Crude oil price a victim of politics
Oil production has never been so political. If you’ve taken time out from Black Friday shopping to follow the markets this week, you’ll know that the commodity’s price continues to decline and cause controversy. The normal economic principle of supply and demand seems to have been flung out of the window of the Middle East: when the Organisation of Petroleum Exporting Countries (OPEC) met on Thursday, they didn’t agree to save prices and cut back production.
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Street, six-week the S&P 500 long winning index streak. That’s because low oil prices directly benefit airlines and transport based industries, and indirectly mean that consumers have greater spending power thanks to reduced petrol costs. But we know that oil producers don’t care about our savings at the pump! So, what are the real underlying motives that have driven OPEC’s decision?
The falling prices are a result of the expansion of the US fracking boom which has created a surplus of shale oil. In just months, a barrel of oil has dropped in price from over $100 to about $70. Yet, paradoxically, fracking is expensive and the success of the industry may be its own downfall. The process requires a certain oil price to be financially viable and America’s competitors are now exposing that.
OPEC’s decision to maintain supply certainly wasn’t unanimous. Many members including Venezuela and Nigeria campaigned to keep prices high. These countries need levels over $100 per barrel to fund national budgets. Yet Saudi Arabia, the group’s most powerful member and the world’s largest oil producer, has its own interests at heart. It is willing to take the short-term hit of low prices in order to grow its market share long-term.
Saudi Arabia’s refusal to play nice doesn’t only serve to pressure the US into curbing shale production. The Sunni Muslim country is no friend of Shi’ite Iran, and it sees Russia, like the US, as a major oil competitor. It knows that the economies of Iran and Russia are already weak from sanctions imposed by the West, and are heavily dependent on oil. Arguably, they are at risk of total collapse if the low oil price is sustained over a significant time.
The question for analysts is how maintainable these low prices are. It is likely that the smaller fracking businesses in the US will struggle, but the larger ones will simply resume operations as prices rise, and may well adapt and become more cost-efficient. In Russia and Iran, oil production may slow down but it is unlikely to grind to a halt despite the economic repercussions: low oil revenues still equate to more income than no revenues.
Saudi Arabia certainly intends for other countries to give way first, but there’s only so much pain that you can inflict upon yourself. Realistically, if its tactics fail and prices remain at the present lows, or sink lower, it would at some stage agree to cut production along with other OPEC members before it hurts itself too much. All good things must come to an end – low oil prices included.