CC BY
9
O. Khlopov,
Ph. D. (Political sciences), Associate Professor of World Politics and International Relations, Russian State Humanitarian University REASONS FOR AND CONSEQUENCES OF FALLING PRICES OF OIL: U.S.A. AND SAUDI ARABIA INTERESTS
A drop in oil prices has a negative impact on the financial and economic situation in Russia, leading not only to a reduction in the budget revenue and the stabilization fund. Oil prices are a tool of geopolitics and a means of changing the spheres of influence among consumers and producers of oil against the background of unfavorable relations with Russia, expressed in sanctions and political pressure initiated by West European countries and the United States.
A drop in oil prices from $114 to 50 and below has given rise to assumptions and theories about the causes of this trend. The head of the Foreign Intelligence Service (SVR) of Russia, former Prime Minister Mikhail Fradkov said in an interview with Bloomberg that the West and its allies seek to weaken Russia through sanctions and attacks on the exchange rate and the price of oil. "Reducing the Russian currency rate by more than 30% was caused by the actions of the United States.1"
The Russian President Vladimir Putin gave the following explanation of the decrease in oil prices in an interview with the Chinese media on the eve of the APEC summit in China. He said that the objective reason for the decline in world oil prices was a slowdown in the economy, and hence the energy consumption in a number of countries. In addition, both strategic and commercial oil reserves are at a historic high in developed countries. Innovations in technology influence oil production, which leads to the emergence of new volumes of hydrocarbons on regional markets.
There is also a political component in the price of oil. Moreover, politics prevails in energy pricing during economic crises.
Lack of a direct link between the oil markets and financial markets is another negative factor. This often enhances the volatility of oil prices. Unfortunately, such situation creates conditions for speculative actions and, as a consequence, for manipulation of prices2.
Factors affecting oil prices are many and varied. According to one version, the world price has been constrained by OPEC countries, especially Saudi Arabia, in order to stop the production of slate oil in the United States and keep it out of the world oil market.
The main idea is that the cost of the "slate" projects will be unprofitable for U.S. companies if the oil price is low. The Gulf States, with half the votes in the OPEC, formed a united front for the preservation of production quotas at the present level - 30 million barrels a day (40 per cent of world production) at the ministerial session in Vienna on November 27, 2014.
Representatives of Saudi Arabia say they do not intend to call for a reduction of production in the near future, even if prices continue to decline to a level of $60 per barrel. According to Abdally El Badri, the OPEC general secretary, price reduction is a result of excess supply from countries outside the OPEC, and they must first reduce the production of excess oil against the background of the market, provoking a fall in prices below $50 for barrel3.
Another explanation is that the U.S. and Saudi Arabia adopted a plan to significantly reduce world oil prices to inflict financial damage to Russia and its partners - Iran and Venezuela. Barack Obama's visit to Saudi Arabia, which took place immediately after the G-7 Summit at The Hague in spring 2014, where harsh statements against Russia were made, caused a multitude of comments on the subject. Similar to those in the 1980s, when Saudi Arabia decided to lift restrictions on oil
production, which led to a sharp drop in prices and a serious blow to the financial sustainability of the U.S.S.R.
This is consistent with the current state of international relations, when the United States and its NATO allies have made efforts to cause political, financial and economic isolation of Russia in answer to the strengthening of its role in world affairs and the growth of its economy. As noted by the new Military Doctrine of the Russian Federation, approved by President Vladimir Putin in December 2014, the development of the world at the present stage is characterized by increased global competition, tension in the various fields of interstate and interregional relations, rivalry of values and development models, and instability of economic processes and political developments at the global and regional levels4.
It is obvious that one of the main trends of the modern world is the redistribution of the former geopolitical realities and the striving of the leading countries to maintain control over resources at the global and regional levels.
On January 20, 2015, the U.S. President Barack Obama addressed his State of the Union message to Congress, which mentioned, among other things, a considerable damage inflicted on the Russian economy by the U.S. He said that today America continues to be strong and united, like its allies, while Russia is isolated, and "its economy is in tatters.5"
The US aim is clear - to prevent the rebirth of a strong Russia, block all attempts to its strengthening by various means and methods and thus cause a significant damage to it. Russia has become a part of the global world, and such damage can now be done in the financial and economic sphere without resorting to military force.
