The price of crude oil has always fluctuated in accordance with geopolitical events. Historically, gluts in supply, the introduction of alternative fuel sources, economic downturns and unexpectedly mild winters have reduced demand, thus pushing prices down. Social unrest in oil-exporting economies and investor speculation overvaluing the commodity have played their part in pushing prices up. An assortment of these factors caused price crashes or extended declines in 1986, 1998/1999, 2008/9 and 2014-2016.
The Organisation of the Petroleum Exporting Countries (OPEC) is an intergovernmental union of oil-exporting economies aligned with the goal to control the price of world oil. In reaction to the above factors, OPEC’s ability to control the price using production levels is only partly effective. OPEC's founding objective was to unite oil policies between member economies to “secure fair and stable prices” for the benefit of oil producing economies and their investors, as well as to maintain a stable supply to consumers. This cooperation intended to cease harmful fluctuations in the supply of this highly sought after commodity. However, the altruism of its members’ underlying desires remains questionable.
OPEC member economies who first joined the cartel during a 1960 Baghdadi conference include Iran, Iraq, Kuwait Saudi Arabia and Venezuela. Their 2013 oil rent levels - the difference between the value of crude oil production at world prices and total costs of production as a percentage of GDP, measuring a country’s economic dependence on oil exports – are 22.8 (Iran), 42.9 (Iraq), 57.5 (Kuwait), 43.6 (Saudi Arabia) and 23.6 (Venezuela).
Since 1960, OPEC has been joined by Algeria (21.6), Angola, (34.6), Ecuador (16.2), Gabon (42.4) (terminated membership in 1995), Indonesia (2.3), Libya (44.2), Nigeria (13.6), Qatar (23.4) and the United Arab Emirates (21.6).
The 8 producers not in OPEC with the highest oil rents as a percentage of GDP, and thus a high reliance on oil exports, are Azerbaijan (33.9), Brunei Darussalam (23.6), Chad (23.3), the Republic of Congo (56.8), Equatorial Guinea (53.3), Kazakhstan (23.8), Oman (34.5) and South Sudan (25.8). These countries are at risk because “the larger a country’s reliance on oil exports, the smaller its chances of weathering deleterious changes in the market”. This list, which contains many developing economies, all have a high reliance on earnings from crude oil. They will not fare well in a world economy with a prolonged period of cheap oil with little reserves to weather the low prices. They are particularly vulnerable right now because, since 2012, there has been a “stunning fall in price, from a peak of $115 per barrel in June 2014 to under $35 at the end of February 2016.”
Currently, Saudi Arabia as the producer with the largest market share has the loudest voice in OPEC. OPEC has been slow to reduce production levels as suggested. This makes a mockery of the first Summit of Heads of State and Government in 1975 convened to tackle the struggles of the poorer oil-producing nations.
There have been many “conflicting statements” about what will happen to OPEC oil production levels. In February 2016, oil ministers from Venezuela, Saudi Arabia, Russia and Qatar signed a deal in Doha “coordinating actions to freeze oil production in a bid to stabilise global oil prices and ensure continued profits from the industry.” It will be interesting to see if this deal holds with Russia, the USA, Iran and Saudi Arabia reported as not slowing their production “since the price of oil started to fall in 2014.” Some analysts are calling the production freeze a “meaningless gesture”. Another round of talks with OPEC and major non-OPEC producers is planned to take place in Doha on 17 April for “to widen the production freeze deal.”
Saudi Arabia has acted swiftly in the past to demand global cooperation regarding oil price strategy. In 1986, the Saudis increased their oil output dramatically to force non-OPEC oil producers to cooperate with OPEC in order to stabilise global output. Now, they seem reluctant to cut production so that they can keep prices low to drive out overinvestment in the current world market.
There are other possibilities as to why the Saudis are failing to reduce production levels swiftly. These include a possibility of pushing out smaller producers which would increase the market share in the future, stalling newly sanction-free Iran from retooling its oil industry and undermining America's fracking production which would reduce reliance on Saudi political and trade cooperation.
Saudi Arabia’s actions in Syria are also provoking questions about their connection to oil. But what has oil got to do with Saudi Arabia’s actions in Syria?
Syria controls access to gas pipelines spanning from the Middle East to Europe. Religiously opposed to the Shiite Assad Government in Sunni Muslim majority Syria, Saudi Arabia would not be happy about the new deal that Syria has proposed. With support from Russia, Syria has elected to give preference to Shiite majority economies in the Iran-Iraq-Syria-Europe gas pipeline, supporting this over the Sunni majority Qatar-Saudi-Jordan-Syria-Europe pipeline.
The Saudis may also want to fiscally hurt Russia, as the Assad Government and Shiite dominated pipeline’s chief ally. This is at the expense of other OPEC member states who want to stabilise oil prices. Moreover “countries that are heavily dependent on remittances from citizens working in oil economies are also at risk.”
For survival, oil-exporting economies are devaluing their currencies and undertaking fiscal stimuli in their economies. However for economies like Venezuela, already facing a serious currency and balance-of-payment crisis, this decrease in exporting abilities only amplifies the problem and exaggerates inflation.
The depreciated price of world oil is causing severe hardship across many economies. The failure of those who have the ability to rectify this problem to make any significant changes amounts to them using oil as a tool or weapon to force political gains – a weapon of economic ruin.
Cassandra Oaten is the International Trade and Economy Fellow for Young Australians in International Affairs.
Image credit: Laura Pontiggia (Flickr: Creative Commons)