In today’s economy the need for a diversification of the economy is more important than ever. In particular, at the time this post is written (February 13^th, 2015), oil prices are its lowest prices in years as a result of the proliferation in supplies and sluggish global demands. All nations, whether they are a net importer or a net exporter, are feeling this squeeze on their national income.

The impact of this fall in oil prices are wide and cuts deep on those countries that depend on this resource. Witness the current crisis that Russia is facing: an economy that that facing sanctions on its key pillars: defense, which is a legacy of the Cold War era competition; energy and mining, both of which are resource based and depends on the global commodities market, and financials, which are in large part the results of capital inflows as a result of the sales of natural resources). And now, with the decline in the price of oil, Russia is finding less and less takers for its petroleum and natural gas reserves, while at the same time, Europe is moving away from the Russian gasman by investing more in green energy and meeting their energy needs through other needs, such as natural gas imports from America. As a result of this, investors have been pulling money out of Russia, resulting in a steep fall in the value of the ruble, a fall of around 50% at its lowest point. While the fall of the Ruble had stabilized recently, the impacts have been far reaching and severe, and it may take years for Russia to come back from this deep crisis. (on oil and national corruptions, click here.)

And Russia is not alone in facing such a challenge to its state coffers as the country tries to balance its budget moving forward to 2015. Iran, whose economy is even more dependent on the selling of natural resources, has been even harder hit. The stagnating national economy can only be expected to be getting worse in the coming years. Likewise, Venezuela, a nation that stylized itself as an example of 21^st century socialism, is in fact heavily dependent on oil to fund many of the social programs that the country is currently undertaking. A fall in its chief exports is likely to cause price rises on a variety of goods, such as food and fuel, which are heavily subsidized using state oil revenues. Moreover, it will likely increase the populace’s discontent with the national government, challenging the government’s very own legitimacy.

The overdependence on natural resource is what is often termed a “resource curse” or the “Dutch disease”, based on the supposingly devastating effects of the discovery of natural gas off the coast of the Netherlands on the Dutch domestic industry during the 1970s. In short, the theory suggests that with an increase in oil revenue, which are in essence easy money that does not take much investment, the government and society as a whole will move away from other sectors of the economy such as manufacturing and research and development. There is simply too little incentive to focus on growing the economy long-term when in the short-term, easy cash flows are being generated. The long term determinants of growth, which includes the accumulation of capital and the improvements in technology (according to the Solow model), are ignored in favor of the easy money that the country can easily receive from selling its natural resources. The government may then distribute this oil wealth to the populace to increase its popularity, or to pursue its own political agendas abroad (Iran in the case of interventions in Iraq and Syria, Russia in the case of its Near Abroad of Georgia and Ukraine). Such a huge amount of easy money in good times will give the government tremendous power in international affairs, leading to the state being called an “energy superpower”.

Another important point to note, as no doubt many have already observed, is that resource dependency tends to breed authoritarian forms of governance. In any case, a government that receives 60% or more of its revenue from selling its natural resources tends to be less free than those that are more resource-scarce. There are a couple of reasons for this:

First, remember the slogan of the American Revolution, “No Taxation without Representation”? Have you ever considered how true this is literally? In other words, if a government do not tax its citizens, or at least not tax them as much, does the government still have responsibility to provide its citizens with a representative form of government? In the cases of the oil-rich countries, when the government’s revenue does not depend on the cooperation of its citizens, there is little incentive for them to give rights to their citizens for a form of participatory democracy. Any sort of social benefit provided to the country’s citizens can be thought of as a “gift” to the populace, since it is not with their tax dollars that these programs are funded. The government may not feel like they owe their citizens anything, and thereby giving the government more leeway in pursuing their own goals.

