Home » Business & Economy » Before celebrating oil @ $30 don't forget to check the ramifications

Before celebrating oil @ $30 don't forget to check the ramifications

Pinaki Bhattacharya | Updated on: 14 February 2017, 5:26 IST

Oil not well

  • Crude oil is now selling at $30 a barrel; that\'s a psychological low
  • Some fear prices can tumble to $10 a barrel

More in the story

  • What caused the slide in prices?
  • How this affects oil producing countries?

The price of oil breaching the $30-psychological floor marker has opened up an avalanche of speculation. Various speculative figures by market watchers reflect the mood - a southward journey is on the cards.

Some say if non-Saudi, non-Gulf Cooperation Council (GCC) members are not able to summon an emergency session of the The Organization of the Petroleum Exporting Countries (OPEC) and not able to cut production quotas, the price could even touch a historic low of $10 a barrel.

Also read - Oil prices rise after Saudi Arabia cuts diplomatic ties with Iran over Tehran embassy attacks

"Each oil producing country is on its own now. They will each have to individually ensure their self-interest," former petroleum minister Mani Shankar Aiyar told Catch.

The OPEC is really the cartel of oil producers. It monitors the market for the commodity, fixes production quota and thus fix a price at which the member-states are expected to sell.

The current downturn in oil prices were caused by:

* huge finds of shale oil and gas in the United States, virtually making it self-sufficient

* the slowing down of the Chinese economy (6.5% GDP growth), leading to a fall in oil demand

* the Saudi intransigence in not cutting production

* the prospect of Iran being able to sell its oil, after being barred for long

What does it mean for whom

Saudi recalcitrance has taken on the shape of causing pain to countries such as Russia, Iran and few others that are more peripheral to the main producers.

Interestingly, the Saudi royalty, with more than 1,000 princelings until now had been buying the support of their citizens by using oil revenue to subsidise public goods and services. The budget deficits of the kingdom have reached phenomenal proportions.

Saudi Arabia's oil revenue has been shrinking despite higher volumes

The country's oil revenue has been shrinking despite higher volumes. This has caused a lot of treasury support being withdrawn, making social unrest a genuine possibility.

Iran is in the same plane: it needs to make up for lost revenue and create jobs for a large youth population, who are unemployed and have voted Hassan Rouhani to power. Now is the time for his government to deliver.

Russia is in a tight corner. The two major exports of the country are arms and oil. While oil price has plummeted, arms sales have not increased as significantly to compensate for the lost revenue.

The context

A pump jack operates in an oil field near Corpus Christi, Texas, on 7 January 2016. Photo: Eddie Sea

A pump jack operates in an oil field near Corpus Christi, Texas, on 7 January 2016. Photo: Eddie Seal/Bloomberg/Getty Images

Oil was the lifeblood of the industrial age. But even in this increasingly post-industrial age, oil's importance has not declined enough in the geo-strategic, geopolitical and, more so, geo-economic terms. And most of the oil remains in a region that is the most conflicted part of the globe.

David Yergin, possibly the most important writer on oil in the present age, recorded in his famous tome, The Prize: "At the beginning of the 1990s..almost 80 years after (Winston) Churchill made the commitment to petroleum (British naval fleet switched to oil as its main propellant under his watch as First Lord of Admiralty), after two World Wars and a Cold War, and in what was supposed to be the beginning of a new, more peaceful era - oil once again became the focus of global conflict." Yergin pointed at the Kuwait war and its aftermath.

China, the other big importer, faces slower growth, thus less demand for oil

In these early years of the current millennium too, oil has become a major component in the battle for supremacy in West Asia. "These are confused times. Everything that happens with oil has such (geo-strategic, geo-political and geo-economic) ramifications," Aiyar said.

The current battle between Iran and Saudi Arabia is not just a sectarian conflict between the Shi'ites and the Sunnis, but also a battle for supremacy in the Islamic world, which coincidentally also pumps out the greatest amount of oil.

This is a particularly poignant moment in the history of West Asia, because the main 800-pound gorilla that was omnipresent in the region ever since the first oil well was struck, the United States is now on a withdrawal mode.

Geopolitical recalibration

Even though the Saudis and the GCC nations are the largest importer of Western arms and ammunition, they always needed the United States as the guarantor of security. The US Navy's Fifth Fleet was almost permanently stationed in the Persian Gulf. But that level of engagement is undergoing a major change for three reasons.

First, with the US having the technological breakthrough of finding shale oil and gas in vast quantities has seriously reduced its dependence on Arab oil.

Also read - Power of diplomacy: lifting Iran's sanctions marks a crucial moment. Here's why

Second, the Americans wish to remove the casus belli of even the early Islamists, who had turned against the United States because they viewed it to be an imperial power of kafirs (non-believers) housed on their 'holy land.'

And finally, easing of relations with Iran have provided the United States a larger swathe of security options besides Israel and Saudi Arabia in the region. Surely, Tehran will soon be drafted into interceding in many of the problems the country faces with Islamists.

Shebonti Roy Dadhwal, an expert on petroleum issues with the Institute of Defence Studies and Analyses (IDSA), says: "the removal of US trade and economic sanctions against Iran signifies another tectonic shift in oil politics. Iran can lead the Latin American producers of oil like Venezuela and African producers like Nigeria to pressurise Saudi Arabia and its other Arab allies to cut production. They have already demanded an emergency session of the OPEC."

Iran, short on cash because of the long-standing sanctions against the country, would like to celebrate Sunday's removal of sanctions by trying to maximise financial resources. But Riyadh will seek to engage it in another existentialist struggle.

For, as Dadhwal points out, Saudi Arabia is trying to get the greatest market share for oil in these trying times.

These are the times when the United States' seemingly unfulfillable appetite for oil and gas seems satiated by its own production. China, the other big importer, faces slower growth, thus less demand for oil.

More in Catch - Shiite-Sunni divide: Understanding the Iran-Saudi Arabia conflict

Saudi Arabia executes 47 people including Shiite cleric Nimr-al-Nimr, stirs anger in religion

First published: 19 January 2016, 6:37 IST