Oil
Oil
prices plumb new depths - geopolitics in play
Benchmark global oil prices have dropped to a
five-year low. Oil producing nations' economies are suffering. US and Saudi
geopolitical goals are in play: both countries are interested in weakening
Russia and Iran.
The price of Brent crude dropped to $59 per barrel on
Tuesday, and West Texas Intermediate (WTI) hit a low of $53.60 before
recovering to just under $56 in midday trading.
Oil prices have dropped nearly by half since June,
with declines accelerating recently after member nations of OPEC, the
Organization of Petroleum Exporting Countries - led by Saudi Arabia - decided
on November 27 they would not cut back production despite an oversupplied oil
market.
Downward pressure on the price of oil was exacerbated
by a report showing Chinese industrial production shrank for the first time in
seven months in December. China is the second-largest oil consumer in the
world, after the United States.
"The trend remains down," said Robin Bieber,
technical analyst at London-based oil broker PVM Oil Associates.
Russia's energy minister said on Tuesday that his
country will not cut production. Before the OPEC meeting in late November,
Russia, which is not an OPEC member, had hinted that it could cut production if
OPEC did the same - which would have resulted in a stabilization of oil prices
at a much higher level than today's.
The drop in oil prices will have some very dark
consequences
This year's wild plunge in oil prices will hit both
companies and countries hard - with positive consequences for oil importers,
but very negative consequences for oil exporters.
"Oil producing nations in both OPEC and outside
the cartel are not backing down on near-term production, so ... companies are
talking of cancelling or postponing investments in future production. Goldman
Sachs report ... nearly $1 trillion is now at risk as oil-producing companies
revise their project spending," said David Elmes, head of the Global
Energy Research Network at Warwick University.
Elmes said the social and political consequences were
of serious concern.
"Political and social tensions arise in producing
countries that depend on income from oil and gas. Vladimir Putin has warned of
harsh economic times in Russia. Venezuela and Nigeria are under pressure, and
people speculate just how long [oil-exports-dependent] countries can dig into
their savings, when they need $70 to $100 per barrel to balance the books,"
Elmes said.
A higher oil price is crucial for a long list of
countries that are primarily dependent on oil for export revenues and for
government revenues. Those countries include Russia and Iran, Saudi Arabia,
Kuwait, Iraq, the United Arab Emirates, Libya, Algeria, and Qatar, but also
many African nations including Nigeria, Angola, Gabon and Equatorial Guinea, as
well as Latin American countries - particularly Venezuela and Ecuador.
Mexico, Brazil, Canada, and several other countries
will also be significantly affected, although their economies and exports are
much more diversified.
Geopolitical aims are in part responsible for the oil
price plunge
Analysts speculate that US Secretary of State John
Kerry, who visited Saudi Arabia and other Gulf states in summer, may have
pressed the Gulf Arab oil states to overproduce oil in order to depress global
oil prices and thereby weaken Russia - and Iran.
Iran and its Shiite Muslim state religion is regarded
by Saudi Arabia, the main home of Sunni Muslim orthodoxy, as its main
geopolitical adversary. The two countries are among the countries engaged in a
proxy war in Syria and Iran, backing opposing sides in the regional
civil-sectarian war. Russia is also engaged - on the side of Syria's Assad
regime, and therefore on the same side as Iran. These factors give the Saudis
an incentive to make life difficult for both Iran and Russia.
Jason Furman, chairman of the US White House's Council
of Economic Advisors, on Tuesday expressed satisfaction at the impact of low
oil prices on Russia.
"They are between a rock and a hard place in
economic policy," Furman said. "The combination of our sanctions, the
uncertainty they've created for themselves with their international actions,
and the falling price of oil has put their economy on the brink of
crisis."
The Russian rouble has declined sharply in tandem with the oil
price in recent months - because the rouble is, in
effect, a petro-currency. The large majority of Russian government revenues
come directly or indirectly from oil and gas sales.
The US dollar is also oil-backed, though in the
opposite direction: As the oil price has plunged, the US dollar has risen.
That's because the US dollar is the main trading currency for oil.
Oil prices are of global strategic
importance. The US provides Saudi Arabia, Kuwait,
the United Arab Emirates and other Gulf Arab regimes its military protection,
in exchange for a commitment on their part to accept exclusively US dollars in
trade for oil.
As a result, $100 will buy more oil when the oil price
is low than when it is high. That makes the dollar more valuable, as measured
in terms of the world's most valuable commodity. A lower oil price translates
directly into a higher dollar exchange rate with other currencies. The global
oil price is not the only factor that affect the value of the dollar, but it's
an important one.
Saudi Arabia's oil is cheaper to produce than that of
almost any other nation, and it has vast reserves. This enables the country to
act as a "swing producer," making more or less oil in order to affect
global oil prices, while still making a profit.
Analysts also have
suggested that Saudi Arabia has an interest in driving US oil shale producers -
who need oil prices upward of about $80 a barrel to be profitable - out of
business. Accomplishing that would require an extended period of low oil
prices.
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