Taking into account the financial, economic and political opportunities of the United States, one can state that it has effective
instruments to influence the prices of oil on world markets. There has been a tendency to reduce the role of the United States as an importer of oil and its gradual transformation into an exporter of oil and oil products in recent years. It is supposed that we can see the transformation of the bipolar world oil market into a unipolar one, where the key role will be played only by the United States, instead of the current two centers of "oil power" (the United States and Saudi Arabia with OPEC). And there is every reason to believe this assertion.
Then there is a boom in production of shale oil in the United States. The strategic goal of the United States is to become independent of imported oil supplies, in the first place - from the Middle East.
The Energy Information Administration of the United States (EIA) predicts the level of crude oil production in the U.S.: in 2015 -9.3 million barrels a day, and in 2019 - 9.9 million barrels a day.6 The United States will overtake Russia and Saudi Arabia in terms of oil production and will approach self-sufficiency as a result of the shale boom. Experts of the British Petroleum predict that the U.S. can become an almost self-sufficient country in energy by 2035.7
Oil has become not only a means of exchange, but also a financial asset ("paper" oil) as a result of globalization. Initially, the exchange price of oil was determined by the balance of supply and demand, and did not depend too much on factors of financial nature. Transition from short-term to long-term contracts, and then - to futures transactions occurred by the beginning of 2000s. The repeal of the Glass-Steagall Act in 1999 in the United States, limiting the speculative activities of U.S. banks, led to additional growth of market liquidity.
These new derivatives of "oil" financial assets began to exceed the volume of trading on the "physical" oil market. Today most of the world's oil is sold by long-term contracts, which determine its price. Thus, it is enough for the United States to limit or increase the flow of
dollars to oil exchange purposefully, providing an inflow or outflow of capital, with a view to having an influence on the price of oil.
An analysis of reasons for a drop of oil prices revealed that it occurs also due to the formation of excess amount of oil on the world market, and not just because of the unilateral actions of Saudi Arabia against the USSR in the 1980s.
Western countries have taken systematic measures to ensure energy security after the oil embargo of 1973 introduced by OPEC. New technologies have been developed to save oil, new oil fields have been discovered, including in the North Sea, and new oil extraction projects launched. The OPEC's share in the world oil production declined from 51 percent in 1973 to 41 percent in 1981, and to 28 percent in 1985. It became clear that the situation cannot be restrained: oil of Dubai varieties fell from $36 per barrel in 1980 to $28 in 1984, despite all attempts of OPEC to keep high prices by restricting oil production.
In 1985, Saudi Arabia adopted a strategy aimed at preserving its high earnings from oil export. In December 1985 Saudi Arabia raised oil output to the level of its OPEC quota. Oil prices have fallen as a result of oversupply. However, even price reductions provided its margin of profitability, given the low production cost level in Saudi Arabia.
Economic growth rates decreased to zero or very low values, the budget deficit will average about seven percent of the GDP over the next 10 years, the national debt grew to more than 100 percent of GDP in 1990 due to a decrease in oil production. So it is unlikely that Saudi Arabia will repeat the negative experience, that is, lose its market share and also a significant share of profits as a result of falling prices.
Today's price drop is beneficial to Saudi Arabia and works against the United States, since the "shale revolution" in the U.S.A. will
be under threat of failure, and shale technology will be unprofitable if oil prices fall to a very low level.8
The International Energy Agency (IEA) has suggested that the observed decline in oil prices today is a sign of the onset of a new stage in the evolution of the global oil sector, which is a threat to social stability of some oil-producing countries.9
In October 2014 the IMF gave an assessment of the level of oil prices, necessary to individual countries for a balanced budget. According to the fund, Kuwait, Qatar and the United Arab Emirates will be satisfied with $70 per barrel, while Iran will be satisfied with $136, Venezuela and Nigeria $120, while Russia - $101. US dollars.10
The fall of world oil prices and the weakening of the ruble against the background of the financial and economic sanctions have emphasized the losses and vulnerability of Russia. The Ministry of Finance of the Russian Federation has estimated the loss of budget for 2015 due to low oil prices and low economic growth rates and the import problems at about one trillion rubles. If this situation continues, the country's budget will not be able to get about 500 billion rubles of income in 2015.11
Today Russia still has a margin of safety, as the country has a low public debt and the budget deficit is still under control - there is the stabilization fund reserves and gold and currency reserves, as opposed to the era of perestroika.
