Daily Times

When you think that the four major oil producing countries — Libya, Iraq, Nigeria and Syria — are in tatters today and Iran is handicapped by sanctions, you will not hesitate even once to think that such a situation would have sent oil prices soaring. However, today, the opposite is happening and it is difficult not to consider if the fall in oil prices is synergistic with the show of power among global oil lords. Lower oil prices, reflected in falling petrol prices at the pump, have given a sigh of relief to Prime Minister (PM) Nawaz Sharif and his government but the game is much larger than the eye can behold. The fall in oil prices is a real problem, according to the Organisation of Petroleum Exporting Countries (OPEC). The lower prices suggest that it will be harder for firms to raise cash either through debt financing or by issuing new shares of stock.
The lower the price of oil, the smaller the revenue for the 12 OPEC member countries (Saudi Arabia, the United Arab Emirates, Kuwait, Qatar, Iran, Iraq, Nigeria, Libya, Angola, Algeria, Equador and Venezuela). Around 80 percent of the world’s crude oil reserves are located in these countries and together they produce more than a third of the world’s crude oil. One can think of a simple reason for the relatively low current oil price of under $ 80 (64 euros) per barrel (159 liters): the supply is greater than the demand. In defence of this argument, in many parts of the world, economic activity has been sluggish, which means less oil was needed. But, at the same time, the US, introducing so-called hydraulic fracturing or fracking technology, could be producing more oil than Russia and Saudi Arabia put together as early as next year.
It would be difficult to establish who benefits the most if the price of oil plummets to less than $ 60 per barrel from $ 100. However, for some analysts, the fall in the oil price has a lot to do with increased US oil production that would directly threaten Saudi Arabia’s standing as the primary oil producing country. Russia and Iran, in this equation, are not innocent spectators, and analysts identify a number of possible reasons for fluctuating US production: slowing economies in Europe and China, and unvarying production from OPEC.
Economic warfare is proving more dangerous than nukes and is being used as a potent US-Saudi alliance weapon against Russia and Iran. Global crude oil prices have been falling for weeks now, eventually resting around $ 68 after a long stretch at $ 105 to $ 110 a barrel. One wonders if there is a secret oil war going on between the US and Saudi alliance on one side and against Russia and Iran on the other.
One cannot resist speculating whether the US-Saudi oil alliance is intentional or a convenience of interests. If it is explicit, then clearly this alliance is trying to instill an economic collapse upon Moscow and Tehran, almost similar to what the US and Saudis did to the leaders of the Soviet Union a few decades ago. Squeeze them to the last drop and bankrupt them by bringing down the price of oil to levels below what is required for both Moscow and Tehran to finance their budgets with ease and control. Paul Richter of the Los Angeles Times agrees that both Russia and Iran are starting to feel the squeeze of lower prices, although he does not go as far as New York Times columnist Thomas L Friedman in speculating about a secret war. Economic pressure is keeping the rouble down but it is not expected to change Putin’s mind over his non-negotiable stance over Ukraine. As for Iran, an oil price of anything less than $ 100 a barrel will create crushing budget deficits and compromise Iran’s position regarding ongoing nuclear negotiations with the west.
Sanctions imposed on Moscow over Ukraine and the low oil prices together will send the Russian economy into recession next year, a dramatic change to an earlier forecast of 1.2 percent gross domestic product growth. This, for Russia, means closed capital markets for the majority of Russian companies and banks, as well as unfavourable conditions for investment, uncertainty and a lack of security. The lower oil price is also going to keep the rouble down and the main factors forecast are expectations of lower than earlier assumed oil prices. Russia’s state budget for 2015 requires oil at least at $ 100 a barrel. Besides, the ruble has already fallen over 14 percent since July against the US dollar. Having said that, the currencies of key BRICS members have also fallen: 7.8 percent for the Brazilian real, 1.6 percent for the Indian rupee and Russia holds at least $ 455 billion in foreign reserves.
Another US-Saudi alliance strategy that can simultaneously hurt Iran, Iraq, Venezuela, Ecuador and Russia draws the invitation to a geo-political game of economic power play. Washington is cutting a deal with Riyadh that would entail bombing Islamic State (IS) leader ‘Caliph’ Ibrahim as an overture to bombing Bashar al-Assad’s forces in Syria. In return, the Saudis squeeze oil prices to bring Russia and Iran to the brink of an economic collapse. Central to the Saudi’s strategy is to put pressure on Washington for not rewarding its “Assad must go” commitment, as well as inescapable urge to bomb Iran. Washington may claim its reliability but it is not good news for Saudi Arabia because Washington, at least for now, seems more determined in removing ‘Caliph’ Ibrahim than Bashar al-Assad, and might be close to signing a nuclear deal with Tehran as part of the P5+1.
It was expected that OPEC countries might agree to produce less oil to lessen the supply and push up oil prices. Officially, the group currently produces 30 million barrels of oil per day, each containing 159 litres of oil. This amount has not changed in three years. But not all member countries keep to the quotas. According to the International Energy Agency (IEA), every day the group produces 550,000 barrels more than the agreed amount. OPEC introduced a production ceiling in 1982, outlining how much oil the countries could produce. But, since then, member countries have been producing more oil than the quota allows 96 percent of the time. Low oil prices, pushed down further by OPEC’s meeting last week, have impacted world economies, energy stocks and several currencies. From the fate of the Russian rouble to the Venezuelan deficits to US mutual funds full of Exxon or Chevron stock, OPEC’s decision sent shock waves around the world for troubled commodities.
We cannot get used to cheap oil forever. There might be a surfeit supply now but when global growth increases, it will absorb the excess. Shortage of investment could thrust prices much higher in 2017 and 2018 and some national projects that were supposed to be developed may become high cost and may be mothballed, meaning when the demand rises, supply might not be able to keep up. That could cause prices to rise steeply. Consumers are getting whiplashed by wavering oil prices. Unlike in the past, potential for users to go to alternative energies is greater. The Nawaz Sharif government can reap a rich harvest if it can work around that prospect for substitution at higher oil prices is quite sizeable and long-term once in place.

The writer is a professor of Psychiatry and consultant Forensic Psychiatrist in the UK. He can be contacted at fawad_shifa@yahoo.com