Falling Global Oil Prices Threaten International Stability

An oil drilling platform on the Caspian Sea. Photo Courtesy of Wikimedia Commons.

January 19, 2026

One of the most unexpected stories since the start of 2015 has been the decline in worldwide oil prices. In June of 2014, oil prices were hovering around $110 a barrel. Six months later, prices have plummeted by over 50 percent to as little as $47 a barrel. Though the drop in oil prices caught most economists and world leaders by surprise, the ensuing action has led to an all-out price war as historically large producers vie for control of the market. While the benefit of low oil prices is already evident to American consumers, there is pervasive fear that continually declining prices can have an ultimately negative impact on the world economy.

There are number of reasons why oil prices continue to decline, with the potential of hitting $35 a barrel in the coming weeks, and $20 within the next few months. A combination of weak demand in many European countries and Japan, due to sluggish growth, and increasing production in the United States have produced an excess on the supply side, and a relatively low level of demand. Despite the extraordinarily low prices, almost all producing nations are not cutting back in order to preserve their own market shares, preventing supply from shifting with demand. Although no producing nation has cut back yet, each has a different level of ability to endure the price war.

Saudi Arabia, one of the world’s largest producer of oil, is best suited to weather a long price war. The government holds currency reserves over $700 billion, government deposits of $450 billion, and no national debt, placing it in the best strategic position. Policy analysts suggest three primary motives for Saudi Arabia’s refusal to cut back on production: establishing complete dominance in OPEC, forcing smaller producers out of the market (therefore allowing Saudi Arabia’s market share to increase), and pushing back against U.S. shale production. Other gulf monarchies, like Kuwait and Oman, are feeling strain from the sustained drop in prices. Kuwait recently cut subsidies on kerosene and diesel, a dramatic and unexpected move. Oman is looking at increasing income taxes, a radical move in the relatively tax-light Persian Gulf.

Iran, on the other hand, needs an immediate, and massive, short-term increase in the price of oil to come close to balancing the government budget. At current prices, the price of a barrel of oil is below Iran’s marginal cost of extraction, further stressing a nation that depends on oil revenues to support the largest population in the Middle East. In addition to nearly depleted foreign currency reserves and a sluggish economy still suffering under U.S. sanctions, the Iranians are in dire straits, but the government’s reliance on oil revenues makes a cut in production infeasible. Like Iran, oil states with larger populations, such as Nigeria and Iraq, also face major challenges with such a low oil price. These populous nations have a higher oil revenue-to-population ratio than the Gulf monarchies, which, when coupled with large deficits and low currency reserves, prevents them from cutting back, due to dependence on these revenues.

America’s position as the world’s top oil producer is not in doubt, but whether the subsequently lower prices will have an ultimately positive or negative effect in the United States is unclear. At the most basic level, American consumers benefit from lower prices – with less money spent on oil, there’s more money to spend elsewhere. That in turn should benefit the overall economy, although consumers may choose to save the money rather than spend it. In general, lower prices are projected to lead to overall economic growth.

But any economic expansion could be tempered by the potentially harmful effects to the fracking industry. According to the US Energy Information Administration, the current price of below $50 per barrel is already far below the per-barrel production cost of around $60. This most likely means fewer new wells being drilled; the S&P 500 index fell by 1.9% on January 5th, partly as a result of the prospect of less investment by energy companies. The slowed growth could also have deflationary effects on the American economy, which would not help growth. The lower prices are especially harmful for American producers, which have higher break-even costs than elsewhere. But US companies, at least for the short term, will continue to operate – partly because much of the costs are one-time costs (wells only have to be drilled once) and actual operating costs are fairly low, and partly because more efficient technology could reduce costs in the future.

By keeping their production levels steady as oil prices decline, OPEC nations like Saudi Arabia are hoping to cripple the US fracking industry to the point that they regain greater market share of oil production. For now, this gambit does not appear to be working, as the US economy has mostly weathered the storm of low oil prices, while consumers celebrate at the pump. However, it appears that the Saudis are looking for a victory in the long run, as they believe they can afford to flood the market with cheap oil for longer than the US fracking industry can sustain the low prices.

While it is yet unclear whether the US or Saudi Arabia will win this price war, there are already definite losers, primarily production heavy countries that cannot afford to run a deficit. Iran’s struggles have already been highlighted. Along with them, Russia and Venezuela have taken the largest hits from lower oil prices. Unlike Saudi Arabia, Venezuela has a large national debt, meaning it cannot run a continuous deficit without repercussion on the economy. Likewise, Russia does not have as large reserves as Saudi Arabia. That, along with crippling sanctions placed on their economy by the West, has drastically reduced the power of the Rouble to the point that it is on the verge of collapse.

Although the consequences of falling oil prices and the ensuing price war have yet to be fully realized, one thing is already clear: both intentional and unintentional manipulation of the price of oil has had (and will continue to have) a profound impact on global

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Falling Global Oil Prices Threaten International Stability