Global Oil Market: Tears and Smiles

What is happening in the global oil market has many losers and winners who do not know how long their losses and gains will continue. The markets are confused, and more confused than them are the renowned institutions that specialize in assessing risk levels, yet none of them could predict the severe drop in oil prices in the second half of this year. Oil price reduction: how far, how long? From mid-June to December 10, the price of oil, based on its average in various markets, has fallen by about forty-three percent. Various variables in the current global situation indicate a continued decrease in oil prices at least until the first half of next year. The global economic outlook is not promising. The Eurozone and Japan show no signs of emerging from recession, and especially concerning news from China is alarming. In this context, most predictions for oil prices next year suggest a downward trend. The U.S. Department of Energy predicts the average oil price in 2015 will be sixty-eight dollars, whereas in November it was estimated at eighty-three dollars. Many banks have lowered their forecasts for next year's oil prices in recent days. Morgan Stanley estimates Brent oil at seventy dollars per barrel, the same as what French bank Société Générale has predicted. Conversely, there are reputable banks whose experts still place next year's oil price above eighty dollars per barrel. These forecasts are based on current variables and do not extend beyond a one-year horizon. If we look beyond this range, a bright future for oil prices cannot be predicted. The International Energy Agency states that in the next five years, non-OPEC producers will produce about six million barrels more than today, with most of that coming from North America (the United States and Canada) and unconventional oil sources. On the other hand, the volume of liquefied gas production in the U.S. has increased by about five million barrels per day. Increased supply, combined with decreased demand due to slowing activity in Japan, the Eurozone, and China, should theoretically keep oil prices relatively low even in 2016 and 2017. Nevertheless, predicting the future of the oil market beyond a year requires audacity and even naivety. Will unconventional oil producers (shale) in the U.S. be able to maintain their production levels despite falling oil prices? Will OPEC, which is effectively commanded by Saudi Arabia, at a certain point, change the relationship between oil supply and demand through significant production cuts? Will the global economy, after years of stagnation, not get back on track and increase oil demand and consequently its price? Will several catastrophic events in the strategic arena not lead to a surprising spike in oil prices? Those familiar with the tumultuous history of oil would not consider asking such questions fruitless. Those who laugh But in the current situation, it is the fall in prices that dominates short-term economic calculations. There are many who are intoxicated by this fall. With a forty-dollar drop in oil prices, approximately one thousand three hundred billion dollars is transferred annually from oil producers to consumers of this commodity. This immense wealth flows into the pockets of Europeans, Japanese, Chinese, and Indians. In several countries, including the U.S., each fuel consumer saves several hundred dollars annually due to falling oil prices, or allocates it to purchasing other goods. Stagnant European economies hope that the drop in oil prices (and also the decline in the euro's value against the dollar, which can boost their exports) will accelerate their return to prosperity. Airlines are among the biggest winners from falling oil prices, and their stock values are soaring. It is predicted that the net profit of these companies will increase from twenty billion dollars in 2014 to twenty-five billion dollars in 2015. With the decrease in air travel costs due to lower fuel prices, the number of air travelers is expected to rise from three billion in 2013 to three billion and five hundred million in 2015. Besides purely economic consequences, the drop in oil prices has increased the maneuvering power of Western powers to exert pressure on Russia and Iran. According to an analysis frequently heard in Washington and European capitals, high oil prices could have neutralized some of the sanctions imposed against Tehran and Moscow. Conversely, with the decrease in the price of 'black gold,' the pressures from economic sanctions will be felt more intensely in both Russia and the Islamic Republic of Iran. However, the drop in oil prices is not without risks for Americans and Europeans. It is still unclear at what oil price level unconventional oil producers (shale) in the U.S. will incur losses and be forced to halt their investments. In this regard, the range of sixty to seventy dollars per barrel is often mentioned, but it is evident that with the shift to richer fields and the utilization of rapid technological advancements, shale oil producers in the U.S. will have greater resilience. In Europe, policies aimed at promoting clean renewable energy (solar, wind, etc.) were shaped under the assumption of oil prices above one hundred dollars per barrel and were economically justified. If oil is to fluctuate in the range of fifty to sixty dollars per barrel or even lower, the policy aimed at transitioning to clean energy will face more opposition and difficulties due to its high costs (compared to relatively cheap oil). If this happens, the advancement of environmental policies will suffer. And those who cry The losers of recent developments in the energy sector are countries that have become addicted to oil prices above one hundred dollars per barrel and tied their budgets and foreign trade to the irreversibility of 'black gold' prices. 