Oil Prices Fluctuating In the Middle East
Introduction
Oil being a commodity is subject to high levels of fluctuations as opposed to the stable investments like bonds and stocks. In particular, Organization of Petroleum Exporting Countries (OPEC) plays a significant role in influencing the prices of oil across the globe. As a result, OPEC controls around 40 percent of the global supply of oil by setting the production levels that caters for the world demand and it can determine the prices of gas and oil by reducing or raising the levels of production.
At a particular point in time, OPEC vowed to maintain the prices above $100 per barrel, but in the mid of the year 2014, the oil prices declined to below $50 per barrel. The market forces of supply and demand have a significant influence on the oil prices in the Middle East countries. Despite the impact of the forces of demand and supply on oil prices, oil futures play the central role in determining the prices of oil and gas in the Middle East. Consequently, oil futures contracts influence the fluctuations of prices in the oil markets.
Furthermore, oil fluctuation is subject to the natural disasters that often occur in various parts of the world. Additionally, political conflicts and instability in the Middle is a critical factor that shapes the nature of price fluctuations in the oil and gas markets; for instance, the wars and civil unrest in Iraq and Afghanistan in 2008 caused the oil prices to hit $136 per barrel owing to consumer fears.
In addition, the fluctuation in the prices of oil and gas have a considerable influence on both on economic growth and development of the countries in the Middle East like Russia, Saudi Arabia, Kuwait, Iraq, Qatar, United Arab Emirates and the non-oil producing countries in this region. The fluctuations of oil prices have a direct impact on the growth of revenues and the standards of living. The non-oil producing oil countries like Jordan, Yemen, and Palestine are also subject to such fluctuations of oil prices in the Middle East because their citizens work in the oil producing countries. The oil prices fluctuation in the Middle East is subject to political, economic, social, and technological factors.
What Is Behind The Drop In Oil Prices?
Oil is a commodity just like any other and as such its price tends to fluctuate more than the others and therefore, the laws of demand and supply of the commodity applies as well. In particular, the main cause of the oil price fluctuations over the recent years has been OPEC, which is also one of the main production blocks as it controls 40% of all the oil in the market. OPEC being the main producer of oil in the market for many decades determined the price for selling a barrel worldwide.
However, oil in the Middle East has suffered a myriad of fluctuations for many due to several factors including futures contract, natural disasters, political instability, oversupply, and the production costs that have been the subject of speculation all over the world for years. The oil prices for the last twenty months have experienced a free fall making it one of the worst bubble burst since the oil market crash of 2008. The main cause of this free fall is an oversupply of the commodity in the market, which has consequently made the prices adversely fall (Arezki & Blanchard 2015).
Noteworthy is that this phenomenon mainly resulted from low demand from the non-OPEC oil producing countries such as the USA and Russia, which have resorted to using other alternatives to oil such as shale oil and natural gas to supplement their need for crude oil. The result of this unprecedented shift is that the prices in the markets have plummeted and are at their lowest after years of stability.
In addition, the OPEC members have vowed to continue the oil production in large volumes to increase their market share grab consequently flooding the oil stores with excess inventory and exceeding the demand of the same in the end forcing the reduction in prices. The shift in prices of the commodity in the market has also altered the futures contract of oil making the phenomenon continue for at least the near future.Ideally, this is a grim indicator for the Middle East exporter countries and their economies that heavily depend on oil exports, as they will have to sell their commodity at low prices.
Does The Oil Price Drop Have Political Reasons?
The oil price drop featured as one of the most complex geopolitical games played between the Western and the Middle East. Many theories brought forward tried to explain the political question and its consequences. First here is the Iran question, which has despite the sanctions enforced against it by the United States and other western nations has continued its oil production in relatively low volumes, exporting some of it and using some of it domestically.
