Russia is a major player in oil and gas production worldwide. It is the second-largest producer of natural gas and the second largest (in 2016) producer of oil. Russia’s oil output touched an all-time high of 11.75 million barrels per day (bpd) in September 2016. In 2016, Saudi Arabia and Russia produced nearly 13% each of total world production whereas the USA contributed 12% of it. Russia left the US behind in terms of production this year and that is why it is considered as a key player in the world oil and gas market.

OPEC is a group that includes some of the world’s most oil-rich countries. According to current estimates, more than 80% of the world’s proven crude oil reserves are located in OPEC Member Countries. Since its inception, they have been controlling the oil prices by dropping or increasing oil production. OPEC produces about 40% of total world oil. OPEC has shown its dominance since its inception.

 In the 1990s and early 2000s, the United States was struggling under declining domestic oil production and the resulting need to import more oil. Although some of the regions in US were still producing but were not enough to meet the demand. In the late 2000s, new technology particularly hydraulic fracturing came into the scene which allowed companies to economically draw oil and gas from shale deposits that were once considered depleted because the cost of extraction would be impractical. The United States is once again one of the top producers of oil and gas and has the ability to dominate other players such as OPEC and Russia.

Past conflicts and their effects on oil prices:

Energy drives the world. The world has long been bifurcated between energy-surplus and energy-deficit states, with the former deriving enormous political and economic advantages from their privileged condition and the latter struggling mightily to escape their subordinate position. There have been various conflicts or disputes between countries over oil. Most of these disputes are really struggle for control over principal source of national income.

Arab oil embargo:

In October of 1973, Syria and Egypt, with the help of Arab nations launched a surprise attack on Israel (Yom Kippur). The US and European nations supported Israel which led OPEC to impose an oil embargo from October 1973 to March 1974. It leads to oil prices quadrupling from $3 to $12 per barrel. The entire world, including the U.S., took the pain until the peaceful end to the conflict was put in place.

Gulf War (1990):

On August 2, 1990, The Republic of Iraq invaded the State of Kuwait, leading to a 7-month occupation of Kuwait and an eventual U.S.-led military intervention. Iraq claimed that Kuwait was stealing its oil by slant drilling but at the time of the invasion, Iraq owed Kuwait $14 billion of outstanding debt that Kuwait had loaned it during the 1980–1988 Iran–Iraq War. In addition, Iraq felt Kuwait was overproducing oil, lowering prices, and hurting Iraqi oil profits in a time of financial stress. Just before the war oil prices were swinging around $21 but on the heels of the invasion, prices rose to a peak of $46 per barrel in mid-October. The price shocks had a substantial impact on US GDP, and the US economy went into a recession.

Fall of USSR (November 1991):

In the 1960s and 70s, the Soviet Union was growing very fast as compared to other nations. Oil prices, but, began to fall in the early 1980s and hence it affected the Soviet Union badly. This drop in oil price made it become much less profitable to drill new oil wells. Also, the Soviet Union was an oil exporter, and at a lower price, it earned less profit for the oil is exported. Given these headwinds, oil production stopped rising, and by 1988, began to fall. As oil production dropped in the 1988-1991 period, FSU (Former Soviet Union) oil exports plummeted. Given the combination of a low quantity of oil exported and low sales price of oil exports, the FSU found itself in financial difficulty–it could not afford to pay for food imports, which is badly needed, and the country collapsed. It was one of the major events in the history of Russia and its associate countries which affected their economy critically. Its effect was huge and long-lasting but in 2007, oil prices went to near $80 which meant that now Russia could earn profits by extracting the oil.

How fluctuating oil prices are affecting these countries?

Different nations have unalike effects from varying oil prices because every country does not have the same kind of economy. Higher prices per barrel of oil helped to justify the cost of a hydraulically fractured well in the USA. Obviously, higher oil prices drive job creation and investment as it becomes economically viable for oil companies to exploit higher-cost shale deposits. Also, higher oil costs hit the business and consumers with higher manufacturing and transportation jobs. The USA has a diversity of industries. Unlike Russia, it is not solely dependent on oil exports, it has many other areas where it can benefits from, such as the automation industry, computer machinery exports, and many others. However, low prices hurt the unconventional oil activity but benefit other sectors where fuel costs are concerned. So, oil prices do have an impact on the US industry but it is a mixed effect because of the diverse kinds of industries present here.

Conclusion:

As mentioned above, Russia, the USA, and OPEC have considered the superpowers when it comes to the oil and gas sector because they are the leaders in producing oil and have most of the world’s proven reserves right now. Oil is the most important commodity of the 21st century and that is why counties play political games to get control over prices of oil. The sole purpose of the formation of OPEC was to take control of the oil from ‘Seven Sisters’. The objective of OPEC was successful as they were able to take control over oil prices. Now, recently, in early December 2016, OPEC reached a deal to cut their oil production by 1.2 million barrels per day in order to raise global prices so that nations can recover their lost revenues. Non-OPEC Russia will join output cuts for the first time in 15 years to help the OPEC prop up oil prices. But still, other than all these, the US plays a major role. OPEC successfully throttles back on production and hikes prices that could induce some fracking companies in Texas or North Dakota to start drilling again. At that point, supply would rise and prices would fall. OPEC would be right back where it started — except it would have lost market share. In 2008, we saw that OPEC members can sway the prices in a single utterance when prices were plummeting due to the financial crisis. But OPEC does not have the same power it used to. Since US shale drillers have flooded the market with oil and swing oil prices. Saudi Arabia and its allies are now trying to reassert their grip. The US is a game-changer at this time and can act as a wild card.

Divyansh Sethi and Saurabh Ghule
Maharashtra Institute of Technology, Pune, India.
Spread the love

Leave a Reply

Your email address will not be published. Required fields are marked *