New political challenges specify the financial and economic opportunities and ways out of the pre-crisis situation. The weakening of the ruble allows us to obtain a greater income from oil sales, when it is converted into dollars. On the other hand, the private sector suffers damage, a further depreciation of the ruble leads to an increase in payment for import, and rising prices can create political problems.
Reduced real incomes and continued capital outflow also create problems. It is obvious that the time has come of major structural economic reforms and changes in the economic development model of Russia. It is necessary not only to evolve and implement an anti-crisis program. The financial and economic sovereignty of Russia is under threat because of its dependence on the dollar, foreign investments and incomes from the excessive export of raw materials. Besides, Russia has been, and still is, under external pressure.
The United States and Saudi Arabia have tools to influence the oil prices and can use them in their interests, which may either coincide or be in conflict, depending on the situation in the oil and gas industry and the geopolitical situation in the Middle East and in the world. A low price of oil up to a certain minimum is not a threat or a challenge to their economies. Obviously, the United States, Western countries, China and India stand to benefit from lower oil prices, as the largest consumers of hydrocarbon resources. The countries whose budgets are largely dependent on oil exports end up in failure. With this in mind, the United States and Saudi Arabia can create financial and social tension to their competitors deliberately. The lowering of oil prices even for a short time is a tool for inflicting damage to the global socioeconomic progress.
Notes
Asian Spy chief Blames U.S., EU for Ruble, Oil Price Collapse. - Bloomberg.
04.12.2014. URL: http://www.bloomberg.com/news/2014-12-04/russian-spy-chief-blames-u-s-eu-for-ruble-oil-price-collapse.html (assessed 20.01.2015).
V. Putin Interview with leading Chinese media. - Russian President. Official site. 06.11. 2014. Access: http: //kremlin.ru/transcripts/46972 (tested 01.18.2015). The head of OPEC has promised rising oil prices in the future. - Interfax.
22.01.2015. Access: http: //www.interfax.ru/business/419386 (tested 23.01.2015)
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3
Military Doctrine of the Russian Federation. approved by the President of the
Russian Federation on December 26 2014. Access: http://news.kremlin.ru/
media/events/files/41d527556bec8deb3530.pdf (tested 22.01.2015).
Remarks by the President in State of the Union Address. January 20, 2015. URL:
http://www.whitehouse.gov/the-press-office/2015/01/20/remarks-president-state-
union-address-january-20-2015 (assessed 23.01.2015).
US Energy Information Administration. International Energy Outlook. 2014. 09.09.2014. URL.: http://www.eia.gov/forecasts/ieo/pdf/0484(2014).pdf (assessed
25.10.2014).
BP Energy Outlook 2035. US Fact Sheet. - British Petroleum. January. URL.: http://www.bp.com/content/dam/bp/pdfEnergy-economics/Energy-Outlook/Coun-try_insights_US_2035.pdf (assessed 12.10.2014).
Crooks G., York Ed. Saudi Arabia Tests US Ties with Oil Price. - Financial Times. 06.10.2014. URL.: http://www.ft. com/cms/s/2/e2fd08c6-554c-11e4-b750-00144 feab 7de.html#axzz3H4H zzjAa (assessed 30.11.2014).
Oil Market Report: 14 November 2014. - International Energy Agency. 14.11.2014. URL.: https://www.iea.org/oilmarketreport/omrpublic/currentreport/ (assessed
10.01.2015).
Saudi Arabia Sees Oil Prices Stabilizing Around $60 a Barrel. - Wall Street Journal. 03.12.2014. URL: http://online.wsj.com/articles/$saudi-arabia-believes-oil-prices-could-stabilize-around-60-a-barrel-1417623664 (assessed 17.01.2015). Siluanov: low oil prices last very long. 11.26.2014. Access: http://news.ru. com/finance/26nov2014/siluanovplan.html (tested 18.01.2015).
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References
1. Konoplyannik A. 2013. Odnopolyarnyi neftyanoy mir - realnaya perspektiva [The unipolar world oil - a real prospect.] - Ekonomicheskaya Politika. 05.09. Access: http://ecpol.ru/component/content/article.html?id=1016 (tested 21.10.2014).
2. Simonov K. 2014. Pochemu SShA ne zainteresovany v obvale tseny na neft. [Why the US is not interested in the collapse of oil prices.] - ITAR-TASS. 03.04. Access: http://tass.ru/opinions/2057 (tested 11.12.2014).
"Vlast", M., 2015, N 3, pp. 156-160.
