The long-term effect of oil abundance on economic growth

Are we witnessing an indirect war waged by Saudi Arabia against Iran, and Russia?

By FADY ANTOON
Oil Platform (photo credit: INGIMAGE / ASAP)
Oil Platform
(photo credit: INGIMAGE / ASAP)
There are two possible reasons for the recent steep decrease in global oil prices. The first is that Saudi Arabia, Iraq and Libya made a decision to increase supply. The second is that slow growth in China and a stagnant economy in Europe could be causing a decrease in the demand.
Though private consumers are happy to fill up their tanks at the pump for less, many institutions are concerned about the negative impact lower oil prices might have on the global economy. While the price of crude oil has been fluctuating between $77 and $85 a barrel, there is an insurmountable fear that the United States is headed toward another oil glut, an increase in the supply of crude oil accompanied by a drastic decrease in demand. Such a glut could result in further drastic decreases in oil prices.
In 1998, oil prices sank from about $20 a barrel to $11 a barrel. The two factors that led to that decrease in prices were Saudi Arabia’s increased production (to discipline a few members of OPEC) and a slowdown of growth in Asia.
In the current situation, Saudi Arabia is increasing supply because it wants to send warning signals to Iran, Venezuela and Russia, according to energy experts. Another major reason for the decrease in prices is a shale boom which has spurred US production to high levels. Production of crude oil in the US in the month of August reached 286,086 thousand barrels.
Who is going to be affected by falling oil prices? First of all, service companies in the US are going to be affected because the revenue will dry up while the big fixed costs remain unchanged. For instance, in the 1980s oil prices declined and service companies suffered large financial losses. Many service companies were forced to declare bankruptcy or to recapitalize their balance sheets.
If oil prices continue to decrease over a long period, service companies with strong balance sheets will continue to offer their services for the same fees during the downturn.
This will result in small crude oil and natural gas exploration and production companies encountering financial difficulties.
Morgan Stanley forecasts the “average break-even oil price for US companies to be about $76-$ per barrel,” according to Business Insider. This decrease in oil prices will impact the financial sustainability of these oil companies who decided to increase their demand after seeing hope in the oil industry.
Research conducted by Deutsche Bank; Thomson Reuters shows that lower oil prices will squeeze seven countries’ budgets. For example, Iraq’s budget is built on oil being $115 per barrel. On October 31, the Iraqi parliament session discussed the effect of lower oil prices on the country’s economy as whole, because the Iraqi economy relies exclusively on oil exports. During the session, the Iraqi oil minister, Adel Abdul Mahdi, talked about OPEC members’ prices. He “stressed the need for effort with OPEC to face the global oil market situation.”
Are we witnessing an indirect war waged by Saudi Arabia against Iran, and Russia? In the past, the oil has been used to send political warnings to various countries. For instance, in 1973 during the Arab-Israeli war, the Arab members of OPEC imposed an oil embargo on the US in retaliation for the decision to supply Israeli army with weapons. The oil embargo had a huge impact on the financial stability of the US because the US economy was dependent on foreign oil. Are we witnessing oil price manipulation to send political warnings? The Iranian government supports Bashar Assad’s regime in Syria in various ways such as providing it with military equipment. The Russian government, too, supports the Assad regime. Consequently, Saudi Arabia might be slashing the oil prices globally to affect these countries’ economic growth.
The writer hold a BS in Finance from Wright State University, Dayton, Ohio. He is an Iraqi born writer, and a human rights activist living currently in the United States.