Despite the increasing instability in the Middle East, oil prices keep dropping. In the 1970s, conflicts in this region provoked a threefold increase in oil process, but now it is not the case.
A boy walks by an oil pump at sunset Monday, Jan. 18, in the desert oil fields of Sakhir, Bahrain. Iran is aiming to increase its oil production by 500,000 barrels per day now that sanctions have been lifted under a landmark nuclear deal with world powers, a top official said. Photo: AP
In 2014 and 2015, oil prices maintained their reputation of being almost impossible to predict, presenting everyone with surprise after surprise.
After nearly a ten-year period of prices first growing, and then maintaining a high (as if frozen above the mark of $100 per barrel), it was considered a given that those levels were nearly at the necessary minimum for the global oil and gas industry’s normal functioning.
And then oil prices suddenly collapsed by 70 percent. But, strange as it seems, nothing extraordinary happened as a result. The scary tales about production collapse and oil hunger haven’t yet become a reality. Despite the dramatically lower prices, the world is still producing more oil than necessary. In 2015, overproduction amounted to 1.8 million barrels, more unused oil that was added to the world’s already solid stock.
The main question is: How long can that last? Are there factors that can swiftly push the price of oil back to the levels more acceptable for producers?
Of course, one could rely on the market price mechanism in action: The lower the price, the smaller the supply of oil. The majority of the world’s oil suppliers simply turn unprofitable with prices at current levels.
However, the producers – both traditional oil and gas corporations and new companies that are extracting shale oil – react only to the suspension of projects for developing new deposits. They continue to pump oil at full speed and are now focused on decreasing their losses rather than increasing profits.
Both are cutting expenses and have achieved much in this field. A long time has to pass until the current deposits will be exhausted, and the raw materials deficiency will be noticeable as a result of refusing to bring new projects to life. And only if no technological breakthroughs will happen could that drastically decrease the production cost. If that has already happened with fracking technologies, why can’t it happen once more?
For many years, the Organization of Petroleum Exporting Countries (OPEC) has been the back-up mechanism to push the prices up from low levels. However, its best days are seemingly over. If in the 1980s, OPEC was controlling over 80 percent of the world’s oil production, right now that percentage has been cut more than in half.
Most importantly, no one believes in the cartel’s capability of performing effective policy for regulating the resource supply on the global market by limiting production.
Despite serious financial difficulties, Saudi Arabia – the organization’s leader and the strongest oil player – now doesn’t want to limit production and provide price growth and whole industry's profitability at its own cost. Relying on its competitive advantages in production expenses, it is rather trying to push the less effective competitors out of the market.
It came to the point when another once-foolproof oil price increasing mechanism is failing – political tension in the Middle East. Even the Soviet Union, according to the architect of Russian liberalization, Yegor Gaidar, used the activity of Palestinian groups to influence oil prices.
Nowadays there’s a full-scale war going on in Syria, an escalation of armed conflict in Yemen, and many signs of increased tension between the leaders of Sunni and Shia camps – Saudi Arabia and Iran.
But even such events, extreme by any means, like the mass execution of Shia preachers in Saudi Arabia and the responsive seizure of the Embassy of Saudi Arabia in Tehran haven’t brought the usual results this time: The prices simply swung up a little, and then came back down to their low trajectory. Why is this happening?
As it seems, the international financers are just soundly weighing all the strong and weak sides of the current oil market. The slowing growth of the global economy, permanent technological progress, the consequences of removing sanctions from Iran, the stagnation of demand for black gold in developing countries and a drop in demand for oil in developed countries – these all seem much more important to the players than geopolitical instability.
Hereby, soberly evaluating the potential for development of tension between Saudi Arabia and Iran, they view it not as a positive factor for prices, but rather, as evidence that within the framework of a cartel, the two states won’t be able to agree on anything. If the players are right, then we’ll have to live with low oil prices for a while – perhaps exactly until the moment when everybody believes that it’s forever.
At least for Russia, with its oil addiction, such a trend will most likely be increasingly painful.
The opinion of the author may not necessarily reflect the position of Russia Direct or its staff.