Oil is first and foremost a commodity. As a commodity, oil is the largest traded commodity in ton miles globally.
Besides being commodity, oil also had been variously describe as “a weapon, a strategic asset, a course and a maker and spoiler of fortunes. Crude oil prices like prices of other commodities are controlled by the forces of demand and supply. Thus, like other commodity markets, the crude oil market is cyclical with prices falling and rising in response to changes in demand as well as OPEC and non OPEC supply.
Such crude oil price cycles often vary from a week to several years. Currently global oil prices have been falling steadily since June 2014. OPEC daily basket price for instance, declined by 54.4 percent from $110.30 per barrel Monday, 23 June 2014 to $50.30 per barrel Monday, 23 March 2015. This oil prices slump generally attributed to market oversupply arising from shale oil boom in the United States and OPEC’s uncharacteristic refusal to cut production is reversing the economic fortunes of oil exporting and importing nations.
The falling crude oil prices have turned the economic stress which high oil prices imposed on oil import dependent nations led by the United States into economic fortune while turning the fortune of export dependent nations led by Russia into economic doom.
Following the oil price crash, the economies of oil import dependent nations have been expanding accompanied by sharp growth in job placement. On the contrary, the economies of oil export dependent OPEC nations have been contracting, going through a period of local currency depreciation, high inflation and unemployment.
It is therefore not surprising that oil import dependent nations who are benefiting from the low oil prices would want the situation to continue, while OPEC nations whose economies are undergoing severe stress, look up to a very quick price recovery.
The question being asked is: how soon will global crude oil prices rebound? Any attempt at providing an answer to this question that focuses on the immediate roles of OPEC and the U.S in this oil price slump but ignores a critical review of their remote causes, will not suffice.
In carrying out its mandate, the IEA formulated an emergency response strategy which focused on four supply and demand side countermeasures. On the supply side the strategy involved member nations implementing a strategic Petroleum Reserve capable of holding equivalent of at least 90 days stocks. The other supply side measure required member nations to increase domestic production of oil.
The United States which alone accounts for about 20 percent of world oil consumption went a step further than other OECD member nations who would be satisfied with just a reduction in their oil dependence, to declare and pursue a policy of complete energy independence’ through which she sought to be self-sufficient in energy production and by so doing wean herself from imported oil. Though the American energy independence aspiration was described and derided as “ambitious”, the U.S nonetheless remained resolute and consistent in pursuing the policy to its logical conclusion. Thus as the green energy revolution raged on in many OECD nations the U.S aggressively pursued the development of her shale oil and gas resources. The development and deployment of expensive Hydrolic fracturing or frackning and horizontal drilling technologies, both products of advanced research, are currently making it possible for U.S companies to increase shale oil and gas production. Currently the U.S has not only achieved self-sufficiency in oil and gas production but is looking forward to exporting to other countries. The U.S has thus switched side from the world’s largest oil importer to zero oil importing, oil self sufficient and may be soon to oil exporting nation if a law in place banning oil export is lifted.
OPEC member nations must wake up to above reality, that this price slump is different from others previously and that their competitors the OECD are now in control. Like the OECD in 1973/74 OPEC should move quickly to fashion out measures to mitigate the impact of this deadly oil prices slump on their economies and currencies. The OECD may have called on their technological ingenuity to overcome their energy supply problem that has created the present problem for OPEC. OPEC on the other hand is not technologically endowed and therefore must look inwards at their economic management systems for solution. Member nations must seize this opportunity to aggressively implement the three D strategy of Diversification, Deregulation and Discipline. There is no better time than now to vigorously embrace economic diversification, oil and gas sector deregulation and fiscal discipline in OPEC member nations.
Dr Uchechukwu is the Deputy Director, Training, PTI