Today, with the potential of the sanctions relieved by Washington, there is a likelihood of an Iran comeback to the major oil-producing arena. The OPEC members led by its archrival Saudi Arabia is determined to stop it from resuming to being a key player in the oil market. Saudi Arabia intends to achieve this by continuing to drain much of its oil by increasing the oil output in the market and consequently making the oil prices stay down for the near future (Chen 2016, p. 45).
Secondly, there is a theory that Saudi Arabia, as the largest producer of oil in the world specifically engineered the 2014 oil crisis to enforce oil prices drop down to shut down the USA oil production by using fracking as a tool. This move was supposed to make the production of oil through fracking a not so significant player in the market and hence Saudi Arabia decided to flood the market with its oil and enable more non-producing countries to buy its oil. OPEC has not been able to act on Saudi Arabia because since it is the largest producer of oil in the group, the decisions of the rest to recede from producing oil do not in any way affect Saudi Arabia production policy that it can go all alone if it wants.
The third theory brought forward is that the Saudis decided to bring down oil prices to punish Russia, whose economy depends heavily on oil and gas exports, for throwing their support at the president of Syria Bashar al-Assad, whom the Saudis hate and loathe and ultimately wish to see his overthrow as their ultimate goal.
The last theory brought forward is that the Americans had a hand in the oil price dropping as their way to punish Russia to prevent them from invading the Ukraine. The sole purpose of this action is to deny them extra cash that can be useful in the invasion and was one of the means used to achieve this goal despite the sanctions against placed Russia. The objective was to keep the oil prices down and make Russia cede from attacking Ukraine or supporting other dictators in the Middle East.
Furthermore, the civil wars and unrest in the countries in the Middle East, both oil producing and non-oil producing countries played a significant role in the drop in oil prices. The civil wars in countries like Iraq, Afghanistan, Syria, Ukraine, and Palestine have political motives with the intent to reduce the supply of oil as a way to improve oil prices.
Who Benefits From The Oil Price Drop?
When the oil prices in the Middle East go down, there are many losers in the process including the countries and companies producing oil while there are many benefactors to the same phenomenon. One of the most notable winners when it comes to low prices of oil is the world economy itself since the resources normally deployed shifts from the countries producing oil to the countries that are consumers of the commodity and are many in number and registers low GDPs in their respective countries. The world economy grows greatly because the consumer countries are in most cases poor and are very likely to spend their earnings on the favorable oil deals on other projects, therefore, injecting investments into the various economies.
The United States have been a major consumer of oil in the world and have been one of the most significant beneficiaries of the oil prices dropping since they have reduced the production costs for their companies and also greatly aided in their economic recovery since the 2008 depression(Arezki & Blanchard 2015).
For Iran, the plunge in oil prices in the Middle East is a disaster, as it currently needs to sell the commodity at $136 a barrel to be able to finance its projects and improve the living standards of its citizens. With the American sanctions, still a huge burden on the country, a further decrease in oil prices means bad days for the country in future. However, the current president of Iran has been able to stabilize the economy and to register a growth despite inheriting massive debts from the previous government making them hopeful again.
For Russia, the plummeting of oil prices is not a huge threat to the economy since it has reserves to cushion against any negative backdrop resulting from oil price drop, but then the presidency will be a force to cut on the spending to ensure that the country is not cash-strapped in the long run. For Japan, the drop-in oil prices are a definite boom for the poor energy nation that spends billions of dollars buying oil from the Middle East. The plunging of the prices has therefore left the country with more resources at its disposal consequently boosting its economic growth.
How Are Oil Prices Affecting The Economy In The Middle East?
The economies in the Middle East are having trouble and stunted growth due to the oil prices dropping. In particular, the main reason for this is that the countries in this region highly depend on the price of oil for their economies to run (Griffin & Teece 2016). The revenues from low oil prices exports saw some reduced earnings for the respective governments forcing them to cut spending by several million dollars to avoid a cash crunch and keep the government running. The countries have seen welfare funds given to citizens slashed, and fuel and water prices increased in several countries as a last resort to countering the cash deficit experienced.
