit. The problem is that the IMF has been downgrading growth. They’re concerned about monetary supply, a Chinese slowdown, crises around Europe, and also that U.S. growth is not quite as robust as you’d like it to be.
The risks in lower energy prices have a lot more to do with sustainability of some of the governments around the world that are really dependent on commodity revenues for their own legitimacy and power. Venezuela is going to default in the next six months if the Chinese don’t find the wherewithal to bail them out significantly. Russia, as a big oil producer, is feeling real strains — nothing destabilizing yet, and Putin is in total control, but taxes and inflation are going up. Nigeria is going to need a new IMF program.
Most worryingly, of course, are the petro states in the Middle East and the emerging-market producer countries with brittle institutions that are trying to stay stable when the one thing that provided them legitimacy — the ability to write really big checks — is falling apart. Plus, we have Iranian sanctions coming off, which is going to lead to a lot more Iranian production, a lot more Iraqi production, and more Libyan production. These prices are going to stay low for some time. This is structural.
There has been hand-wringing about a possible connection between sustained low oil prices and the risk of another global recession. Could oil prices actually be driving increased risk of a slowdown?
I don’t think so. I know people say that every 7–8 years on average we’ve had a recession in the postwar era, and the last one was in 2008, so we’re due. People see all of the economic constraints in growth around the world. These gain some momentum in the news, then seeing oil prices dive makes people grow more negative. But that’s very different from saying we’re on the cusp of another global recession, and it doesn’t feel like we’re entering that kind of environment right now, oil prices or no.
Do you think lower oil prices could slow the transition away from fossil fuels, the demand for electric vehicles, the shift to wind and solar, and other renewable sources of energy?
Clearly, the shift in price pushes out the date that you expect these things to really expand and become large market participants globally, but I don’t think there’s any possibility the transition to renewables will just stop or slow dramatically. We’re well beyond that point. Governments around the world are very much onboard with the notion of climate change and believe that it’s going to get worse. Industrial renewables are still going to be huge.
Keep in mind that if you’re China, you need everything. The growth and energy demand in China is immense. They’re investing more in nuclear than anyone around the world. They’re not going to stop doing that because energy prices are low. They know they need it. They’re going to do huge amounts of wind, a huge amount of solar, and that’s going to continue to drive a lot of research and to generate technological benefits in the economy as well.
In your tweets and commentary from Davos, you remarked on something called the “Fourth Industrial Revolution.” How is this connected to what’s going on with oil?
By the “Fourth Industrial Revolution,” people mean things, like automation and AI and genomics and 3D printing, that are going to transform every sector and take jobs out of economies. Most people I spoke to at Davos thought that this transformation would happen within 10 years, that we’ll see dramatic changes in the way we think about these sectors and in labor.
I generally agree, but the revolution is already hitting energy, right now. Seems like just yesterday we thought we had peak oil, we thought we were running out, that it was in the hands of traditional producers. Suddenly, overnight, it’s in the hands of a number of entrepreneurs unleashed on the U.S. market. Within the course of just a few years, fracking went from being viewed as never-going-to-happen to a world-changing technology.
America is now the largest energy producer in the world. The problem is, if you’re Saudi Arabia, it’s not labor that makes your economy work, it’s oil. A year ago, if you talked to Saudi leaders, they would have told you, “Oh, this is a pipe dream,” pardon the pun. They didn’t prepare for this over the past decades when times were good. Now time has suddenly turned against them very quickly. For them, this Fourth Industrial Revolution is not only disruptive, it’s disruptive in a big way, immediately.
How should we view the fact that America is now the biggest energy producer in the world? How does this change the U.S. perspective or behavior?
We like it, we like it a lot. What’s significant is that we’re no longer a high-priced energy producer, we’re a medium-priced energy producer. We were high-priced just a year or two ago, but the fracking industry changed that. It’s very competitive, very decentralized. We’re getting more efficient at producing at a lower cost because of the market pressures.
Also, keep in mind that energy is a relatively small piece of the U.S. economy. When you talk about what drives the U.S. economy, you’re talking about finance, you’re talking about IT — Apple and Facebook and others. So, on balance, low energy prices are still an unmitigated good for the U.S. This is true from a macro perspective as well as for the average taxpayer. Paying vastly less at the pump equates to a significant tax break for working-class and middle-class Americans. Many of them are still paying a lot of money just to be able to drive back and forth from home to work.
There’s been quite a bit of discussion about winners and losers. The obvious losers are producers and the banks. The winners are consumers and, traditionally, the overall economy. Who’s missing? Are there hidden winners or losers?
Xi Jinping is a huge winner. This is a guy that desperately needs to transform his economy and needs to move away from low efficiency, but he doesn’t want instability. Much lower energy prices allow him to smooth a lot of the pain that China is facing with its reforms, to actually open up to more market pressures and respond to them without just crunching people completely with restrictions. I think that’s a real benefit for him.
I should also say, people have been concerned about a significant Chinese slowdown. They see all of the economic constraints in growth around the world that have been gaining momentum in the news over the last months. Then seeing oil prices dive and stay low makes people even more anxious. But China has the tools to push this off. The government can use further stimulus from their over $3 trillion in reserves. Also, unlike the U.S., China can demand that Chinese market participants actually allocate capital to continue to prop up the market and growth. That’s going to maintain economic and political stability and allow China to continue to reform strongly. Low oil prices definitely help with that.
Lastly, what strategic points do businesses need to think about or understand when it comes to the implications of low oil prices?
I think the big picture here is that as we’re entering a world where there is much more volatility from geopolitics and from technology, we need to recognize that we will focus less on growth and more on resilience. It doesn’t mean there won’t be some unicorns and new technologies and companies that will take off, but generally speaking, the average investor or the average business has to recognize that the quality of their growth is going down.
This is a world that’s much more volatile, a world driven by emerging markets that are much more brittle, where labor’s going away and the consumption that traditionally comes on the back of that is harder to guarantee. That’s a world where you generally want to ensure that your money’s safer, that the markets you’re exposed to are stabler, and where you can predict market conditions more effectively over time. I believe people are going to focus more on resilience in their investments, on anti-fragility, on stability.
This world is changing from an economics-driven world to one that’s more politically driven, and the markets are changing in that regard. It’s going to create some big shifts.
