Illustration: Liu Rui/GT

Since late July 2014 the price of oil has dropped by nearly half, the second steepest crash in history. If oil prices stay low, there will be profound impacts on global economics and politics and on how the US engages with the world.

Overall, the collapse in world oil prices is excellent news for the US and other large oil consumers such as China. But making the transition into a world of cheaper oil will also require carefully designed policies to counteract the harmful effects.

The benefits of cheap oil are twofold. The economic effect of a big cut in oil prices is like a reduction in taxes. It leaves more money in the pockets of consumers who spend less on gasoline and other fuels and thus can spend more on other forms of consumption.

The US is the world's largest oil consumer and thus will probably be the world's largest economic beneficiary of cheap oil. While the US is producing a lot more oil these days, the country is still a huge net importer. And in the US, the households that spend the biggest fraction of their income on energy tend to be the poorest. For those families, keeping more money because oil is cheap nearly always leads to spending more on other things and larger benefits across the economy.

For gas drillers, including in the huge new shale gas fields, the news could be good as drilling rigs currently idle because they are no longer looking for oil will be cheaper to hire.

A second major benefit of cheap oil is that it forces oil exporters to reform. While many people assume that US foreign policy is organized around cozy relationships with oil exporters, in fact some of the most difficult foreign policy problems are created by the big revenues that flow to such nations such as Russia and Venezuela. Nuclear proliferation in Iran stem, in part, from finance that Iran earns by exporting oil. Unrest in western Africa and the Middle East is rooted, in part, from the money that rebels can make by stealing oil from pipelines. That same method for making money is funding new terrorist networks in Syria and Iraq.

Cheaper oil makes it harder for these groups to work against US interests. But most important, in my view, is that expensive oil allows countries to avoid economic reforms and allows autocrats to shelter their economies from the benefits of global economic competition.

But we must consider too that the US is in the midst of an energy revolution that includes the rise of alternative, cleaner fuels such as wind, solar, nuclear power and biofuels. Over the last decade, new policies along with expensive fossil energy helped boost these alternative sources. Already there are signs that investment in new energy sources is waning with the crash in oil prices. New policies will be needed, quickly, if the clean energy revolution is to be sustained.

The other dark side of cheap oil could be to reduce the diversity in supplies. For a global commodity like oil, security comes from diversity in supplies and a free, fungible market. With cheap oil some marginal and new suppliers may get shut out. For example, significant new oil resources have been found in East Africa and massive new production is coming from inexpensive US shale oil producers. Sustained, low prices could crush these new producers.

All the big oil consumers have a common interest in inexpensive, clean energy sources that are delivered through vibrant markets. Even as the US and China disagree on several topics, this is one of many areas where the two can work together.

The author is professor of international relations at the University of California, San Diego and chairman of the World Economic Forum's Global Agenda Council on Governance for Sustainability. [email protected]