As a result, the reduced incomes of the people in the Middle East resulted in inflation reflected by high prices of commodities. In particular, this inflation subjects the people living in such economies to the harsh economic environment. Consequently, the increase in food prices will subject the consumers to low standards of living thereby a decrease in the general welfare of the people in the Middle East countries.
What Are the Consequences of the Oil Crash?
The harsh reality of oil crash in the Middle East has begun to appear more broadly with the consequences proving to be dire and already causing destabilization in the region. The economies of the Gulf Cooperation Countries(GCC) is expected to plunge further in the coming years with the United States experiencing a shale oil boom, the oil prices in the Middle East are supposed to remain low and economies to register little or no growth at all.
Therefore, the consequences of the oil crash in the Middle East are very severe and may often lead to instability in the region, and possibly wars (Griffin & Teece 2016). In this regard, the affected countries may have trouble in the delivery of basic services to citizens and running their governments making it a disaster in waiting if not dealt with it properly in a sober manner that guarantees good returns for all players in the sector.
If Oil Prices Do Not Rise, the Middle East Will Sink
The oil industry is the main economic pillar to the Middle East countries. In this regard, the continual decline in the oil prices will have huge negative implications for the economies of the countries in the Middle East. As a result, the decline in the prices of oil and gas will reduce the levels of revenues from the exportation of oil leading to the slow rate of economic growth in the oil exporting countries mainly in the Middle East.
Consequently, the fall in the value of exports will lead to the low levels of Gross National Products (GDPs) of the oil-producing countries in the Middle East, which will translate to the decline in the incomes and the standards of living of the citizens of the citizens of such countries. Being the major contributor to the economy of the countries in the Middle, the perpetual decline in the oil prices will result in the economic depression and inflation in such countries. Consequently, the prices of other commodities will also inflate leading to low standards of living.
In addition, Russia heavily relies on the energy exports, however; it faced a continual plunging of oil prices since the year 2014 from the price of around $100 to prices below $ 40 per barrel (Arezki & Blanchard 2015, p. 13). As a result, this caused the continual decline in the Russian rouble. The economic sanctions imposed on Russia for involvement in the Ukraine conflict led further to its drop in the value of its currency. In addition, the sinking oil prices have shown the increase in inflation in Russia leading to very high food prices thereby subjecting the citizens to low standards of living and economic struggles. Consequently, if oil prices do not increase the economy of Russia is likely to worsen.
On the other hand, Saudi Arabia reflected a huge and persistent decline in the income from oil exports by around 23 percent only in 2015. Consequently, this resulted in a budget deficit for the country as well as a sharp decline in the Saudi Arabia Stock Exchange. In addition, the economy of the United Arabs Emirates faced challenges due to the decline in oil prices thereby leading to reduced budgets and inflation of food prices.
As a result, it is evident that the countries in the Middle East are experiencing declines in the oil prices thereby subjecting the economies to continual economic downturns. Moreover, a further decline in the prices of oil will cause the countries in the Middle East to stumble. Moreover, the continual decline in the value of exports will cause the reduction in the job opportunities and reduced standards of living of the citizens of the countries in the Middle East.
Nevertheless, if the prices remain low in the Middle East, the tension and civil wars will occur in leading to further deterioration of the economy and the general decline of the welfare of the people in the Middle East. Both civil and sovereign wars will result in the loss of skilled workforce thereby resulting in the reduction in the productive workers.
What Is Behind The Current Rise Of The Oil Prices?
The current rise in prices is mainly is because of the negotiation among the oil producing countries to lower their production. The decision to reduce the amount of oil produced and exported led to the decrease in supply compared to the demand in the market.
Noteworthy is that the members of OPEC and other countries like Russia agreed to decrease the production of oil thereby creating shortages and increasing the prices of the commodity in the market. The production cut, therefore, resulted in the slight increase in oil prices (Anandan & Ramaswamy 2016. The OPEC countries dropped the exploration investments thereby reducing the oil supply in the market hence an increase in the oil prices. Additionally, the sound decision of Saudi Arabia to reduce its production of oil by five percent slightly boosted the oil prices in the Middle East.
