Three Reasons for Global Oil Price Slump

Saturday, December 20, 2014

Ali Omidi
Professor of International Relations at University of Isfahan, Iran

Three major reasons have been given for the ongoing slump in global oil prices:

1. Lack of balance between supply and demand: At present, high supply of oil by the OPEC and non-OPEC oil producers as well as diversity of energy sources, including fossil and nuclear energy, shale oil and gas, renewable energies and so forth, have undermined the position of the Organization of the Petroleum Exporting Countries. Therefore, this organization is no more capable of playing the decisive role that it once played in setting global energy prices. According to figures released by the US Energy Information Administration (EIA) as well as the International Energy Agency (IEA), resumption of oil production by Libya as well as continued production and export of Iraqi oil despite the current crisis in the country, have actually glutted the global oil market. As a result, the market will not be able to absorb and consume more than a daily total of 92.3 million barrels (according to EIA), or 93.3 million barrels oil (according to IEA).

2. Political differences among OPEC members and the role of Russia: At present, profound political differences among OPEC members have rendered this organization incapable of reducing its output ceiling. Saudi Arabia maintains that it has to keep its share in the global energy market by producing a daily minimum of 9.5 million barrels of crude oil in order to prevent rival countries such as Russia and Iran to get a higher share of the market. Saudi Arabia is also trying to undermine underway projects for investment in the production of shale oil in such remote regions as Alaska. There is no doubt that the policy followed by Saudi Arabia in this regard is more of a political nature and can be better understood in the light of this country’s political dependence on the United States. The rulers of Saudi Arabia are well aware that continuation of their rule hinges on the continued support from the West, especially the United States, and this is why they move in line with the West’s interests. They, therefore, believe that reduction of global oil prices is currently in line with the West’s interests and Riyadh is trying to keep the Western countries satisfied.

As for the role played by Russia, some analysts believe that the current oil price fall has been intentional and preplanned and is aimed at undermining the positions of Russia and Iran. I personally believe that the current oil price is the outcome of a set of structural and political factors and cannot be entirely due to a project implemented by the West. If oil price was totally under control of the Western countries, they would never allow it to rise above 115 dollars per barrel. Therefore, although the Western countries are quite happy with further weakening of the Russian President Vladimir Putin, it does not directly follow that they have been able to intentionally reduce oil prices to achieve this goal.

3. Psychological factors: When the price of any commodity is falling or rising out of proportion, psychological factors can further intensify its fall or rise. As a result, a price gap is created between the real value of that commodity and its market value. At the moment, this is the case about oil prices and the fall in oil price is out of proportion with the cost of shale oil production (which stands at about 60-80 dollars per barrel), or even renewable energies.

Since the oil price fall has taken place on the threshold of the cold season, climatic conditions cannot be expected to have a considerable impact on this process. That is, even an extreme cold in winter may only cause limited fluctuations amounting to a few dollars or cents per barrel in the oil price. The ongoing political developments in the Middle East are also more in favor of increasing oil exports, than a halt or reduction in crude exports. I am especially pointing to Iraq where following the appointment of the new Prime Minister Haider al-Abadi, the political turmoil has been relatively decreasing and the ISIS has been increasingly losing ground. The situation in Syria has not changed much. Libya is moving toward relative calm and Russia is not a country that would be willing to make a remarkable reduction in production and export of its crude oil in order to cause global oil prices rise. If it were willing to do so, it would have joined the OPEC in the first place. Therefore, it seems that everybody should say goodbye to an oil price of 100 dollars per barrel or higher and crude exporting countries should get used to sell their oil at 60-80 dollars per barrel.

Key Words: Global Oil Price Slump, Supply and Demand, International Energy Agency, US Energy Information Administration, Political Differences, OPEC Members, Russia, Saudi Arabia, Psychological Factors, Omidi

More By Ali Omidi:

*Possible Scenarios for Ukraine:

*Why Israel’s Impunity Goes Unpunished by International Authorities?:

*Is Iraq Bound for the Same Destiny as Syria?:

*Photo Credit: The Sleuth Journal

طراحی و توسعه آگاه‌سیستم