When asked in a recent interview about his famously sympathetic gaze into Russian President Vladimir Putin’s soul in 2001, former President George W. Bush argued that rising oil prices had fundamentally changed his interlocutor: “When I looked into his eyes and saw his soul, Russia was broke . . . [t]he price of oil goes up and Putin changed.”
Does the relationship between oil prices and Russian behavior to which Bush alluded hold true? The higher the price of oil, the more aggressive Russia becomes? And what about other petrostates? Might it be true for those as well?
We may soon have more evidence for the proposition. Oil prices are brushing off 2016 lows and hitting three-year highs. Brent crude has been hovering above $70 a barrel since April, up from lows of around $30 in early 2016, fueled by OPEC production cuts and rising geopolitical tensions (over issues like the Iran deal). Though nuances, complications, and exceptions abound, the academic and historical evidence on balance tells us that, as we transition from a lower to a higher oil price regime, we can generally expect a darker geopolitical outlook. As rising oil revenues gives Russia, Saudi, Iran, and other oil-exporters an added sense of confidence, it may at least selectively inflame interstate tensions and lead to more aggressive behavior. That possibility, alongside an increasingly hawkish U.S. national security team and a President who appears to feel rather “unchained” of late, points to a potentially combustible mix just ahead.
It is generally taken for granted that aspects of geopolitics can function as a key input into oil prices. Trump’s mere threat of a U.S. strike in Syria, for example, caused oil to spike by 2 percent on April 11. In addition to short-term effects, geopolitical competition can influence prices in other ways. To give just one general example, as Soviet power spread into parts of the Third World after the independence era, some states felt safer nationalizing their oil industries to escape Western company control (Iraq in 1961, for example), and prices rose as a consequence.
But the relationship may also work the other way around: Oil prices can also be a key input into geopolitics. Many studies have demonstrated that oil prices have a direct effect on the domestic stability of petrostates. This makes ample intuitive sense: Higher prices fill public coffers, allowing governments to palliate needy populations and potential elite opposition groups by dispensing more largesse. Some regime elites may reason that a firmer grip on power may free them to carry out more assertive foreign policies without fear of being undermined at home.
There are, however, several complications to this general intuition. Some states already have sufficiently buoyant revenues relative to their small populations to satisfy their publics and feed clientelistic networks. Providing largesse can also backfire if prices drop; taking away something valuable that people have grown used to is a dangerous game, especially when elites aren’t ready to play it. And then of course there is the famed “oil curse”: For all sorts of reasons, from “Dutch disease” economic distortions to the derangement of normal citizen-state relationships, oil riches can in time undermine regimes, weakening and even destroying them.
That said, a more recent body of research has empirically demonstrated the intuitive twin of this conclusion: Higher prices cause greater interstate aggression by oil-producing countries. Why would this be the case? Greater oil revenue flushes petrostates with confidence and also cash that they can put toward military spending or foreign adventures. To take one obvious example, we need only look to Iran’s using its oil revenue to fund proxy groups such as Hamas and Hezbollah. Furthermore, military spending by one regional oil producer can beget spending by others, fueling regional arms races that can make aggression and conflict by miscalculation more likely. The onset of the Iran-Iraq War in September 1980 may be a prime example of that dynamic.
Most prominent among the empirical studies is Cullen S. Hendrix’s 2014 paper, which shows a statistically significant relationship between higher oil prices and “dispute behavior” (military actions short of actual war) by oil-exporters. (Hendrix also summed it up nicely in this Washington Post piece.) He found that “all things being equal, a one standard deviation ($18.60) increase in the price per barrel of oil from the sample mean ($33.81) is associated with a 13 percent increase in the frequency of [dispute behavior]” in oil-exporting states. He also found that, above $77 a barrel, oil-exporters are significantly more dispute prone than non-oil exporters.
