Rising oil prices will buy off democracy

Dictatorships, as well as democracies, depend on money, although North Korea and Zimbabwe would like to prove the contrary. Dictators have their own constituencies and their constituencies have their own costs.

The victory of Mahmoud Ahmadinejad may have been fraudulent; it is certainly bad news for the Iranian people and the world. It means that the theocratic dictatorship of Iran will not benefit even from the modest reforms promised by Mir Hossein Mousavi. The result will alienate the young urban middle class, particularly women. It will do nothing but damage to Iran’s foreign relations.

It would be pleasant to suppose that the underlying trends of the economy would bring down this oppressive regime.

President Ahmadinejad is a dangerous populist who prides himself on his own ignorance, particularly of economics. He once said that he prayed to God that he would never know anything about economics because he regarded the whole subject as “a tool of Western imperialism”. His prayer seems to have been answered; in 2007 he had to introduce petrol rationing in a leading oil-producing country.

Iran is primarily an oil economy; the global oil market is in the middle of an economic transformation.

The price of oil has been extraordinarily volatile. At the beginning of the recession it fell by about 80 per cent as world expectations were lowered. In the past six months, the price has recovered by about 100 per cent, taking oil back to $70 a barrel.

These price gyrations need to be explained, particularly the strength of the price recovery in 2009; the recession may have reached bottom but it has certainly not reached this level of recovery.

Part of the explanation is the shift of the global economy from mature to emerging countries, particularly to the four biggest emerging markets of Brazil, Russia, India and China, the so-called Bric countries, which are holding their own economic summit in Yekaterinburg this week.

In coming years Bric is expected to soar above the US and Europe; China alone will catch up with the US in five to ten years’ time. The big emerging countries have continued to increase their demand for oil, even during the recession.

The swing of effective demand to the emerging countries is not in dispute, but there are different views about an even greater shift in the oil market, so-called “peak oil”. That is the point in time when flows of new production are fully cancelled out by declines in existing production. That does not mean that oil is running out; but it does mean that demand will outstrip new supply, as has happened in the North Sea and North America. This time it will be a universal shortfall.

Many experts believe that the recession has indeed passed its low point; in that case demand for oil will recover in the countries worst hit, but will also continue to increase in the emerging countries, particularly the Bric countries. Much of the discussion in Yekaterinburg will centre on the future of oil supplies and particularly on the possible diversion of Russian oil from Europe to China.

If the peak oil theory does prove correct, the present recovery in prices will only be the beginning. Those oil economists who accept the peak oil argument tend to expect the price to reach $150 a barrel, probably in 2010.

This might be accompanied by a rise in the gold price above $1,000 an ounce. Oil and gold prices tend to move together, and the emerging countries have larger dollar reserves than they would altogether like. Gold is the one real alternative to paper currencies as a reserve asset.

The old assumptions are being undermined. It is only too clear that most politicians are still living in the 20th-century world, the world in which they grew up. The peak oil market may already have been reached, but in any case it will be reached eventually. The only question is when. Power is passing from the North West to the SouthEast, from the US to China.

Europe and the euro are very different from what they were. The euro is an oil-poor currency; oil-rich emerging currencies have the edge. Unfortunately, the natural logic of liberal democracy does not fit the natural logic of the oil market. Countries tend to become more liberal when the people are rich and the state is poor.

In 1215 King John was weak and he had to make concessions to the barons. That was how England got Magna Carta. When the state becomes independently wealthy, as the oil states now are, they do not have to persuade their people, because they can rely on external income. Unfortunately, there is a global shift of wealth in favour of the oil countries, few of which are democracies. Even in Russia one can see that the post-communist administrations have been more or less authoritarian according to the price of oil. Boris Yeltsin’s liberalism was a response to a fall in the oil price; Vladimir Putin’s authoritarianism is equally a response to a high oil price, which has boosted his revenues. The Iranian dictatorship has increasing revenue from oil.

President Ahmadinejad does not have to worry too much about elections because he knows where his regime’s money will be coming from. It will come from oil and not from the people – and the price will continue to rise. As an economist, he is not as stupid as he makes out.

William Rees-Mogg