What is Behind the Steep Decline in the Crude Oil Prices: Glut or Geopolitics?

15 June, 2015

This paper was originally presented at a special one-day conference on the Iranian nuclear agreement, which was hosted by the ACRPS on April 11, 2015. Details of the meeting can be found here.  

Introduction    

The price of crude oil has declined 54% since September 2014, and there are no indications that it will stop at this level in the absence of a major production cut by Organization of Petroleum Exporting Countries (OPEC).

The reasons given for the steep oil price decline so far, has been a glut in the global oil market. Theories say this is caused by rising US shale oil production and over-production by some members of the OPEC beyond their production quotas, as well as a slowdown in economic growth in China and the European Union (EU), thus reducing the demand for oil. There may, however, be a second reason: the geopolitical impact of events in Syria, Iraq, Libya, and Yemen. While the impact of these events may have been eclipsed by rising US shale oil production and thus discounted by the global oil market, it must certainly be taken into account. As for the issue of glut, it was exacerbated by OPEC's very wrong decision not to cut production by at least 2 million barrels a day (mbd) to absorb the glut in the oil market. Had they cut their production, Russia and Mexico would have joined them and cut production by 500,000 barrels a day (b/d) and 300,000 b/d respectively, a total of 2.8 mbd capable of removing the glut and stabilizing the oil price. Russia and other non-OPEC producers would not cut their production without OPEC leading the way. It is not too late for OPEC to reverse their earlier decision and cut production.  


Still, a glut in the global oil market estimated at 1-2 mbd and a slightly slower economic growth in China and the EU should not have led to such a steep decline in oil prices. The global economy suffered harsher and direr crises in the banking and economic sectors simultaneously during the period of 2008-2011 and oil prices never declined as steeply or for such a long time. 

It has always been the case in the past that when oil prices fell steeply OPEC would decide immediately to cut production as a way to bolster oil prices. This time, at its 166th meeting on the 27th of November 2014, OPEC decided under strong pressure from Saudi Arabia not to cut production.  Circumstantial evidence suggests some political collusion between Saudi Arabia and the United States behind the steep decline in oil prices aimed against Iran and Russia. Saudi Arabia took advantage of the low oil prices to inflict damage on Iran’s economy and weaken its influence in the Middle East in its proxy war with Iran over its nuclear programme. At the same time, the United States took advantage of the low oil prices to weaken Russia’s economy and tighten the sanctions against Russia over the Ukraine.

 

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