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Sunday, 4. January 2015 - 11:56 Uhr

International Politics of Falling Oil Prices

There has been heavy fall of around 40% in the price of global oil price in 2014. Though the growth rate of Global GDP in 2014 has remained the 3.31% which is marginally higher than that of 3.28% of 2013, but global oil prices declined from US $ 103.48 in January, 2014 to US $56.39 in January, 2015. Though global oil prices are very volatile and depends on many factors such demand vs supply, upfront investment in oil production, geo-political situations across the world, prices of other alternative sources of energy etc, but it is very interesting to learn that even though the level of global economic activity remained almost the same in 2014 as compared to 2013, but global oil prices dropped to around 40% in one year by end of 2014.

 

The global oil price like any other commodities also follows simple economic principle of supply and demand. If supply is more than demand price falls and if supply is less than demand then oil price rises. The global oil prices have been controlled by OPEC (Organization of Petroleum Exporting Countries) since early seventies by controlling the production. OPEC cut the production of oil to maintain the price of oil whenever there is slump in economy and demand for oil is less or even sometimes to boost the price of oil for higher profitability or due to other geo-political reasons.

 

The reduction in global oil demand could be attributed to reduction in global economic activities, efficient use of energy in economic activities, use of alternative source of energy and its other substitute. However, if a time frame of one year in 2014 is taken, there is no reduction in global economic activities, though growth rate inChinahas tapered down slightly which is manufacturing based economy and energy and oil intensive. Therefore, even after structural changes in global economy due to reduction of growth in manufacturing sector due to decline in Chinese GDP, there would be very little reduction in oil demand. U S has started producing the shale oil which is another substitute for oil, but its production is not very significant compared to global oil produced. Energy efficiency drive is continuously pursued across globe in developed and developing economies since first oil crisis in 1973-74, and no breakthrough technology has been employed in last one year that could reduce the global oil demand drastically. On the other hand due to conflict in Iraq and Syria global oil production must have suffered at least a little bit, though it is claimed that oil production in conflict areas has not dwindled, and this should have off set to some extent the effect of decline of oil demand due to economic activities, energy efficiency and shale oil production. Therefore, there is no much logic behind these factors for such a heavy fall in oil price in last one year.    

 

In November, 2014 in OPEC meeting, some of the members proposed to cut down the oil production in order to prop up the sagging price of oil for which Saudi Arabia did not agree despite its huge financial reserves.  On account of this many OPEC countries whose economy mainly hinges on oil export are facing great financial difficulties especially Venezuela and Iran. The biggest sufferer among non-OPEC countries isRussia, who is currently engaged in armed conflict with Ukraine and requires huge money to fund its Ukraine operation. U S and entire West are against Russiaon this issue. Perhaps they want to break the financial backbone of Russia so that it could not fund the war against Ukraine. And the best way for this is to bring down the price of oil as nearly half of the revenue in Russia come from oil export. It appears that under the pressure of US and West, Saudi Arabia did not agree to reduce the production of oil in order to bring down the oil prices drastically. The logic given by Saudi Arabia for not reducing the production of oil is to bringing down the oil price so that production of shale oil could not be cost effective vis-à-vis oil. This logic appears to be ridiculous as Saudi Arabia is protectorate of US and Saudi Arabia can not enter into such type of economic war with US. Therefore, the lower prices of oil is due to pressure of U S and West on Saudi Arabia to financially ruin Russia that is currently in armed conflicts with Russia. The major beneficiary of falling oil prices are major oil importing countries such as China, Japan and India etc, but this situation will not prevail forever. Rather, once the Russia-Ukraine conflict is over prices of oil will again increase. Now only option left with Russia and other oil exporting countries is to enter a long term sale oil contract with major oil importing countries at mutually beneficial price. In this process Russia and China have already entered into deal. Now India, Brazil and other big economies should follow the same suit.   


Tags: Russia-Ukraine Conflict OPEC Falling Oil Prices Energy Efficiency 

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