How the West Can Capitalize On the Big Drop in Oil Prices.(International Edition; PETRO-DIPLOMACY)

Byline: Michael Freedman

For some time, one of the chief concerns of policymakers in the United States and the European Union was how to deal with oil-rich states like Iran, Venezuela and Russia. As the price of oil reached an all-time high of $147 in July, all three became increasingly aggressive, a trend that reached its height, perhaps, in August, when Russian troops moved into Georgia. Now, with oil at $65, these nations are feeling the squeeze. Russia's budget balances at $70-a-barrel oil. After that, paying the bills means dipping into a $143 billion reserve fund already under pressure from the financial crisis. Iran's budget balances at $95. In Venezuela, oil accounts for more than 50 percent of government revenue, and with crime and inflation off the charts, the country is spiraling downward. In the short term, that could mean unrest and political upheaval--and more bellicose language, as these nations' leaders cast about for a villain to blame for their woes. Longer term, declines in oil revenue have historically been associated with increased public demand for accountability and greater international cooperation, says UCLA political scientist Michael Ross.

How should the West deal with these deflating oil powers? First, avoid internal meddling. Declining budgets will make prickly oil regimes even more explosively sensitive to outside pressure. But vulnerability may ...