The Promise and Peril of Falling Oil Prices

The 40 percent fall in oil prices since June will significantly reduce the coffers of oil producing states and oil companies while boosting other countries and corporate bottom lines. That is clear on its face, but they’re not the only ones with something to lose or gain from the oil market.

Many shapeholders — the political, regulatory, media, and activist actors that may have little or no stake in an organization’s success, but nevertheless shape, constrain or expand its opportunities and risks have seen a shift in their opportunities. One of these actors, OPEC, contributed to falling oil prices by deciding to keep production constant. Let’s briefly review the changes impact on three other shapeholders.

Green Energy Activists — Wind in Their Face:

The desire to reduce dependence on foreign oil — particularly from those countries that had precipitated costly military interventions — has been a key selling point for alternative energy proponents. The revolution in energy production techniques in the United States, combined with expanded sources of energy in Canada, is putting North America on a path to greater energy independence and reducing the case for energy alternatives.

High-energy prices are essential to making the generally high cost of greener sources of energy economically attractive. Falling oil prices mean that many greener energy sources need even more subsidies to make them economically viable. This comes at a time when maintaining support for green initiatives will become increasingly difficult, not only because the need for energy independence is reduced, but because of the budget constraints faced by many governments and growing backlash against the perceived overreach of President Obama’s efforts to promote such efforts by many Republicans.

This does not mean that green energy activists will be any less funded, active, or that their case for action has changed, only that they face a more difficult time achieving the outcomes they seek.

Prudent companies will continue to search out every opportunity to embrace sustainability, and make it a point of differentiation. Yet in doing so, lower energy prices may require them to recalibrate or redouble their current efforts.

Democracy Activists — Wind at Their Back:

Most of the countries that will face revenue shortfalls from falling energy prices are authoritarian regimes. These leaders’ credibility with their own people does not rest on a strong foundation of public consent, but rather through some combination of economic progress, fear, or nationalist sentiments. While countries with deep pockets like Saudi Arabia may have the resources to sustain benefits to their people, this will reduce the ability of sanction-restricted Russia and Iran from doing the same.

Just as a wounded beast often lashes out in desperation, we may see more of the same from Russia. Optimists may hope for a more conciliatory tone from Iran on nuclear negotiations motivated by economic urgency. Yet there is no doubt that the falling energy prices takes cards out of the hands of dictators and forces them to overplay the remaining options. These moves make ordinary citizens more open to political change. Wise democracy activists will seek to gear up for this eventuality.

Organizations that have made big bets in these nations, often in tandem and dependent on the continued support of the government, need to refresh their risk analysis and burnish their plans for action in the event of either regime change or the current powers being increasingly ostracized due to belligerent foreign policy moves.

Defense Hawks — Case for Bigger Pieces of the Pie:

Defense spending in the United States has been cut with President Obama’s wind down of wars in Iraq and Afghanistan. With America’s return to Iraq and tiptoeing into the Syrian conflict to address the Islamic State and the recognition of the need for extended engagement in Afghanistan, the need to reverse this decline had already been building. With the Republican takeover of the U.S. Senate, a renewed push for more defense spending has been anticipated.

Yet the fall in energy prices both expands the pie available for spending and gives defense a greater case for a larger slice. Lower energy prices will be an economic boost for those countries needing to face off against hostile acts by Russia, while at the same time making the case for a strong defense more urgent.

At a recent Economic Club of Washington, D.C. event, IBM CEO Ginni Rometty said that succeeding in today’s ever-changing environment requires agility and speed. The operational environment for organizations is constantly changing. Those who recognize those changes and adapt quickly will succeed. Those that do not will become yesterday’s news.

The change in energy prices is but one change, but it is a big one. Prudent enterprises should evaluate how it impacts them and promptly pivot accordingly.

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