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Analysis: An oil glut and currency crisis | ASHARQ AL-AWSAT English Archive 2005 -2017
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An employee of a local company, producing equipment for electrical meters, counts Russian rouble banknotes in Stavropol, southern Russia, December 17, 2014. (Reuters/Eduard Korniyenko)

An employee of a local company, producing equipment for electrical meters, counts Russian rouble banknotes in Stavropol, southern Russia, December 17, 2014.  (Reuters/Eduard Korniyenko)

An employee of a local company, producing equipment for electrical meters, counts Russian rouble banknotes in Stavropol, southern Russia, December 17, 2014. (Reuters/Eduard Korniyenko)

Khobar, Asharq Al-Awsat—The price of oil fell to below 59 US dollars per barrel on Tuesday, the lowest since July 2009, helping kick off an international currency crisis which has seen the Russian ruble lose 20 percent of its value in just a few days and the Norwegian krone drop to a five year low.

While there has not been a currency collapse in the Gulf, thanks largely to the strong US dollar, the latest international developments will likely hit stock markets which have recorded losses of hundreds of billions of US dollars this week.

But just who or what is responsible for the fall in oil prices and the subsequent impact on global markets, including the currency crash?

Many people speculate that what is happening in the markets today is part of a joint Saudi-US plan to hurt the Russian and Iranian economies, aiming to undermine Russia’s growing international influence and put pressure on Iran to make concessions in the talks on its nuclear program. Those who espouse this conspiracy theory base their views on what happened during the 1980s, when oil prices fell after Saudi Arabia and OPEC fought a fierce price war that contributed to the collapse of the Soviet Union.

Even before the most recent OPEC annual meeting on November 27, many conspiracy theorists speculated that Riyadh would seek to hold oil production steady in order to drive down oil prices and hit the Iranian and Russian economies.

This theory extended to include claims that Saudi Arabia and the rest of OPEC were also seeking to target shale oil production, viewing this as a major threat that must be nipped in the bud before it could expand and threaten their share of the oil market, as occurred in the eighties with the emergence of North Sea oil.

Supply and demand

The economic reality confirms that it is the market, not Saudi Arabia or OPEC, that sets the price of oil; this is something that the conspiracy theorists either cannot or do not want to acknowledge. OPEC accounts for approximately a third of the world’s oil sales; its share of the market has fallen to this level from around 50 percent during the 1950s.

The reality is that there are clear causes behind the drop in oil prices, not least a simple surplus of oil compared to demand. An international slowdown in economic growth, particularly in China which failed to meet its target of 7.5 percent growth, has further affected the global demand for oil.

Kuwaiti financial analyst and former Chief Operations Officer of Kuwait Petroleum International Esam Al-Marzouq told Asharq Al-Awsat: “With all due respect to everyone who believes in conspiracy theories and that there is a political plan behind what is happening in the market, they either are not seeing the economic realities or are pretending not to simply to place the blame on Saudi Arabia and OPEC.”

“Everybody has been surprised by the drop in oil prices from 100 US dollars per barrel, while I was surprised that the price of oil remained steady at 100 US dollars in the first three quarters of 2014. The market was saturated with oil since the beginning of the year, and any trader can obtain the quantity [of oil] that he wants,” he added.

International Energy Agency (IEA) figures shows that international demand for oil this year stood at 92.4 million barrels per day (bpd); however if we look closer we will see that demand stood at 93.1 million bpd in the third quarter of the year and 93.5 million bpd in the fourth quarter of 2014, while production in November stood at 94.1 million bpd. Therefore, it is clear that production is outstripping demand.

As for claims that Saudi Arabia has kept its oil production level over the past year at close to 9.6 million bpd, the reality is that production this year—specifically during the second and third quarters of the year—are down from last year. This clearly demonstrates that Saudi Arabia takes global demand into account with regards to its oil production.

If Saudi Arabia truly wanted to flood the market with oil and drive down proces, whether in order to restore its share of the market or for any other reason, then it is capable of easily increasing oil production by around one million bpd. Saudi Arabia’s output capacity stands at approximately 12.5 million bpd, according to experts, however its oil production has never gone beyond 9.6 million bpd this year.

Russian oil production

One of the things driving the latest conspiracy theories is a meeting between Saudi Arabia, Russia, Venezuela and Mexico last month in Vienna, prior to the OPEC general meeting later that month. At the time Oil Minister Alexander Novak said that Russia—the world’s biggest energy exporter—had no plans to cut oil production in order to shore up prices.

Speaking to reporters in Doha on Tuesday, Novak confirmed that Russia will keep oil output steady throughout 2015, fearful of losing its share of the oil market and believing that ultimately oil prices will stabilize. Russia is therefore matching OPEC’s strategy of refusing to cut oil production in the belief that the market will stabilize on its own.

Another talking point among conspiracy theorists is that Saudi Arabia “forced” OPEC not to cut production to deal with the oil glut, but well-informed sources who attended the closed door OPEC meeting in November told Asharq Al-Awsat that while Saudi Oil Minister Ali Al-Naimi had said that Riyadh would keep its oil output steady in order to preserve its market share, he said that other OPEC member states were free to lower production as they wished.

More than this, the OPEC decision to maintain an oil-production ceiling of 30 million bpd was secured by a full consensus of all 12 member states. Therefore, no single state of group of states was responsible for “forcing” or “imposing” any decision on this body.

OPEC member states agreed with Naimi’s position as this served their own interests; they did not want to cut their own oil production nor see Saudi Arabia or any of the other Gulf states do the same. Even the proposal that was issued during the session to reduce output by 5 percent exempted Iran, Iraq, and Libya from any reduction.

Speaking earlier this week, OPEC Secretary-General Salem Al-Badri said: “We agreed that it is important to continue with production [at current levels] for the . . . coming period. This decision was reached by a consensus among all ministers.”

Speculation and non-OPEC production

Kuwaiti oil analyst Kamel Harami told Asharq Al-Awsat: “The best thing that Naimi did was not to agree to this proposal and allow the market to determine the price [of oil]. It is up to the aggrieved party to reduce its own output, not to ask others to reduce their output and risk their market share.”

Harami said that while the latest reduction in oil prices, and all the economic repercussions of this, have been influenced by a disparity between supply and demand, other factors have also contributed to this situation.

“When we look at supply and demand, we can see that there is an increase [in supply], but it is small and cannot account for this fall in oil prices which have plummeted by almost 50 percent since last June,” he said.

“If this [price drop] continues, then I believe that this will be down to speculation [on oil prices],” he added, saying that while OPEC has kept the same production ceiling over the past decade, non-OPEC production has grown.

Production by non-OPEC members, particularly following the shale oil revolution in North America, has increased significantly, adding to international oil supply without a similar increase in demand. The independent Kuwaiti oil analyst said that despite this, many people routinely hold OPEC solely responsible for the price of oil.

UAE Energy Minister Suhail Al-Mazrouei also criticized the obsession with OPEC earlier this week. “OPEC is now a swing producer. It’s not fair that we correct the market for everyone else . . . I don’t think that is a sustainable strategy anymore,” he said.

“We are of the view that the market should be left to balance itself,” Mazrouei added.

Therefore, the latest developments on the international economic scene are easy to explain if we look at the reasons behind them. However, fans of conspiracy theories are likely to prefer to ignore reality in search of easy targets.