Where to expect blood if low oil prices are here to stay?

Unless you’ve been living on a desert island for the past 12 months you’ve heard a lot of talk about falling oil prices. Since summer 2014 the drop has been significant and nobody knows how this will continue. Below you can see the two-year weekly development of WTI Crude Oil Futures at NYMEX (the chart for Brent is similar). We’re currently below the blue trend line and as you can see, it’s no longer appropriate to just talk about a halving of prices.

WTI Crude Oil Future (CL@NYMEX), continuous contract, two-year weekly chart. 

Some analysts think we’ve entered a prolonged period of low oil prices. This could be the case if the imbalance between supply and demand continues. OPEC doesn’t seem to be able to decide on production cuts. Perhaps China doesn’t need as much oil in the future as expected. The US becomes more and more self-supporting thanks to increasing domestic production. And who knows what happens in the distant future – perhaps we don’t need oil at all for energy production.

If oil prices remain low for a long period, it’s clear that many countries dependent on oil exports will hurt. In some countries you might even see civil unrest and outright chaos. Why? Well, take a look at the 20 largest oil exporting countries:

Norway (1,680,000)
Canada (1,579,000)
Algeria (1,547,000)
Mexico (1,460,000)
Kazakhstan (1,406,000)
Libya (1,313,000)
Azerbaijan (821,000)
Colombia (777,900)
Oman (705,100)
Brazil (619,100)

Saudi Arabia (8,865,000 exported bbl/day)
Russia (7,201,000) 
United Arab Emirates (2,595,000)
Nigeria (2,500,000)
Kuwait (2,414,000)
Iraq (2,235,000)
Qatar (1,843,000)
Iran (1,808,000)
Angola (1,738,000)
Venezuela (1,712,000)


In the list you find successful societies like Norway and Canada, but you'll also find distressed countries like Nigeria and Iraq. It’s interesting to see that over half of the countries are classified as "Authoritarian Regimes” according to the Democracy index (DI). It means that the DI value is below 4. But lack of democracy is apparently not an obstacle for a high Human Development Index (HDI). That's proven by countries like Saudi Arabia, United Arab Emirates, Kuwait, and Qatar. The HDI is a composite index measuring average achievement in three basic dimensions of human development — a long and healthy life, knowledge, and a decent standard of living. Don't confuse HDI with a Human Rights Index (HRI).

When you plot these countries on a chart with DI on the y-axis and HDI on the x-axis you get a provoking picture. Up in the winners' corner you have Norway and Canada, i.e. full democracies with very high HDI. In the losers' corner you'll find Nigeria, Angola, and Iraq. It’s clear that things will get even worse in these countries if oil prices continue to drop and remain low for a long period. 

Major oil exporting countries and their Democracy and Human Development Index rankings. 

But what about the authoritarian regimes with a high HDI? Countries that are totally dependent on oil and where this black gold has allowed rulers to buy the obedience of people? What happens for example in Saudi Arabia when they can't afford to maintain the current system anymore? Sure, they have reserves and can postpone bankruptcy for some time, but not forever. How long do you think the ruling royal family "House of Saud" will remain in power when things get messy on the streets? Remember that over 50% of the 27 million Saudi population is under the age of 25.

If low oil prices are here to stay my prediction is that we will see several of these oil-dependant authoritarian regimes crumble. There will be conflicts and fighting and the consequences might be even worse than what we today witness in Syria.