The geopolitical implication to the sudden fall in oil prices has had broad-reaching ramifications for a number of very powerful countries. Two of those countries, Russia and Saudi Arabia, are the most important energy commodity exporters in the world. The other, the US, is the single most crucial oil importer in the world.
The possibility of Russian fatalism awakening is very real as the country faces tightening sanctions, severely underpriced oil exports, and rapid inflation as military spending has increased. Similarly, Saudi Arabia’s diminishing currency reserves and its military adventurism in Yemen have many questioning how the economy can diversify to stabilize the budget. In the US, shale companies have largely been cannibalized to consolidate power across fewer but larger corporations. At a time when the world is increasingly looking at alternative energies to lower pollution and greenhouse gases, oil industries have drastically lowered prices to the detriment of budgets and investors. The question that looms among these oil producers: who will blink first?
The Organization of Petroleum Exporting Countries (OPEC), controlling over 40% of the global crude oil production, curiously refused to cut production while oil prices were plummeting last summer, further exacerbating the price fall. OPEC stated that the decision was not politically based and that prices were simply returning to ‘normal.’ OPEC’s decision to force prices lower in the wake of the worldwide glut confounded oil market pundits. Many looked to shale oil for a formidable explanation. Producing over 5 million barrels a day, the US shale oil revolution has revitalized the local economies of North Dakota and Texas, while little regulation has allowed companies to produce at prodigious rates. This has lowered US oil imports and softened the influence of OPEC producers on US foreign policy.
While OPEC may have wanted to deliver a severe blow to the shale oil companies, who operate with smaller margins than traditional producers, the simple reality is that OPEC was too late to react. Shale oil production increased since the drastic price collapse last year and has only recently shown signs of stagnation. Large shale oil companies have repeatedly bought previously thriving small shale companies for pennies on the dollar as possible bankruptcies have loomed. This consolidation of the shale industry has provided more oil fields for future exploration to companies that have the capital to wait until prices again rise. While the US shale oil industry only accounts for roughly 6% of the global oil market, OPEC’s decreasing reach into the US market may have initiated the production glut. Thus, while the price decrease has recently slowed the shale oil market, consolidations have kept the industry alive.
The most intriguing geopolitical connection with oil prices collapsing is the Western sanction regime on Russia. As inflation hit the Russian economy and protracted recession weighed on Russian morale, OPEC ramped up production. Similarly, Russia has (as of May 2015) produced more oil since the end of the Soviet era. Interestingly, this economic stand-off brought the two biggest oil-producing countries (Saudi Arabia and Russia) to the bargaining table as Russia considers closer ties to OPEC. This tantalizing prospect of a Russian-OPEC alliance has almost always been an illusion since OPEC’s formation and would drastically increase OPEC’s global power in determining oil prices. OPEC has never really trusted Russia and an alliance may only form out of dire necessity. But that is something the United States would staunchly oppose.
As Iran will likely demand greater regional power responsibility as the lifting of sanctions occur in coming months, Saudi Arabia will find its close Western ties strained. Thus, a closer OPEC relationship with Russia would be a geopolitical conundrum for the Western world as the Middle East once again faces possible political destabilization. Witnessing the difficulties of Russian natural gas dependency in recent conflicts in Ukraine, Georgia, and Estonia, an OPEC-Russian alliance would control nearly half of the world’s oil, with Russia becoming the likely leading producer. This could echo the 1973 oil embargo, a time when OPEC controlled 53% of the world’s oil and subsequently handicapped Western economies. With Russia continually looking for ways to damage Western economies and strengthen its own geopolitical position, more Russian energy control would be deplorable to the West.
Contrary to the OPEC-Russian alliance is the simple fact that such cooperation would further strain interrelations with Western powers and would be a difficult political gamble for Saudi Arabia. As Western economies are projected to continually dwarf that of Russia for the foreseeable future, and with an apparent divide between the US and Saudi Arabia regarding Iran, any further strain would leave Saudi Arabia’s Western relations questionable. However, as China becomes the world’s major oil importer, Saudi Arabia has monopolized the Chinese market and increased Chinese sales 37% in the last year, while every other country lost market share. However, Russia is unlikely to agree with any OPEC policy of lowered production while Saudi Arabia continually strives for dominance in the coveted Chinese market.
While market competition has surely decreased oil prices, it remains the most geopolitically significant commodity in the world by all measures. In this environment of little policy clarification and OPEC’s failure to halt shale oil production, Russia has faced the harshest conditions of all oil-producing countries. Although Russia would benefit from an end to shale oil, its economy was already facing difficult projections. Vladimir Putin has had to balance his military adventurism with economic difficulties, exacerbated by the oil glut. In this way, Russia may be aligned with Saudi Arabia in wanting to damage the US shale oil industry (and, at the same time US oil giants, like Exxon), but has more to lose than Saudi Arabia. However, Saudi Arabia and Russia have deftly managed budgets, low debt (a meager 2% and 18% respectively), and strong nationalism. While they would serve each other better as partners in OPEC, the US cannot allow it and Saudi Arabia is, as of now, most unlikely to make that gamble.
All countries involved have much to gain and, similarly, much to lose by way of oil. The US will be the last to consider any kind of radical action in the oil market as low prices serves the White House’s policy for the moment. Russia has little history of giving into foreign pressures and most likely will adapt to lower oil prices. Saudi Arabia, as the leader of OPEC, will most likely act first to balance its budget. While this will leave Russia to increase oil production if OPEC lowers theirs, it may be the only workable political solution. As of now, however, production remains high as all sides stare down each other and decide which direction is the best direction to take. For the first time in a long time, because of so many diverse geopolitical maneuvers happening at one time amongst the world’s energy producers and consumers, the future of ‘status quo’ may indeed be very uncertain.