Increasing returns of systems disruption as oil prices plummet

By Fester:

A few days ago, Dave Schuler raised the question of how does the collapse in oil prices impact international affairs.  I'll want to extend this discussion into the question of system disruption, but let's start at the beginning:

The falling price of oil is likely to have an impact on areas of concern other than Russia and the KSA including Iran, Pakistan, India, and China. It’s likely to be good news for India, China, and Pakistan. Not long ago Pakistan obtained a World Bank loan much of which was needed to keep its oil subsidies up. That’s less likely to be a problem going forward.

Oil at $36 or even $46 a barrel isn’t the drag on China’s or India’s budgets that $146 dollar a barrel oil is. Iran, contrariwise, will be less able to pursue expensive development projects than it otherwise might have been....

Lower oil prices means system disruption becomes more attractive to non-state actors as the state producers of oil have far less slack in their system.  When a state's budget break even point is far less than the current realized price of oil, the loss of ten thousand barrels of production/distribution per day only eats into the discretionary budget.  However when the budget break even point is above the average received point, losing ten thousand barrels per day eats into reserves or the baseline budget.  Brad Setser has some good information on the break even points of several large petroleum exporting states:

Projecting existing spending patterns out, I wouldn’t be surprised if the Saudis spent 585 SAR ($156) in 2009 — a spending level that produces a crude estimated break-even price of the Saudi blend of around $57. For sweet light, that works out to an oil price of $60 or more ...

The Russians — who need an oil price of $70 (if not a bit more … ) to cover their budget — aren’t in quite as good a position. Particularly when they also need to draw on their reserves to bailout (or take over) their corporate sector …

Indeed, if oil stays at $40-45 a barrel, only Norway and perhaps Kuwait would still be adding to their stock of petrodollars (or petroeuros). Most other oil exporters would be sellers.

The IMF (see table 4/ p. 30) puts the break-even price for Algeria and Libya in the 50s.

And I don’t buy the IMF’s estimates for the break-even price for the UAE and Qatar. Not in the sense of providing an accurate picture of the true drain on each country’s oil revenue.....

Mexico's federal budget assumes oil will be priced in FY-09 between $70 and $80 per barrel.  Mexico will most likely get the net equivilant of $70 per barrel as they aggressively hedged for this fiscal year.  This budgeting policy has produced large, but unsustainable increases in security spending.  I would not be surprised if there are several attempts over the next year by Mexican narco-guerrilla groups to seriously crimp Mexican oil exports.  If those attempts are successful, the value of the Mexican oil export hedges will decline as fewer barrels will export.

System disruption will be more effective and attractive in hollowing out states where the state was unable or unwilling to effectively hedge their downside risk heading into the commodity bust.  The ability of Nigerian elites to bribe their hold onto power and distribute spoils will massively decrease.  The attractiveness of everyone getting a cut of the corruption from Kirkuk or Basra declines when the flow of cash is only two fifths of what it was three months ago.  Denial instead of tacit sharing is a more favorable tactic now than it was six months ago as the denied revenue is approaching core revenue that maintains minimal state functions rather than optional and expansive state functions.