Some observers claim the US and Saudi Arabia have made a secret deal to bring down oil prices. They are supposed to be doing this in particular to hurt Iran and Russia. But Friedbert Pflüger, Director of the European Centre for Energy and Resource Security (EUCERS), King’s College London, finds their arguments unconvincing. The oil market is too big to be manipulated by conspirators.
Since June 2014, the oil price has dropped by some 60 per cent: from $115 per barrel to $45-$50. Are powerbrokers in Washington and Riyadh behind these developments, aiming at bringing rivals to their knees?
Conspiracy theorists claim that the United States want to subdue the Russians in the Ukraine crisis as well as the Iranians in nuclear negotiations, while also toppling the disdained regime in Venezuela. All three countries are particularly vulnerable due to the double effect of sanctions and the drop in oil prices.
But what would the instrument be that Washington could use to artificially lower the oil price? In the United States, the market dictates production volumes and prices. Also, incidentally, one of the winners of recent price developments is China. Why would this make the Americans rejoice? And, most notably, the US suffer themselves during a downswing of oil prices. Shale extraction needs an oil price of $50-$70 to remain lucrative. Investments are already being stopped and expensive offshore projects are being re-evaluated. The French-American drilling company Schlumberger had to cut 9000, Haliburton 8000 jobs.
The supply will soon drop, mainly driven by the cooling-down of the shale boom in the US. The expectations of speculators will alter accordingly
If not the US, then maybe the Saudis are the conspirators? Why did Riyadh not throttle oil production in order to restrict supply and keep the prices balanced? The explanation of Saudi Oil Minister Al-Naimi that Riyadh was concerned with losing market share should it lower production seems reasonable. To be sure, Riyadh will not be distraught at seeing low oil prices hit American shale and offshore explorations. And yes, given its enormous currency reserves, it is much better positioned than its Iranian rival during this price crisis. Such thoughts have nothing to do with conspiracy, but a lot with competition.
In the mid- to long-term, the Saudis do not have an interest in the current situation either: they need an oil price of $106 in order to balance their budget, which is inflated by social benefits meant to appease the population in the context of the Arab Spring.
Despite all conspiracy theories: the reasons for the drop in oil prices lie with three factors, all of which follow market forces:
- Essential is the rising global oil supply, particularly due to American shale exploitation. The increase of US production alone over the last six years surpasses the production of each of the OPEC members with the exception of Saudi Arabia. At the same time, demand grew less than expected due to moderate world economic growth.
- Speculators also bet on a stronger growth of world economy and higher oil prices. In July 2014, there were four million long oil futures contracts. The drop in oil price led to a wave of sales and induced a domino effect.
- The announcement by the US Federal Reserve to halt quantitative easing and consider raising interest rates increased the value of the dollar, especially with the European Central Bank pursuing a converse policy. As oil is being traded worldwide in dollars, the resulting strengthening of the American currency contributed to a falling oil price.
The development of oil prices over the last decades resembles a rollercoaster ride. The interaction of demand and supply, but also real and expected political crises, interruptions of exploitation, the monetary policy of central banks and speculative deals have led time and again to large up- and downward movements.
Global oil demand will increase – despite the triumphal expansion of renewables
BP CEO Bob Dudly might be right with his recent prognosis that oil prices will remain low for the next three years. But as low as at present? There is a lot that speaks in favour of a rebound in the foreseeable future. In Davos, the head of ENI, Claudio Descalzi, just announced that the oil industry would slash 10-13 per cent of its investments.
The supply will soon drop, mainly driven by the cooling-down of the shale boom in the US. The expectations of speculators will alter accordingly. Global oil demand will increase – despite the triumphal expansion of renewables – due to population growth, urbanization and the emergence of a middle class with significant purchasing power on all continents. Oil remains an important energy source whose price is shaped – just as in the past – on a global market. There is little room for conspirators.
Prof. Dr. Friedbert Pflüger is Director of the European Centre for Energy and Resource Security (EUCERS), King’s College London.