How current geopolitical factors are working to rebalance the price of oil
While the drop of the oil price in the past months has proven to be a challenge for many nations, others have used it to their advantage to aid economic improvement. The reason why the oil price has been at a low can partly be attributed to the United States falling from first to second place as the top oil importing country, mainly due to increased domestic output. Though perhaps this low is simply a sign of an old, traditional institution in the midst of change.
The oil industry has seen some groundbreaking actions taken in the past few months. For the first time ever, members of The Organization of the Petroleum Exporting Countries (OPEC) have lined themselves with non-OPEC states in agreement to cut oil production due to global glut, and it might just be an indication of the organization’s decartelization over the industry. The largest oil-producing state at the moment, Saudi Arabia, has taken the lead alongside rising star Deputy Prime Minister and Prince Muhammad bin Salman with a new outlook on the oil industry. These unprecedented changes can not only prove to get the oil price back on its feet, but they promise to change an industry that has become obsolete.
America’s reduced role as an importer of oil has left a vacuum, and it appears position will continue to be lessened as U.S. President Donald Trump’s ‘America First’ ideology will most likely continue to concentrate on domestic production and according to his campaign website, “unleash an energy revolution that will transform us into a net energy exporter…”
Since Barack Obama took office, the U.S. reliance on oil importation decreased yearly. Since 2011, the U.S. has been amongst the fastest declining crude oil importers, down by 61.3%. In 2010, the state imported less than 50% of the oil it consumed for the first time in around 13 years and by 2015, it was down to 24%, the lowest since 1970 according to the Energy Information Agency (EIA). EIA data also shows how at the same time, American oil (and natural gas) companies’ spending increased yearly by 11% on average from 2000-2012, and spending on development increased by $18 billion in 2013. This investment proved beneficial as it helped the U.S. produce 7.9 million barrels of crude oil per day in 2013, a level the country had not seen since 1988, also making it one of the top oil producing countries.
With Trump’s administration and its action so far geared towards overpowering energy projects Obama had vetoed, fracking will most likely make a comeback in oil drilling and the U.S. will continue to increase its production at a higher rate than it is now. What this means, though it’s bad news to the environment, is good news for the oil industry. As the oil price dropped due to America’s decreased importation, their role as a top player in the industry will only add another league in which to play, as they still import an important percentage of the world’s crude oil (16.5%), now they’re also a top oil producing country. This promises new futures contracts and hopefully something speculators can view with optimism.
While countries such as Russia and Iran grow positive as their energy deals increase in quantity, OPEC members such as Venezuela and Nigeria struggle with internal conflict and no significant income from oil producing. For this reason, Vienna’s new and unprecedented agreement between OPEC and non-OPEC members to cut production in response to oil oversupply has been incredibly significant. This is why, for the first time in the history of the oil industry, OPEC and non-OPEC states came together in efforts to increase the oil market price again, as now two of the three top oil producing countries are not OPEC members (Russia and the United States). The intergovernmental organization that has for decades controlled 60% of world crude oil production now faces a challenge in its leadership and time will tell whether its position as a cartel is in play. However, its decartelization may be what is best for the industry, as many OPEC members find themselves unable to produce to their maximum potential, mostly due to internal conflict, as seen with Libya’s militia fighting and oil smuggling, Venezuela’s massive debt and inflation, and Nigeria’s unrest, or Iran’s delicate position now that Trump may choose to re-introduce the sanctions that disabled Iran from exporting oil as it has in the past year.
As the unofficial leader of the OPEC and largest oil producing country in the world, Saudi Arabia has plans of its own. Deputy prince Mohammed bin Salman, has made an impact in world politics and certainly intends to shake the oil industry and Saudi Arabia’s role in it. The prince publicly announced Vision 2030 last June, a project in which Saudi Arabia’s economy will have diversified from the oil industry by 2030. As of today, 90% of Saudi Arabia’s income comes from oil and gas production. This is an ambitious project that intends to attract foreign investment and boost the role of the private sector as a long-term partner of the government through the financing of public services. In terms of oil, he aims to bring state owned oil company Aramco to the financial markets, in an effort to modernize the oil sector. Saudi Arabia is being pushed to catch up with the 21st century and as political observer Hassan Yasin said in a BBC article this month, “we’re like a turtle on wheels”. What this means for the future of the oil industry remains to be seen, but for a major oil producing and exporting country like Saudi Arabia to change the guidelines it has followed for so many decades will not only be a challenge for the country, but a major one for the industry.
The long-term rebalance of the oil market price is certain, but what we should really look for is a dramatic change in the industry, particularly the way oil is being traded and by which power players.
Camila Rivas is an IEA intern and starts studying International Relations at the London School of Economics in September 2017
As with all IEA publications, the views expressed are those of the authors and not those of the Institute (which has no corporate view), its managing trustees, Academic Advisory Council or senior staff