FEATURED | The Geopolitics of Falling Oil Prices by Arjun Sreekumar

By Arjun Sreekumar Oil is an element, which exerts a strong influence on geopolitical decisions made in the high tables of politi...

By Arjun Sreekumar

Oil is an element, which exerts a strong influence on geopolitical decisions made in the high tables of politicians, dictators and generals. Everybody understands the importance of oil as a resource and why nations wage wars to secure it but what doesn't meet the eye is how oil and its price manipulation can be used to block new market entrants and take down political adversaries.

The economics of oil follows the simple Marxian segregation of ‘haves’ and ‘have-nots’. If the energy ‘have-nots’ are unable to diversify their energy sources, they get into dependency traps set by the ‘haves’. Similarly if the energy ‘haves’ are unable to develop any other source of revenue save by the sale of energy, its economy becomes subservient to the demands of others and makes it vulnerable to market disruptions caused by changes in the energy-mix.

The Organization of the Petroleum Exporting Countries (OPEC) belligerently established its position in the global oil market after breaking the monopolies of the first world corporate. They dictated terms to the world by keeping a firm grip on oil supplies and raked in profits. However, with oil prices tumbling, one could ponder on whether the current market situation bodes well for the stalwart economies of OPEC and other oil producing nations of the Middle East. After all, most of these economies do not have other cash-cows to milk. This leads to the question – is this tumble a result of market dynamics or is it artificially induced?

Oil output is still high despite slide in prices

The Arab Spring was an inflexion-point in the geopolitics of the Middle East causing regimes to fall like a stack of dominoes. The institutional failure in states and the anarchy that followed caused production to plummet which in theory should have resulted into inflation. The regime of two major OPEC oil producers (Iraq and Libya) destabilized and their oil output plummeted. Also, until recently, Iran’s oil supplies were blockaded from entering the global market through sanctions. Thus, if we apply conventional economics to such a situation where supply is reduced with no change in demand, then oil prices should rise. But in reality, the supplies have not dwindled and the oil prices continue to fall.

What is apparent is that, prices can be induced to fall if the supply expands disproportionately to demand. OPEC countries like Saudi Arabia, Qatar and UAE ramping up oil production to compensate (or overcompensate) for the supply deficit seems to be a logical explanation to rationalize the price fall – but there are other latent reasons also which cannot be discounted. ISIS has taken over oil producing area like Najmah and Qayyarah. Oil produced from these “untraceable sources” enter the black-market, thereby adding to the supply component and also pulling away demand from legitimate sources. The net result is an increase in supply and a reduction in demand – textbook conditions for fall in prices.

Predatory pricing taking out adversaries

United States (US) and Canada have curtailed oil dependencies on the Middle East with the discovery of shale oil/ oil sands, as a result oil kingdoms of the Middle East have lost market-share. The textbook marketing counterattack to recover market-share is to use predatory pricing. Keeping the prices low bodes well for the richer OPEC nations as it not only gains new markets but also can straddle competitive price point vis-à-vis oil from shale sources – blocking new competitors like US and Canada. Perhaps this is why Saudi Arabia has been vehemently opposing cutting OPEC oil supplies to drive prices up despite protests from poorer OPEC countries. There’s also a geopolitical angle to this if one probes deeper. For instance, plummeting oil prices without doubt has exacerbated Iran’s economic woes - a nation the Saudis want to keep at bay for reasons ranging from different interpretations of Islam to fledgling nuclear ambitions.  There was never a lack of motive to keep prices low.

Pricing oil to keep Russian aggression in check

Meanwhile, Russia has woken up from inaction with assertiveness reminiscent of the post-World War II era. Annexing Crimea certainly gave the US and EU cold sores. As the supplier of over 35 percent the European Union’s energy-mix (mostly crude oil and natural gas), Russia is not a country that the EU can afford to antagonize. Meeting territorial aggression with deterrent action is not an option at this point.  EU countries affected by Russian aggression directly or indirectly are trying to cut dependencies with their large neighbor. Falling oil prices present an opportunity for them to shift away from Russian natural gas to oil sourced from the Middle East. This action has a dual effect – European nations can meet Russian assertiveness confidently and the loss of revenue will turn into a pain point for the Russian economy. It bodes well for the EU/ NATO if oil prices are kept low and the conflict in the Middle East is helping them. 

Energy, a key Influence

The energy geopolitik plays out like chess game - many moves are planned well ahead. The undercurrents that drive the energy market are myriad and latent. Energy – its abundance, dearth and other permutations are leveraged by many to take on adversaries. In today’s scenario of tumbling oil prices the ones that seem to be the losers are in actuality, winners in the long run. Falling prices stimulate oil demand from the OPEC and blocks out US, Canada and other shale oil producers from the energy market. It also causes Russia to hemorrhage slowly whilst making the energy prospects of NATO and EU stronger. The loss of revenue now is but a small price OPEC is paying, and the return in terms of new European markets and a subdued Russia will be reward enough for this temporary setback.

About The Author:

Arjun Sreekumar is an Industry Analyst - Aerospace and Defense in a leading Research Firm. He started his career in the Indian Military Academy and later worked with a fortune 500 oil company in a marketing role.Thomson Reuters Researcher Id: M-2366-2015

Image Attribute: Pump-jack pumping an oil well near Lubbock, Texas, Source: Wikimedia Commons [Link]

AIDN: 001-10-2015-0341