The present near-sustained global oil price contraction has more to do with the international politics than the demand supply position of crude oil. The latest US decision to allow export of its crude oil after years despite the currently low international price appears to be part of the US politics to inflict an ultimate economic damage on Russia, until recently the world’s largest oil exporter. Russia has been the worst hit by the global oil price fall. The US-led trade embargo on Russia with its EU allies as a punitive economic action against Russia’s Ukraine policy has done little to corner Russia. The developments in West Asia involving the US and its most reliable strategic partner Saudi Arabia on one side and Russia, Iran and Syria on the other, seems to have forced the US to go for the ultimate economic action against Russia so that President Vladimir Putin is put in a very awkward political situation in his country where the people are already suffering from shortage of essential items, including food articles, and falling income.
So far, the US has garnered the support of Saudi Arabia, its allies and the world’s six oil majors – ExxonMobil, Total, Shell, BP, Chevron and ConocoPhillips – to take the price and profit hits to teach the Russian president a lesson on economic diplomacy. If the selling price of oil remains so low or fall further, it may lead to political instability in Russia as it would impact the government’s tax revenue, forex reserves and its ability to provide programs needed to pacify the people in terms of food prices, energy subsidies and jobs programs, etc. Low oil prices make the plight of oil exporters with declining oil production worse such as Russia, Mexico and Venezuela. However, the US economic diplomacy against Russia is unlikely to last long. The oil majors are not certainly prepared to wait indefinitely to improve their balance sheets and stockholders’ confidence. Three of the six oil majors are from Western Europe – Total from France, Shell of England and the Netherlands and British Petroleum of the UK. A part of their production comes from West Asia.
Today, the oil production market is not entirely controlled by either by OPEC or producers from Russia, China and Venezuela. The last three countries are among the top 10 global oil producers along with Saudi Arabia, the US, the UAE, Iran and Canada among others, Yet, OPEC, the US and the oil majors from the US and EU play a big role in production and pricing of crude oil. By cutting down production, they can jack up the oil prices any time as almost 65 per cent of global oil production comes from the top 10 oil producing countries and the global market is largely controlled by the six oil majors. They have done it in the past to the desired effect. And, there is no reason to believe that they won’t do that again to recover the current losses. The indirectly US-influenced 12-member OPEC, having Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, United Arab Emirates and Venezuela as members, still has a big say in the world oil supply and pricing. Iran and Venezuela have limited interest in the US policy.
Despite the global push for the non-conventional and non fossil fuel energy, the world oil demand is not expected to fall too soon with India and China emerging as the major long-term consumers. Oil is the world’s No.1 export commodity accounting for 7.8 per cent of all exports. Last year, crude oil exports earned US$1.451 trillion. The export figure represents a 29.2 per cent increase in value since 2010 but only a 7.9 per cent decline from 2013. According to reports, west Asian producers accounted for the highest value of crude oil exports during 2014 with shipments amounting to $623.9 billion or 43 per cent of global crude oil exports. Among them were: Saudi Arabia $268.2 billion (18.5 per cent), United Arab Emirates $98 billion (6.8 per cent), Iraq $84.4 billion (5.8 per cent), Kuwait $69.3 billion (4.8 per cent), Iran $41.3 billion (2.8 per cent) and Oman $34.8 billion (2.4 per cent). Kuwait, Iraq and Oman are among the fastest growing crude oil exporters. Iran is the only one of them known to be close to the Shiite regime of Syria and, as such, Russia.
How far may the oil price be allowed to drop depends upon the success of the US strategy and its impact on Russia in 2016. The current oil price is still well above the inflation adjusted price of crude oil at below $25 a barrel between 1980 and 2003. With the US entering the oil export market, the price may still be brought down temporarily to the level of around $30 a barrel. All will depend on the success of the US oil gamble to bring Russia on its knees within a period. India needs to play safe and follow a conservative economic policy towards non-oil imports and foreign commercial borrowing and not consider the current international oil price as a mid-term trend. India’s public sector oil companies should continue to invest in oil equity abroad as production partners. It may be time to protect and expand domestic production of all key items, improve infrastructure investments and push exports by linking all FDIs with a minimum export obligation. (IPA Service)
US POLITICS BEHIND THE GLOBAL OIL PRICE CRASH
LITTLE COMFORT FOR INDIA IN THE LONG RUN
Nantoo Banerjee - 2015-12-21 11:27
There is little to draw comfort for India, the world’s fourth largest oil importer, from the continuing oil price fall. The world crude oil price has remained most volatile, though not entirely unpredictable, and has been changing almost every day. It has been the tradition since September 1960, when the Organisation of the Petroelum Exporting Countries (OPEC), the world’s largest commodity cartel, was formed. The price fell to $33 a barrel at the beginning of the week starting on December 21, 2015. No doubt, it's a massive fall from its 2008 peak at $147.02 a barrel on July 11. For India and its economy, whose growth is substantially impacted by global oil price, the current oil price trend may appear to be a good news for the time being, but it must recognize the fact that the current global oil price is engineered and indirectly determined by the United States according to its perception of global politics. The government may find itself in an extremely sticky wicket if its 2016-17 budget, infrastructure spend and import policy are allowed to be influenced by the current oil price trend.