Oil price and the world of international politics in 2015

It seems that the oil prices were relatively prominent in influencing the world politics (Russia, Venezuela…), especially in the last couple of months. I know we do not have a crystal ball, but would you say it may continue and what kind of impact do you expect? Or maybe you think it won’t continue, and why? Read few comments.

Vlado Vivoda, Research Fellow, University of Queensland

My view is that this is the race to the bottom driven by Saudis, who want to regain their control of global oil markets. They also want to prevent the U.S. shale revolution from destroying their strategic objectives of income diversification and industrialization. Saudis want to preserve their market share, not only in crude oil, but also in petroleum products, petrochemicals, and NGLs. Low oil prices are a challenge for oil production from resources (or technologies) that require a relatively high oil price over a sustained period of time, mainly in the U.S. and Canada, but also countries where there is a lot of new offshore production. If the U.S. privately owned oil industry has the ability to respond to short-term price changes, it will cut production when prices are low and increase production when prices are high, but it will not go out of business altogether; it will simply produce more oil when prices are favorable. U.S. (and Canadian) producers will react quickly to market shifts. Perhaps oil production in Nigeria and Venezuela is less flexible and will not recover so quickly after a period of low oil prices? Of course Russia is facing economic difficulties, and low oil prices are a key factor. If Russia is having trouble, surely one or two OPEC countries (Angola and Algeria, perhaps) will also have difficulty retaining their market share.

Overall, I suspect that the downward trend will continue for another few months, probably at least until mid-2015. The Saudis will be increasingly pressured from other OPEC states to cut their production and they will eventually have to react, particularly if U.S. drop in production is greater than their additions. However, in the next few months, OPEC (Saudis) are likely to continue increasing production to keep market share and drilling activities will decline almost immediately in North America, thus leading to production decrease. National economies that have the ability to adapt to oil price fluctuations (U.S. in particular) will be more competitive in the long run. Others will lose their market share.

Kamran Dadkhah, Associate Professor, Department of Economics, Northeastern University

As you mentioned, no one has a crystal ball, witness the fact that no one expected that the price of petroleum that in June 2014 had reached $115 (Brent) and $108 (WTI) per barrel to drop to $59 (Brent) and $55 (WTI). That is, a 50% drop in the price. There is no question that part of this is due to added supply; shale oil extraction has added 3 million barrels a day to the output of the United States, while Saudi Arabia and other producers have refused to cut supply. Another factor is the sluggish demand in Europe and some Asian countries. But another element has been expectations and rumors including estimates of lower demand for oil by the International Energy Agency (IEA). In other words, the market is reacting to rumors rather than news.

All in all, it is highly likely that the price has already gone too low and we can expect it to rebound in 2015. It is possible that the drop continues for a period but at a slower pace and then stabilize and start a slow upward movement. The reasons, in my view, are the following. First, there is no reason that the reduction in demand continues. The United States economy has shown a vigorous growth in the second and third quarters of 2014, and there is little reason to believe that other economies would not come around. Second, given the low prices, investment in shale oil cannot continue and we should remember that investment in shale oil has a shorter life. Similarly, investment in traditional oil wells are not looking very profitable either. Saudi Arabia can easily handle its estimated $38 billion budget deficit of the next year. But it is not clear that other countries would be as patient. Further, although the turmoil in the Middle East and North Africa so far hasn’t affected oil output, it is not out of the realm of possibility that the conflicts result in damage to oil facilities.

Thus, my conclusion is that in the future we should expect a calming down and a gradual increase in the price of oil.

David Deese, Professor, Department of Political Science, Boston College

I do think it will likely continue for 2015 and place important constraints on their foreign policy options over the next two years. Of course it is still possible to evade such constraints by ruining the country’s growth prospects in favor of making foreign policy even harder or less compromising.

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