Girish VS

Managing Editor, BFSI Vision

The Geo-Politics of Global Oil Prices

I was reading the analysis offered by a variety of experts on the decline in Oil prices. Everyone seems to believe that the current slide in oil prices is due to slowing global growth and the possible reduction in demand. That seems to be the classical explanation for the low prices. Demand supply mismatch. And that precisely is the trap we are walking into – explain the price movement through economic principles. We are trained managers – we are conditioned to think in terms of demand and supply. Did we try and look at the figures?

The global oil demand as put out by the Oil International Energy Agency is showing a consistent upward trend, though the demand increases in the third and fourth quarter of every year. And the demand is set to rise. If the argument is that the US is not importing enough, figures put out by US Energy Information Administration shows that it is more or less aligned with the global trends, but there has been a significant reduction from the highs of 2006. But since Jan 2014, it was 287188 thousand barrels, while in Oct 2014 it was 276057 thousand barrels – a decline of 3.87%. The question is, if the global demand has been rising and the US imports have contracted by 3.87%, why is the price down from around USD 110 to around USD 47 - a 57.22 percent drop! Is the premise of demand supply false?

Another interesting question – during the previous price drops, the supply was reduced – to stabilize prices. And prices did firm up. After all if a few countries decide to close the tap, the prices will rebound.

Let us check the facts – the oil price in July 2014 was around USD 110. What happened in July 2014 – Russia attacked Ukraine and the West announced sanctions on Russia. The West, led by the US and Europe want to contain a resurgent Russia. Russia had made it to the league of fast growing nations and started flexing its muscle. This did not suit the unipolar view of the US. What better way to finish Russia than to hit its exports – oil exports. The results are beginning to be seen. The economy has stared contracting. The other major player – Saudi Arabia – is the handmaiden of the US. And this time around it is refusing to cut production.

So what if African and Latin American economies take a hit. So what if Venezuela or Angola is also taken down. Russia needs to be hit. Another target industry in Russia is its arms industry – the US is systematically destroying the Russian arms export.

And that is the reason why no one can predict when oil will rebound. It depends on the US power projection. When the US is convinced that Russia is down, prices will be allowed to rise. Till that time let us enjoy the fruits of lower oil prices. And forget the demand supply mumbo jumbo.