Correction Appended: January 19, 2009
Few of us will miss 2008. Stock markets tanked. Government budgets bled as billions went to bail out banks. Thousands lost their jobs or their homes, or both. Yet amid the gloom there was one reason to celebrate as the year ended: filling your car with gas got cheaper with each day. After hitting a high of $147 a barrel in July, world oil prices have crashed to their lowest levels since 2004. By Jan. 7 the cost of oil for February delivery was around $43 a barrel — less than half the price of a year earlier. Goldman Sachs last month predicted that the price could sink to as low as $30 by March. For car owners, airlines and any person or company that uses a lot of fuel, plunging gas prices provide a financial break just when it is needed most.
But not everyone is applauding the return of cheap oil. Oil-producing nations that raked in billions over the past few years now face a reckoning. Governments that didn't set aside any of their windfall, or shortsightedly budgeted on sky-high prices — and more than a few fall into both categories — are grappling with tumbling revenues. The reality of lower oil prices for countries such as Iran, Nigeria, Russia and Venezuela in 2009 is likely to include political unrest, massive cuts in public spending, and rocketing inflation and unemployment. "The brutality and speed of the price decline is a huge shock economically and politically for some of these countries," says Didier Houssin, director of energy markets and security for the International Energy Agency in Paris.
That shock is just starting to hit the world's fourth-biggest oil producer, Iran. The price crash has pummeled Iran's foreign earnings, 85% of which come from its shipments of 3.8 million barrels of oil a day. Last summer the country was garnering about $300 million a month from oil and natural gas. This month it's likely to make just $100 million, according to Saeed Leylaz, an economist in Tehran who edits the business newspaper Sarmayeh.
For many of Iran's 65 million people, responsibility for the downturn has settled on one man: President Mahmoud Ahmadinejad. International sanctions have tightened during Ahmadinejad's fiery presidency, resulting in oil exports dominating Iran's economy even more than normal. According to energy analysts and economists, Ahmadinejad has also spent billions of dollars from Iran's Oil Stabilization Fund, which is supposed to act as a safety net during an oil crash, to pay for social programs for his millions of supporters, most of whom are poor — though there is little public accounting for where the money has gone.
Iranian budget deficits have soared and inflation is now a hefty 25% a year, according to Cliff Kupchan of risk consultancy Eurasia Group in Washington. Government officials are "digging a deeper hole, spending money they do not have," Kupchan says. Last November, 60 Iranian economists sent Ahmadinejad a letter warning him that his policies threatened economic ruin. "We have nothing because Mr. Ahmadinejad has spent it all," says Leylaz, who did not sign the letter, though he is a fierce critic of the President. "Mr. Ahmadinejad's economic policy has an absolute lack of financial discipline. His priority is making people satisfied now, not to have money for the future."
After months of upbeat assurances, Ahmadinejad finally admitted last month that economic problems had compelled him to recalculate the 2009 budget to reflect an oil price between $30 and $35 a barrel rather than $60. He also drafted a bill to scrap lavish fuel and electricity subsidies, which give Iranians some of the world's cheapest gas (just 36ยข a gallon), even though it has to be imported from foreign refineries. The move is a high-stakes gamble for the President, who is up for re-election in June and is already cast by his opponents as the cause of the Iranians' deepening poverty. "Mr. Ahmadinejad will spend as much money as possible to make people happy," Leylaz says. "Then immediately after the election we will face the collapse."
Halfway around the world, Venezuela's President Hugo Chávez is confronting a similar predicament. Two years after Chávez won his third term, Venezuela faces a deep recession. The price Caracas gets for its oil has dropped some 70% since July to about $31 a barrel. That has left Chávez with about half the money he budgeted to spend in 2009, and doesn't take into account the millions of dollars Venezuela will lose each month if it abides by recently agreed OPEC production cuts.
Despite all that, Chávez vows to keep spending, especially on social programs such as public housing and health. He has also flaunted his petro-wealth over the past few years, by giving money and free oil to allies like Bolivia and Cuba. Such generosity may be unsustainable, as Chávez is discovering. He provided cheap heating oil to poor Americans in New York, Massachusetts and elsewhere until last week, when Venezuela's financial meltdown forced him to scrap the program.