Oil prices, socio-political destabilization risks, and future energy technologies

Abstract

Our review of some modern trends in the development of energy technologies suggests that the scenario of a significant reduction of the global oil demand can be regarded as quite probable. Such a scenario implies a rather significant decline of oil prices. The aim of this article is to estimate the sociopolitical destabilization risks that such a decline could produce with respect to oil exporting economies. Our analysis of the relationship between changes in oil prices and political crises in these economies shows a large destabilizing effect for price declines in the respective countries. The effect is highly non-linear, showing a power-law type relationship: oil price changes in the range higher than $60 per barrel only exert very slight influence on sociopolitical instability, but if prices fall below this level, each further decrease by $10 leads to a greater increase in the risks of crises. These risks grow particularly sharply at a prolonged oil price collapse below $40 per barrel, and become especially high at a prolonged oil price collapse below $35 per barrel. The analysis also reveals a fairly short-term lag structure: a strong steady drop in oil prices immediately leads to a marked increase in the risks of sociopolitical destabilization in oil-exporting countries, and this risk reaches critical highs within three years. Thus, the possible substantial decline of the global oil demand as a result of the development of the energy technologies reviewed in the first section of the present article could lead to a very substantial increase in the sociopolitical destabilization risks within the oil exporting economies. This suggests that the governments, civil societies, and business communities of the respective countries should amplify their effort aimed at the diversification of their economies and the reduction of their dependence on the oil exports.