Low oil prices may rebound on Western countries as Russia looks east

By Paul Cochrane Source:Global Times Published: 2015-1-21 20:23:01

Numerous factors cause oil prices to fluctuate, such as speculation, financial plays, and supply and demand, but this latest swing has political-economic meddling written all over it. The big issue, though, is not so much what is driving oil prices down but about what low oil prices may bring down themselves. The ongoing drop in oil prices by around 60 percent since November and the Organization of the Petroleum Exporting Countries' (OPEC) refusal to cut production to bolster prices is no coincidence. The OPEC's decision, pushed by Saudi Arabia, the world's largest single producer, effectively undermines the re-emergence of the US as a top oil producer through shale and tight oil, which needs high prices to cover higher extraction costs. Yet the US enabled the plunge and pushed it further at the end of 2014 by allowing light crude oil exports.

It is on the geopolitical front that the low oil price deals a short-term blow to the West and Saudi Arabia's oil-producing enemies: Russia, Iran and Venezuela. Russia was a clear target following US and EU financial sanctions over the Ukraine crisis, effectively kicking the Russians when they were already down. For Saudi Arabia as well as the West, it was also meant to send a message to Moscow and Tehran in retaliation for propping up Syrian President Bashar Assad. The big question is whether these geopolitical gambles will not rebound.

A concern in the short term is that indebted energy companies may cause havoc in the Western financial markets if they default due to a lack of profits. This could have a ripple effect on the global financial system, which has been on the ropes since the last crisis in 2008, compounded by the current eurozone debt crisis, issues around quantitative easing, and a globally sluggish economy. The problem this time around is that Western governments and international financial institutions do not have the money to bail out the financial sector once again.

Neither can OPEC play the low oil price card for too long, as it would otherwise impact negatively on their own economies. For the Gulf Cooperation Council (GCC) countries, the drop in oil prices is projected by the Institute of International Finance to reduce energy export receipts from $743 billion in 2012 to around $410 billion in 2015.

With most GCC states having budget surpluses they can weather the drop for a while, but will need a return to higher prices to fund infrastructure projects and the financial handouts that keep local populaces amiable. For example, in 2011 during the height of the "Arab Spring," Riyadh doled out $100 billion to its citizens.

Russia may be a loser in the geopolitical game that is underway. Moscow has the ability to alter the oil price by lowering production but is curbed by financial constraints, as well as not wanting to let OPEC, especially Riyadh, off the hook. But in the long run, the situation will reinforce Russia's already strengthening ties with major oil importers in East Asia, particularly China, and push the diversion of Russian energy exports away from Europe.

In the nearer term, the reduction in exploration and production in North America due to low oil prices will translate into a diminished supply a year down the road and a return to higher prices, bringing everything back around, to the benefit of oil-dependent economies until tight oil production gets back on track.

The author is a freelance journalist based in Beirut, Lebanon. opinion@globaltimes.com.cn

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