Hendrix also explores the potential complication of reverse causality: Could dispute behavior by oil-exporting countries be driving prices higher, rather than the other way around? A key analytical consideration here is timing. We can all agree that geopolitical activity affects prices in the short-term (such as the Syria example mentioned above), but is this reverse causality true on a sustained basis? Parsing out long-term signal from short-term noise, Hendrix examines whether elevated aggregate dispute behavior affects oil prices at the yearly—rather than daily or weekly—level, and finds that this relationship does not hold. His explanation here is that other players typically step in to redress markets: “While dispute behavior may drive prices changes in the short term . . . the strategic significance of oil prices and oil-exporting states encourages major powers to act in ways that stabilize markets, either through market intervention . . . or direct, armed intervention.”
Jeff Colgan of Brown University has also touched on this topic, finding through his research that oil has fueled—in some way—one quarter to one half of interstate wars since 1973. He also notes that oil-producers are 50 percent more likely to engage in conflict than non-oil producers. Colgan identifies eight, non-mutually exclusive causal mechanisms for how oil fuels international conflict, most of which are implicitly exacerbated by higher prices. They are: “(1) resource wars, in which states try to acquire oil reserves by force; (2) petro-aggression, whereby oil insulates aggressive leaders such as Saddam Hussein or Ayatollah Ruhollah Khomeini from domestic opposition and therefore makes them more willing to engage in risky foreign policy adventurism; (3) the externalization of civil wars in oil-producing states (“petrostates”); (4) financing for insurgencies—for instance, Iran funneling oil money to Hezbollah; (5) conflicts triggered by the prospect of oil-market domination, such as the U.S. war with Iraq over Kuwait in 1991; (6) clashes over control of oil transit routes, such as shipping lanes and pipelines; (7) oil-related grievances, whereby the presence of foreign workers in petrostates helps extremist groups such as al-Qaeda recruit locals; and (8) oil-related obstacles to multilateral cooperation, such as when an importer’s attempt to curry favor with a petrostate prevents multilateral cooperation on security issues.”
Though he doesn’t substantiate statistically that higher prices lead to more conflict through these channels, he implies it heavily. For example, he writes that, “the low oil prices of the 1990s have given way to higher and more volatile prices, increasing the magnitude of the consequences one can expect from oil-conflict linkages.”
While the emerging academic evidence may validate the claim that higher oil prices lead to more aggression, the historical and anecdotal evidence is somewhat mixed, and understandably so. Oil price is clearly only one of many inputs into foreign policy decision-making, and an indirect one at that. No leader thinks, “Now that oil is at $X, I’m going to invade my neighbor.” Context obviously matters, too: No one imagines that Ecuador or Norway is going to invade or try to blackmail a neighbor just because spot prices rise 15 or 30 percent in a given six-month period. Price levels seep into decision-making more subtly, affecting interlocking beliefs about strategic behavior generally and specific cases more particularly; they may fuel self-confidence by shoring up budget outlooks and funding the tools of more aggressive behavior in contexts where such behavior could conceivably make sense.
Moreover, there are many contravening (and occasionally countervailing) complications. Prominent among these is the fact that low oil prices can incentivize states to “wave the flag” in order to distract from domestic difficulties—so the impact of low oil prices might lead to more aggressive behavior in some cases. That suggests that neither high nor low prices per se may be the trigger affecting behavior, but rather notable changes in price that become politically salient in one way or another.
And there’s also the tricky issue of timing: Over what timeframe does increased oil revenue fuel aggression? Is it in anticipation of higher prices, in direct response to the current pricing levels, or is there more of a lag in effect as oil revenue slowly shores up—or is expected to shore up—budgets and military spending over time? The answer might depend on specific cases and leadership cadres.
There is also a scaling problem. If a 20 percent rise in oil prices makes a more assertive foreign policy more likely in a given country, does a 40 percent rise make it twice as likely? Or put differently, how much of a difference in price, and presumably in expected revenues, does it take to cross a threshold where it might have an impact on decision-making? Are there multiple thresholds?
Russia exemplifies these issues. Taking the same long view as George W. Bush in his interview, it seems self-evident that rising oil prices and higher government revenues over the course of the 2000s gave Putin confidence, funded military expansion and modernization, and helped enable Russia’s most revanchist tendencies. Between 2003 and 2013, Russian military expenditure doubled as the price of Brent crude rose from a low of around $20 a barrel in 2001 to a high of more than $140 a barrel in 2008. Russia, as the saying goes, is a gas station with nuclear weapons; a higher pump price thus means more weapons, nuclear and otherwise.
