Over the last 6 months, the world has been treated to a front row seat as to how economic policy can be used to seriously undermine enemies in the modern world. Specifically, the fall in the price of oil has fallen from around $110 dollars in July to about $56 now (a decline of 49%). For countries such as Russia, Iran, & Venezuela, who need oil prices north of $100 to balance their budgets, a drop of this magnitude is devastating and will hinder the ability of these countries. Given that none of these countries are friendly to the U.S. and given that lower oil prices mean that U.S. consumers are paying less at the pump (the equivalent of a tax cut for them), the low oil prices are a win-win-win for the U.S.

However, even more fortuitous for the U.S., and problematic for Russia & Iran, is that these developments are not the result of some temporary unique factors like a freak weather event, but rather are the result of several factors. One factor is that with fracking and drilling technology advancing, the U.S. has more natural gas but is also drilling more oil (as a percentage of world production) than it has in decades which is creating downward pressure on prices. While nobody can (or did) predict when a new technology (or an advance in an old technology) will arrive on the scene and completely upend a market, this is what has happened since the middle of the last decade. Although the new technology is like a freak accident from the point of view of energy producing countries, its effects are permanent.

Another factor is that Saudi Arabia is standing in the way of OPEC reducing production to prop up prices, and indeed seems determined to drive prices down. While there are several theories being put forth to explain why Saudi Arabia seems to be acting against its own economic self-interest in driving prices down, there are really a couple of factors. One long-term consideration is that Saudi Arabia would like to make the new wells that have come on-line in the U.S. un-economical and take them out of the game so to speak. The idea is that with lower U.S. production, Saudi Arabia will have more influence in world oil markets and can drive the price higher. The effects of this gambit remains to be seen, but with the U.S. and Russia being number 3 and number 1 respectively in oil production as of 2013 (i.e. two non-OPEC countries), Saudi Arabia is unlikely to exert the impact on world oil prices to the extent that it did in the 1970’s. The second consideration is that lower oil prices hurt Iran and Russia. While Saudi Arabia unlikely sees a rival in Russia in that it is siding with a Saudi rival in Syria (and by extension Iran), it sees an existential threat in Iran with its nuclear program (much like Israel). Anything that hurts Iran, creates political/economic instability for them, and thereby hampers their ability to obtain nuclear weapons while also reducing their influence throughout the Middle East is something that can be considered a vital interest of Saudi Arabia’s.

A final factor is the actions of the Federal Reserve. While perhaps not directed at the price of oil, the winding down of the quantitative easing and indications that the low interest rate policy of the U.S. will not be kept for forever is having the effect of strengthening the U.S. dollar in foreign currency markets. Because oil prices are denominated in U.S. dollars, a strengthening dollar has the effect of lowering oil prices across the board, all things being equal. As the U.S. dollar strengthens, we can expect to see lower oil prices than would otherwise prevail in any given set of market conditions.

In summary, we normally think of military build-ups or military action as the way to combat implacable enemies like Iran and rivals like Russia and China. Certainly, those actions have their place. But economic policies also have a place and can be used to undermine enemies without having to blow things up. And when an economic policy can help you (low oil prices for U.S. consumers) while creating economic & political instability in your enemies, that is an unbelievably positive development.