It was today announced that the price of crude oil has fallen for the 7th straight session, amidst significant worries about oversupply across the globe. The price ($35 a barrel) is the lowest recorded since February 2009, which comes as a blow after it appeared that the oil market was beginning to stabilise after last year’s decline. However, such a development could have very real consequences for countries reliant on export, and could lead to tense relations within the market.
Oil has proved to be an extremely controversial topic of late; Russia’s accusation that Turkey is heavily involved in the purchasing of crude oil from ISIS only heightened already strained relations between the countries. This, alongside the targeting of Islamic State oil fields with coalition air strikes, means that oil has been an unnaturally popular topic in recent months, and it seems unwilling to change any time soon. Reports from inside Raqqa, capital of the so-called Islamic State, conveyed that fuel prices were beginning to rise within the caliphate. However, this position is not one which is mirrored elsewhere.
The main issue with oil is, quite simply, that supply is outweighing demand. In spite of this, Russia and Gulf producers have been clear about their refusal to cut their crude oil output even if prices drop below $20 per barrel. Russia currently produces around 10 million barrels of crude oil each day, and exports half of these. The main export destinations for Russian oil are Germany and China, which demonstrates a mutual reliance I’m sure Putin and Merkel would rather not address. Overall, oil makes up 60% of Russia’s exports, and accounts for 30% of the country’s GDP. It is therefore evident that such fluctuations in the price per barrel can/will have grave implications for the Russian economy. In the second half of 2014, the decline in oil prices led to the Russian ruble declining in value by 59% relative to the U.S. dollar; in an era where Russo-American relations are as frosty as they have been since the Cold War, a Russian economic slump is the last thing Putin needs. The leader’s attempts to address this issue last year were less than popular, both within Russia and beyond; the imposition of interest rates of up to 17% were Putin’s answer to the sharp increase in import prices which resulted from the Ruble’s decline. In other nations, punishing one’s citizens in such a manner may lead to a loss of confidence in the governing party, but Putin’s immortal stance allowed him to progress unscathed in his attempts to stabilise his country’s economy.
Russia is not the only one suffering as a result of the global decline in prices; Venezuela desperately pleaded with OPEC members in early December 2015 to reduce global output by 5%, amidst economic chaos in the country which has led to the collapse of currency and a huge electoral loss for the country’s government, the first loss of its majority in 16 years. In spite of this, OPEC failed to reach an agreement on output reduction. Such news could prove devastating for Venezuela, who boast larger oil reserves than Saudi Arabia and are almost wholly reliant on the export of oil. The price per barrel in Venezuela fell to $31.24 this week, the lowest price in 11 years, and considerably lower than the price in pre-crash 2008 ($126.46 per barrel). When 2 million barrels are being exported from the country each day, it is impossible to overlook the long-term economic consequences that such a tumble will result in. After OPEC’s failure to reach an agreement in relation to global output, it is likely that Venezuela will be forced to look for a solution internally- this is unlikely to be economically beneficial for the country short-term, but any alternative seems impossible at this stage.
So where does the USA and UK fit into all of this? Such a decline is not particularly unwelcome news in the US, where the fuel tax rate is lower than many other nations. A reduction in the pre-tax price of oil has a more immediate and significant impact than elsewhere. In fact, many economists believe this decline in the oil price is the equivalent of a tax cut in terms of promoting economic growth in the US. That being said, the US has also been a contributing factor to the current oil situation; the significant growth in US energy production, resulting from techniques such as fracking, is a further cause of the decline in oil prices. It seems unlikely that the US will rush to the aid of countries such as Russia and Venezuela in their bid to economically stabilise amidst a chaotic oil market. And with alternative methods of production booming in the US, Obama’s stance in this area is highly unlikely to change any time soon.
While, at this point, the decline in oil prices has had little impact on the UK economy as a whole, many warn that sustained low prices make it impossible for companies based in the North Sea to generate profits and that jobs may have to be cut accordingly. On a more positive note, the slump in oil prices has led to the plummeting of petrol prices; Goldman Sachs indicates prices could fall below £1 a litre for the first time in 6 years. Currently the price per litre of unleaded petrol is £1.07 on average; if predictions are correct, this could fall to less than £1 within the first few months of 2016. Had Scotland voted in favour of independence in 2014, such instability within the oil market would have been most unwelcome news for Nicola Sturgeon. The volatile market was a key argument of the “No” campaign in the lead up to the referendum, who predicted that a crash in oil prices could economically cripple Scotland, who are a key producer of oil within Europe. In spite of this, Scotland’s commitment to the production of clean energy has placed renewables at the heart of Scottish economic growth. With wind-farms, both on-shore and off-shore, regularly popping up throughout the country, and attitudes towards solar panels seemingly changing for the better, it is clear that Scotland’s long-term plan is to stray from a reliance on North Sea oil, as the country moves towards a more sustainable and less volatile means of energy production.
It is evident that the fluctuation of oil prices seems unlikely to stabilise any time soon, with continued rapid production and widespread disinterest in increasing imports thereof. Aside from Syria, where it was today reported that fuel prices have increased, the global oil market is in a state of volatility, which has a domino effect on the economies of those countries who rely heavily on its export. In spite of Venezuela’s pleas, countries such as Russia, Saudi Arabia and Iran simply refuse to reduce their oil output, a position which is unlikely to change, even if the current slump continues. Until a global solution is sought to the current problem, it is up to individual countries to do their best to tackle the problem at domestic level.