Secondly, as this is a national resource, the ones who will be managing it most closely will likely be government bureaucrats, acting on behalf of the entire population. Obviously, such an arrangement will lead to corruption, cronyism, oligarchies, etc, since so much money and power are concentrated in the hands of so few people. This is simply too tempting for government officials not to abuse their power to enrich themselves in one way or another. Often, governments will sought to protect their own interests by clamping down on those who threatened their monopoly on the national wealth, leading to increasing authoritarianism and undemocratic forms of governance. For further discussion on oil and global corruption see here.

How is all of these going to affect the international arena as we move forward in 2015? It is interesting to note that the three countries we have mentioned thus far – Russia, Iran, and Venezuela – are in one sense or another a geopolitical rival of the United States. As we have previously noted, increased amounts of oil revenue will leads to more undemocratic forms of government, which in turn leads to more irresponsible governments, which are more likely to engage in forms of military adventurism and assertive foreign policies. I would argue that Russian would not have invaded Georgia in the summer of 2008, when the world’s attention has been focused on the Beijing Olympics, if it had not been for the fact that oil prices had been at its historic heights and much of Europe depends on the oil and natural gas provided by Russia. The anti-western rhetoric of Hugo Chavez would not have gained traction had it not been for the fact that Venezuelan oil had given him the economic foundation and confidence to do so.

But with the dramatic decline in oil prices since the middle of last year, all of these geopolitical conditions are bound to change. The large net oil exporters, not only Iran, Russia, and Venezuela, but also US allies such as Saudi Arabia, are going to see a drastic decline in their influence, which will require them to adjust their respective foreign policies accordingly. Let’s go through the three main powers we talked about here one at a time:

1. Russia: The current involvement of Russia in the Ukraine started when the oil prices were still relatively high, and when American natural gas exports to Europe are only starting. But now, a year later, Russia simply no longer have the sort of leverage to keep the European Union from fighting back against Russia designs, whatever it may be. My prediction for the current conflict would likely be for Russia and the separatists to drag things out a little longer to maximize their gains and to destabilize the situation in the Ukraine further and then to come up with a peace treaty with greater autonomy for the east of Ukraine in mind. In the end, Russia’s geostrategic goal is not necessity annex the region as it did with Crimea, but rather to influence it in such a degree that Ukraine’s foreign policies would still have to take Russia into consideration.
2. Iran: Without a sufficient source of oil revenue, the Iranian backing of Assad’s regime in Syria and the ongoing fight against the Islamic State will be in jeopardy. This compounded with the continuous international actions against Iran will seriously hurt the Iranian nation. Therefore, it is likely that we will see an Iran that is more willing to compromise on many key issues, from Syria to its nuclear program, diminishing somewhat its power in the Middle East.
3. Venezuela: The populist government of President is already under tremendous economic and political strain from before the fall in the prices of oil. And now, if oil decline continues, we may see increasing pressures for political reforms in Venezuela.

And to talk about it briefly, we may also expect to see the relative increase in power among the net oil importers, which includes large sections of East and Southeast Asia, and non-oil producing South America. Although, this increase in power for the net importers may be less than the decrease in power of the oil exporters, in part because there simply more oil importers than exporters.

Significantly, countries that are energy poor but are growing through economic means, such as Turkey and China, may become stronger than before. Their freedom to maneuver will likely increase, and they may become more assertive in their respective neighborhood. The impacts of their rise will remain yet to be seen. In political relations, we speak of both “hard” and “soft” powers, with “hard power” defined in military means, while soft power is described as cultural influences. Country’s national power is no longer measured by what they can produce or how they can impose their wills on the world. Some countries, particularly in Europe and East Asia, may see themselves benefitting from the oil decline as beneficiaries of tourism and places of interest for the entertainment industry. Whatever the shift in geopolitics may be, we may be guaranteed that we will see a shift in the international order in the coming years (assuming oil prices remained low), where countries that have obtained enormous power through using energy as a chess piece will see a decline in their influence and more power will be shifted toward nations with strong economic performances and a more solid source for their power, whether they be strong economic performers like China or Turkey, or strong “cultural powers” like Korea or the UK.