PER 2015
production. Thus the reason I believe for the cause of falling oil price is Saudi Arabia’s stance not to increase its oil price. First, it is crucial to understand Saudi Arabia’s foreign policies that increasingly reduced the market share of Iraq and Egypt that allowed Saudi Arabia’s dominance over the market. On the political aspect, they disturbed Egypt and cleverly used Sunni-Shia Muslim division to from ISIS. In Egypt, by secretly funding the Muslim Brotherhood, they successfully disrupted Egypt and its politics. This was a successful attempt in reducing oil production in Egypt. Now, their main competitor was Iraq, which America militarily engaged in to eliminate Al-Qaeda whilst tearing apart the whole country ironically, to secure the oil supply (although this is arguable). The destroyed industry is told to still not able to produce more oil output this year. This was a few years back and now, the fact that Saudi Arabia’s few wealthy donors are funding the ISIS is a known secret. This seems to be a perfect oligopoly for oil. In fact, Russian and America’s production cost for oil is higher and Saudi Arabia’s monopoly seems possible. However, Saudi Arabia has decided keep the oil price free. OPEC, consisting of multiple Arab nations, has always tried to tie up the supply if necessary to raise the oil price. This unusual occasion of excess supply has led to dropping oil prices across the world. What I believe that is occurring at the moment is decreasing oil price can hit $50 per barrel which will hit the oil industry in Russia and America hard as that is almost the cost of production. Although this of course would not lead to shattering of America’s well-funded Shale gas industry, it would give Saudi Arabia more diplomatic power and establish its firm ground for its power over the global price of oil as seen in 1973 Yom Kippur war when they quadrupled the price of oil, causing the oil shock. Why do they employ such an aggressive policy? The reason for this aggressive policy is directly aimed against America’s lift in its oil export. It is clear that Saudi Arabia wants to test its newly introduced shale gas competitor. Recently, America decided to partially lift its oil export ban which means that it will no longer be bound to sell the products to domestic refineries, similarly to the Chinese oil industry. Although oil producers may enjoy for a short while as they can export instead of selling them to domestic refineries, it is at risk of fierce price competition. In general, for oil the demand is fairly consistent, depending each year on global economic growth. With the expectation of low growth rate this year, demand has not really increased. This is because crude oil related business does not only include refineries but main organic chemical industry, including plastics industry, and power stations for electricity. Manufacturing industries and infrastructures such as electricity can change the general demand for oil. However, it is important to highlight the fact that the factor of supply is far more influential on price than the demand due to its inelasticity in price. The main beneficiaries for this low price of oil is obviously the importers of oil. For example, South Korea has a large industry over refining crude oil, who would enjoy from such low price of raw materials. Also, whilst American producers could be hurt by such low price, it is important to recognise the fact that America is also the largest importer of oil. Thus, it enjoys an enormous benefit from such price. On contrary, Russia is damaged significantly over this incident as once- genius Putin is suffering from its lack of oil-money politics and funding to “restore the power of the USSR”. This was his main political card, to a certain extent, to increase the global power of Russia. His limits were clear with the rouble crisis and its efforts to diverge its attention outside of domestic market is damaging its global relations. To start with, with the Crimean annexation, its sanctions were severe and it was clear that Putin is only trying to cover-up domestic problems of corruption
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