In particular, Russia concentrated in cutting the supply of oil by diverting the energy needs to the use of gas to power its economy. The use of gas to meet the energy requirements helped to increase the prices of oil in the Middle East slightly.
In addition, the countries like Australia and the US intervened to influence the recent increase in the prices of oil. Australia being an oil exporter greatly influenced the oil prices by shifting the supply the gas as a way of reducing the demand for oil. Moreover, the US investment banks and hedge banks through futures played a significant role in reducing the supply of oil to raise the prices.
What Are The Expectations Of The Oil Prices In 2017?
The oil prices in the year 2017 are likely to drop because the OPEC agreed to cut its production for around six months from the beginning of 2017 as a way of reducing the supply against the current market demand. In particular, the agreement indicates that Saudi Arabia will reduce its supply by 5 percent per day to facilitate the increase in the oil prices.
Furthermore, Russia and other non-OPEC countries agreed to lessen the output of oil to curb the problem of price declines (Krauss 2016). As a result, if the oil producing countries maintain and enforce the international cooperation on cutting the supply the oil prices are likely to grow in the year 2017. Ideally, the rare spirit of international understanding of the oil supply may lead to a slight increase and stability of the oil prices in the Middle East.
However, failure of the oil producing nations to facilitate full enforcement of the agreement in 2017 problem of declining oil prices is likely to persist. In the past, such countries reached such agreements on cutting the supply of oil but later they failed to implement their agreement. In this regard, strict mechanisms are necessary to ensure the implementation and enforcement of the agreement to execute production caps.
Conclusion
In conclusion, the political, economic, social, and technological factors played a significant role in influencing the fluctuation of oil prices in the Middle East countries. In particular, it is evident political unrest in various countries in the Middle East significantly influenced the fluctuation of the prices of oil. The civil unrest in countries like Iraq, Syria, and Afghanistan considerably contributes to the negative impact of the oil industry in the Middle East leading to the decline of prices.
Additionally, the levels of oil and gas production in the oil producing countries in both the Middle East and the rest of the world played a crucial role in determining the extent of fluctuation in oil prices. Noteworthy is that the changes in the prices of oil in the Middle East reflected both the negative and positive effects on the economic growth and development of the countries in the Middle East; both the oil producing non-oil producing countries.
Furthermore, it is evident that geopolitical factors by the US and Russia are critical determinants of the oil prices all over the globe. In particular, the instigation of wars at the countries like Syria, Afghanistan, Iran, Ukraine, and Palestine caused the fluctuation of the oil prices in the Middle East and the rest of the globe.
Finally, the technological advancements have potential effects on the rate of wealth creation through drilling and processing of oil in the Middle East as well as the nature of job opportunities for both the residents of oil-producing countries and non-oil producing countries. The agreement reached by the oil producing countries to cut the supply of oil in 2017 will likely help in controlling the fluctuation mostly the persistent decline in oil prices.
Reference List
Anandan, M., and Ramaswamy, S., 2016. Global Oil Market: Macro Economic Scenario. Global Journal For Research Analysis, 4(9).
Arezki, R., and Blanchard, O., 2015. The 2014 oil price slump: Seven key questions. VOXEU, January, 13.
Chen, H., Liao, H., Tang, B.J. and Wei, Y.M., 2016. Impacts of OPEC's political risk on the international crude oil prices: An empirical analysis based on the SVAR models. Energy Economics, 57, pp.42-49.
Griffin, J.M., and Teece, D.J., 2016. OPEC behavior and world oil prices. Routledge.
Krauss, C. (2016). Oil Prices: What’s Behind the Volatility? Simple Economics. [online] Nytimes.com. Available at: http://www.nytimes.com/interactive/2016/business/energy-environment/oil-prices.html?_r=0 [Accessed 31 Dec. 2016].
