In less than
one year time crude oil prices have come down by more than 30 percent and it is
expected that the downward trend will continue for a while. The United States
having emerged as the largest producer of oil does not seem in a mode to
curtail its oil production. Smaller oil producing member countries of OPEC are
proposing reduction in daily production. All eyes are set at forthcoming OPEC
meeting. While non-oil producing countries are more than happy with the
reduction in price, it seems both the United States and Saudi Arabia want to
show the world that one of them controls oil prices, who is that?
I have
stated in my last blog that many wondered why Saudi Arabia has been supporting
the United States in keeping oil prices high. My perception is that since
United Stated was working on shale oil and also wanted to keep Iran from oil
market it lured Saudi Arabia to produce extra oil and mobilize more petro
dollars. During this period Arabs were brain washed and made to believe that
Iran was a bigger enemy as compared to Israel. This allowed the United States
to sell over US$36 billion arms to Saudi Arabia in one year. Since United
States refused to fight proxy Saudi war against Syria and Iran the King and his
allies were upset. Signing of an interim agreement between the superpowers and Iran
further annoyed the Arabs.
Historically,
Saudi Arabia has been extending its support to the United States in keeping oil
prices high, but this time it is reduction in production which the monarchs of
Arabian Peninsula don’t like at all. Instead of carving any mutually acceptable
strategy OPEC led by Saudi Arabia is trying to enhance production to maintain
its revenue levels. This policy has led to the decline in oil prices which was
certainly not liked by United States. The reason is obvious Shale oil
production in not economically viable below US$80/barrel. Saudi Arabia still believes
that shale oil production will not remain economically viable if prices decline
below US$70.
After attaining
the position of largest oil producing country after more than three decades the
United States seems to suffer from the illusion that it has also attained
control to fix price. To avoid any adverse price movement United States has not
officially removed ban on oil export and its stockpiles are at record high. Instead
of capping its own production the super power wants OPEC members to cut
production of oil. There is high probability that OPEC may agree to this
proposal to boost its petro dollar income. If this happens it will become too
evident that oil producers other than United States and particularly Arabs have
lost pricing control.
Oil is the
most geopolitically important commodity. It drives economies around the world
and is located in some usually very volatile places. Now U.S. crude production
exceeds 9 million barrels a day, the most since at least January 1983. Over the
last 10 years, the defining factor in the oil market was the growth of China
and Chinese oil demand but at present the defining factor is the growth of U.S.
oil production.
While making
attempts to achieve this position, the United States has also been able to
prove to the world that it remains the sole super power. Some experts say a new
age of abundant and cheap energy supplies is redrawing the world’s geopolitical
landscape, weakening and potentially threatening the legitimacy of some
governments while enhancing the power of others. Surging
U.S. oil production enabled United States and its allies to impose tough
sanctions on Iran without having to worry much about the loss of imports from
the Middle Eastern nation. Now Russia faces a catastrophic slump in prices for
its oil as its economy is battered by U.S. and European sanctions over its role
in Ukraine.
The first
prey of this policy is Russia, which is the second largest producer of energy
products outside OPEC. One can still recall that plunging oil prices in the
latter half of the 1980s helped pave the way for the breakup of the Soviet
Union by robbing it of revenue it needed to survive. Russia again looks likely
to suffer from the fallout in oil markets, along with Iran and Venezuela.
The second
prey is Saudi Arabia that is trying to prove it still enjoys pricing power. If it
succeeds in plunging the price down to $60 or $70 a barrel, there could be a
slowdown in the U.S. shale oil production but the world is not going to see it
stop. The factors that can possible reverse the trend are: 1) terrorist attacks
on a few oil fields in the volatile Middle East, 2) production cut by OPEC and
3) revival of global demand but neither is likely in the near term.
The third
prey is Iran, like Russia its economy has been weakened by economic sanctions
due to its nuclear program. The steps by the United States and its allies have
almost closed Iran’s oil and gas fields to investment over the last decade,
limiting the country’s access to technology to boost output. The nation needs
to achieve enhance its oil revenue to keep its budget in balance. The decline
in crude prices and a Nov 24 deadline for a nuclear accord are raising pressure
on Iranian president elected last year on the promise to end Iran’s isolation
and revive growth. If he succeeds in striking a deal and sanctions are lifted
and the country is allowed to increase its oil exports, price may come under
further pressure.
Oil producers,
other than United States have to agree on the bottom prices if their
governments want to survive. Social turmoil could paradoxically help prop up prices
in the short term if output is disrupted, but that may not be the real
solution.
The biggest
winner in oil war will be the United States with Increasing energy
independence, it will become less vulnerable to supply disruptions that will also
provides added leverage in international negotiations, whether with Iran over
its nuclear program or with Russia over its intentions in Ukraine.
China is also
likely to emerge as a big winner, as it imports almost 60 percent of its crude.
The world’s second-biggest economy probably will take advantage of the savings
to build up its strategic reserves rather than dedicating the funds to
increased spending on defense or any other program. The plunging oil prices will
also gives the nation leverage in its dealings with Russia. The two countries
signed a US$400 billion, 30-year gas-supply accord in May during a summit in
China and then deepened their energy ties earlier this month by signing a
preliminary agreement for a second Russia-China pipeline. China will always
have an upper hand in dealing with Russia as long as crude prices stay low as Russia
needs the energy income dearly.
