Falling Oil Prices and Geopolitics

The dawn of 2015 finds Americans continuing to marvel and benefit at the pump from low oil prices. Yet many ask: Why all of a sudden are prices falling so drastically? Do market forces have anything to do with it? Or is this a political strategy?
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The dawn of 2015 finds Americans continuing to marvel and benefit at the pump from low oil prices. Yet many ask: Why all of a sudden are prices falling so drastically? Do market forces have anything to do with it? Or is this a political strategy that targets certain countries as some of us remember from the oil embargoes of the 1970s? The answer might surprise you.

Let's first provide a synopsis of where oil prices were last year to what they are currently. According to Brent crude oil, the price of oil has dropped from $115 per barrel to just over $50. This sudden drop baffled energy analysts around the globe. While cheap oil provides U.S. consumers some financial relief, it's spurring distress in other countries like Iran, Russia, and Venezuela. These countries' economies depend heavily on oil revenues. The flood of cheap oil in the world market hinders their capacity to financially support various programs including education, social welfare and transportation.

While the narrative is that oil prices during much of the last decade were over $120 a barrel, this rise was fueled by China's appetite for energy to fuel its economic machine. As the demand for oil surged, the market could not supply enough; thus, prices spiked. This shift prompted companies in developed countries including the United States and Canada to start drilling in their own backyard. However, as prices continue to fall and motorists ponder summer vacations in more distant areas, many oil companies in the United States and Canada are shutting down their operations.

Against this backdrop, one wonders why the Organization of the Petroleum Exporting Countries (OPEC), the world's largest oil cartel, has decided not to cut production so prices could stabilize on the world market. The answer lies in geopolitics. At last November's OPEC conclave in Vienna, Saudi Arabia -- still the world's leading oil-exporting country -- opted to keep oil production at its current level, thus dropping oil prices even further in the global market. The Saudis clearly hope to weaken, even kill the astounding U.S. shale oil boom.

But geopolitics is another reason. Saudis are focused on Iran's nuclear program and Russia's annexation of Crimea. Because oil prices continue to drop, Iran's revenues from oil are suffering tremendously, damaging its economy and forcing its leaders to, possibly, compromise on controversial nuclear aspirations. Needless to say, Saudi Arabia's refusal to cut production highlights ongoing tensions between Sunnis (primarily in Saudi Arabia) and Shiite (dominant in Iran).

On the Russian front, U.S. sanctions on Russia following its much-disputed annexation of Crimea targets the oil sector. Russia generates half of its federal budget revenues from two commodities -- oil and natural gas. Thus, it only makes sense to the United States and some key OPEC members including Saudi Arabia to let oil prices plummet.

The lesson in all this: The drop in oil prices is driven by politics as much as economics. While consumers in Japan and the United States welcome this shift, the situation is bleak for countries such as Russia, Iran and Venezuela. Russia's economy is nearing collapse; Iran is unable to find other revenue sources; and Venezuela is on the brink of a major social unrest. In the case of Venezuela, oil represents 95 percent of its export revenue; thus it needs to have the price of a barrel of oil be at $85 to pay for imports and keep up with its debt. Even Saudi Arabia might down the road feel the economic impact should oil prices keep falling.

What consumers need to understand is that geopolitics does have a major impact on oil prices. Consider how the U.S. government and Saudi Arabia might have teamed up to rein in Russia, third-largest oil producer in the world, by keeping oil prices low to further isolate it.

What one needs to remember is that economic and political winds are always changing. Oil prices will eventually rebound. What's crucial at this unique juncture is for the U.S. government to re-evaluate major energy policies such as ending wasteful fossil-fuel subsidies and possibly relaxing to a degree new car efficiency measures.

What I find frustrating is that if our government can influence world market prices through deals behind closed doors, why then aren't its own leaders, Republicans and Democrats, able to come together to address threatening domestic issues such as student loan debt, social security, national debt, immigration, dysfunctional education system, and a nearly corrupt tax code?

Sadly, in a political climate characterized by self-serving interests, many such challenges could go unaddressed, to the detriment of our great nation. Wisdom and sense of duty must prevail -- and I hope sooner than later.

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