Many believe the July 14 Iran nuclear deal will cause oil gluttony in the world markets, with Iran being able to ramp up exports and improve its standing in the region due to removal of economic sanctions.
In a seemingly unrelated set of events, oil prices, which were stable from 2011-14, saw an unprecedentedly drastic drop in 2014 from $110 per barrel; reaching its nadir at $42 per barrel in January 2015, to the present rate of $56 per barrel.
How are these two happenings related? What is the convoluted common ground which escapes notice?
Here are some interesting strategies Middle Eastern countries employ as a part of the region’s politics of oil-
1. Global oil market
The daily oil demand in the international market is about 90 million barrels per day (mbpd). Out of this, members of Organisation of the Petroleum Exporting Countries (OPEC)- like Saudi Arabia, Venezuela, and Iraq- contribute about 40 per cent (about 36 mbpd). Non-OPEC members- like the Russian Federation, China, and the U.S.- contribute the remaining 64 per cent.
Asian economies like India, China, Japan, and Singapore fulfil their oil requirements through imports from the Middle Eastern OPEC nations. In contrast, the European Union depends largely on Russia for its oil requirements.
Oil-rich countries have the capacity to cripple the economies of the countries which depend on them. Europe, for example, is said to benefit from the Iran Nuclear Deal because the region hopes to reduce its oil-dependency on Russia by importing from the new seller in the market. Hence, Iran (a member of the OPEC) can use this requirement to its advantage and dictate prices along with other OPEC nations.
2. OPEC and price wars
Since last year July, oil prices starting dropping noticeably and rapidly. A number of reasons have been given for the same- the discovery of Shale by the U.S. meant that the Middle East loses an important importer, abounding terrorism in Iraq, Syria and Yemen meant that regional instability would lead to fear of supply cuts and automatically reduce demand; and a slump in many economies, especially that of China and European Union countries, would lead to a fall in demand domestically and thus cause a price drop.
But what happens when the most important country of the most important oil cartel decides to take unilateral steps to not reduce production to aid the ailing prices? Saudi’s preponderance in the OPEC was made visible when it decided in November 2014 to retain the same levels of production, hurting other OPEC countries like Venezuela and Algeria. There are two speculations mired in Middle Eastern politics as to why Saudi could have taken this self-defeatist-seeming decision.
First is related to Syria- Saudi does not approve of the Shia ruler Bashar al-Assad’s regime in the country and has been supporting the rebel cause there. Syria is being supported by Russia and Iran, two countries which depend greatly on hydrocarbon exports to fuel their economies. Saudi can bear reduced oil prices for a few years, if need be, since it has currency reserves to the tune of $659 billion. But Russia and Iran, both, are already reeling under the pressure of international sanctions which has hit their economies tremendously, and a drop in foreign currency inflow due to reduced oil prices has hurt them, probably, the worst.
3. Iran nuclear deal
The second reason is Iran. The imminent signing of the nuclear deal of the P5+1 countries with Iran leading to removal of all international sanctions, coupled with the country’s involvement in supporting Lebanon’s Hezbollah and Yemen’s Al Houthi rebels has frayed Saudi’s nerves. There is already sufficient enmity between the two countries due to sectarian disparities (Iran is a Shia-majority country and Saudi, Sunni). Saudi could have wanted to send a message across that it has the ability to cause economic disarray in Iran, and the latter should be wary before it tries to gain regional supremacy post the signing of a nuclear deal.
4. Domestic expediency
In the Gulf Cooperation Council (GCC) countries, 47 per cent of the electricity consumption is for residential purposes, far ahead of other countries like the U.S. (33 per cent) and the global average (25 per cent). Kuwait provides highly subsidized or sometimes even free electricity. Saudi is one of the largest per capita consumers of oil in the world.
Such expediency is not uncommon in the region and hence, the GCC countries are expected to increase their residential electricity consumption in the period 2007-2035 by 2.5 per cent per annum. But what after oil reserves extinguish? What is their contingency plan to diversify their economies and stop relying on oil? These questions remain unanswered.