But when you cross reference this conclusion with specific acts of Russian aggression over the past roughly twenty years, the picture gets much more complicated. When Russia invaded Georgia in August 2008, oil was above $100 a barrel. Same with Russia’s invasion of Crimea in 2014. But Russia also dramatically intervened in Syria in September 2015, when oil had dropped to around $50 a barrel and the economy was sputtering due to both low energy prices and Western sanctions. Here, many analysts plausibly described these interventions as a way of rallying Russians to the flag and distracting them from domestic hardship. More likely, Putin saw an emergency in Syria that simply had to be dealt with, no matter the cost or risk; the Assad regime was in danger of collapsing, and Syria is Russia’s only ally offering ports and bases in the Mediterranean basin. So Russia is a bit of a mixed bag, but on balance its behavior—especially over a long timeframe—appears to support the thesis.
Saudi Arabia’s role in the 1973 Yom Kippur war also illustrates the tricky question of timing. Saudi funding of the effort was enabled by a financial buffer created by a rise in revenues from the late 1960s, and was likely justified by an expected rise in revenues due to an oil price increase that was anticipated, in part, because of the very war it was in the process of financing. Its reserves had already grown so large that, for the first time, Saudi Arabia could ride out a supply (and revenue) disruption and still finance a war. But the Saudis helped finance a war that they themselves did not participate in. So if rising oil prices led to greater interstate aggression, it did so in this case in a particularly indirect way.
These are all interesting and important nuances that attenuate any direct causal connection one might be tempted to draw between oil prices and conflict. So it would be nice to know if historical studies have shown any significant statistical relationship between fluctuations in key sources of government revenue (and what memoirs and archives tell us about how those situations were perceived) and interstate behavior. It would be even nicer to drill down into such studies to find cases where specific lucrative commodities—for example, European colonial profits such as from British opium sales in China, or cotton grown in Egypt—made any difference in the behavior of the relevant governments. Alas, such studies do not exist.
But regardless of the timeframe and mechanism, academic and historical studies alike do suggest that higher oil prices have generally lead to more aggressive, or at least riskier, behavior in recent decades—whether in anticipation of higher prices, immediately in their wake, or only after sufficient revenue stores are built up.
So are we at a point in the energy price cycle where, all else equal, we should expect greater interstate conflict? We’re close to Hendrix’s $77 a barrel threshold, above which oil-exporters are significantly more dispute-prone than non-oil exporters. But given the nuances just described, this specific price threshold is probably too cute. The more realistic argument to make is about the effect of a higher-price vs. lower-price paradigm over a multi-year horizon (particularly in light of the timing issue and potential lag). And if the period of the past two years (when Brent largely hovered between $40 and $60) was a lower-price paradigm, 2018-19 is potentially gearing up to be a higher-price paradigm driven by continued supply cuts by OPEC, tight global inventories, and—in a coincidental way—heightened geopolitical risks. We’ll see how these factors play out, but if oil prices remain elevated we may begin to subtly feel their effects on behavior by Iran, Saudi Arabia, Russia, and perhaps others.
None of this is to say that oil prices are the most important factor in the geopolitical outlook over the near, medium, or long-term. The reputed hawkishness of Mike Pompeo and John Bolton, the effect of the upcoming mid-term elections on Trump’s decision-making, and reactions to potential exogenous shocks (for example, a major clash in Syria between U.S. or Israeli and Iranian or Russian forces) will play a much more direct and important role in shaping the geopolitical landscape. But a higher oil price regime (if it holds) could well make petrostates like Iran, Saudi, and Russia more aggressive—either in challenging the United States and Europe in the case of Russia, or by exacerbating ongoing proxy conflicts in and around the Middle East in the cases of Iran and Saudi Arabia. Given these and other dynamics, we should expect a bumpy ride ahead.