1) Iran's budget, based on the International Monetary Fund's assessment, balances at an oil price of one hundred thirty dollars per barrel. The current solar year budget (1393) was based on an oil price of one hundred dollars per barrel, considering the export of one million barrels of crude oil and three hundred thousand barrels of gas condensate. Even before the oil price drop intensified, legislative sources spoke of a significant budget deficit. Given the more than forty percent drop in oil prices over the past six months, this deficit has likely increased. The 1394 budget bill was drafted under conditions where Iran, in addition to ambiguities arising from the status of its nuclear file and the future of economic sanctions, also faced major questions regarding the future of oil prices. Ultimately, in the budget bill presented to the parliament on Sunday, December 7, the government set the price of each barrel of oil at seventy-two dollars. Given that the price of each barrel of oil in the global market has fallen to around sixty dollars, it seems highly unlikely that the Islamic Consultative Assembly will approve a budget based on a seventy-two dollar oil price. Currently, a more or less realistic price for each barrel of oil next solar year should be below sixty dollars. If the parliament wishes to amend the government's bill on this basis, many other budget variables will be disrupted. In any case, there is no doubt that various markets in Iran (currency, stocks, gold, and housing) and also macroeconomic indicators (inflation rate and growth rate) will be significantly affected by future oil price developments, along with foreign trade. But beyond economic arenas, the political priorities of the Islamic Republic, especially regarding upcoming negotiations with the 'P5+1' group, will also not remain unaffected by fluctuations in the price of 'black gold.' 2) In Russia, the power and popularity of Vladimir Putin are intertwined with the fate of the black market. Fifteen years ago, when he came to power, the price of each barrel of oil fluctuated below twenty dollars, and thanks to the long-term rise in this commodity's price, the average income of Russians tripled during his rule. Today, as oil prices have reached their lowest level in the past five years, the strongman of the Kremlin faces a very tough challenge, especially as he is under increasing economic pressure from Western powers due to the Ukraine crisis. Over the past few months, the ruble's exchange rate against major world currencies has fallen by about forty percent, and the inflation rate has approached ten percent. The stock index on the Moscow Stock Exchange has dropped by about eight percent just in the past ten days. A significant decrease in foreign investments, coupled with the flight of tens of billions of dollars in capital, has placed the Russian economy in a very precarious position. The leniency of some Western powers, including Germany, towards Putin is mainly because if the Russian banking system collapses, several European banks will not remain unaffected by the severe shocks of this potential event. In this context, the theory of 'conspiracy' has gained significant traction in Moscow, with Kremlin-affiliated media accusing the U.S. and Saudi Arabia of conspiring to overthrow the Russian political system by creating conditions for the fall in oil prices. 3) Venezuela is one of the biggest losers from the fall in oil prices. Hugo Chavez left behind a bankrupt country with populist slogans and destructive policies that can only balance its budget with oil prices at one hundred sixty dollars per barrel. Today, this South American country's economy is grappling with a growth rate of minus three percent and an inflation rate of eighty percent, with ninety-six percent of its foreign exchange earnings coming from oil. In this situation, the fall in oil prices is a real disaster for a country that imports a large portion of its consumption needs. It may be hard to believe that Venezuela, home to the richest oil resources in the world, is now importing crude oil. This is the legacy of a man who claimed to save Latin America with his 'Bolivarian Revolution.' There are other countries that have been severely shaken by the fall in oil prices: from Algeria, whose political system relies solely on oil and bayonets for its survival, to Nigeria, where seventy percent of its budget resources and ninety-five percent of its foreign exchange earnings come from oil. And this list can go on.