Oil: the price war begins

The modern world knows the value of resources, power and they provide direct and indirect struggles that cause. For over 100 years the natural resource that has been at the center of these battles was oil, but this competition has not only captured in armed conflicts but  the usual scenario of war have been the markets.

Approximately a year ago began a new phase in this ongoing war in the oil market with a drastic fall in prices of the barrel. In June 2014 prices $ / barrel while 115 were registered this year stood at $ 43'6 / barrel. Thus,  the drop in oil prices has been the largest in the last decade  and has represented a decline of almost 50% over the 2014 summer forecast.

What is the cause of falling prices?

Several analysts in energy policy and political economy of oil seem to agree that  there is a range of key causes  behind this new situation:

1. Overall production increase  that has made ​​increase oil supply over demand.Specifically, there have been higher rates of production in countries like Yemen, South Sudan, Nigeria and Libya.
2. Large increase in production in the United States  due to the use of the technique of fracking  (hydraulic fracturing) , which has allowed the country to extract enough in order to have the largest reserves of the past 80 years and almost cover domestic consumption oil.
3. Increased demand for oil produced by non-aligned countries to OPEC  (cartel of producing countries, acting monopoly is able to set the price of global crude).
4. Increased  energy efficiency  in major consuming countries.
5. Increased use of natural gas and nuclear energy for electricity production(although oil still reigns as the main power in the field of transport).
6. Who wins and who loses in this situation?

The drop in prices has led to several consequences. In general, it is estimated that  the price of oil at these levels may increase global GDP by 0.7 or 0.8% , which, a priori, would be beneficial. But beyond this, as an individual, companies that have contributed to this scenario -that say using the  fracking - predict that if prices continue to fall, the cost of using this technique will be too large for profitable. Argument reinforced by the analysis of OPEC, which estimates that  the threshold at which US companies will stop extracting profit stands at $ 40 / barrel.

Meanwhile, refinery companies, chemical industries, airlines and major transport companies seek to maintain this situation, since they are the ones bringing greater benefits. While on the other side of the coin are the traditional oil producing companies that have obviously been reduced profits by lowering the price of their product.

Leaving aside the business level, in each of the battles that occur in the oil market there are  winners and losers countries . This time,  the drop in oil prices benefits the major importers, ie countries with greater energy dependence , among which are the majority of states of the European continent, with data from 2013, we see that acquire a combined average of 9.3 million barrels of oil a day. In addition, other big winners are China and India, due to its high energy consumption, buying around 5'6 and 3'8 million barrels of oil per day, respectively.

On the other hand,  those affected by this trend are large producers, those countries that export the largest quantities of oil in the world and whose economy depends to a large extent on such exports . Among them are members of the OPEC cartel -highlighting Saudi Arabia, Iran and Nigeria, new large producers such as Brazil, Russia or countries as additionally affected by economic sanctions resulting from its activities in Ukraine. In short, these actors have suffered a decline in profit to export crude extract.

Actors and strategies in the war on oil

Analyzing in depth this new stage in the economic war that is generated around the oil, we find  two main actors:. United States and Saudi Arabia  Starting with the first of these countries, we see that American policy on oil has varied greatly from arrival of the Obama administration.

As noted by the US analyst Michael Klare, during the Bush Jr. was the program known as National Energy Policy, under the leadership of Dick Cheney neocon was developed which established that  the energy security of the United States was a key element of the national security and, for this reason, the use of military force to secure the supply of energy resources was justified.  That's how the US launched a "neo-colonialist" policy that, in addition to support certain oligarchies Gulf, used the called "power projection forces" (ie, military) to ensure the flow of oil getting involved in the internal conflicts of the producing countries.

The US National Archives via Flickr

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With the change of administration, Barack Obama began a policy whose consequences are reflected in the drop in oil prices today. Thus, the policy for external dependence Bush has been replaced by an agenda based on two pillars:

1. Energy Security:  Increased domestic production of oil and gas through techniques fracking  and deepwater drilling, especially in the Gulf of Mexico; reduction of oil imports to 1993 levels; and promotion of technological improvements in the field of transport.
2. Climate change and environment:  Increased investment in clean energy technologies and renewable energy; and tougher efficiency standards on vehicle fuel.

Thus, we see that Obama's plan is aimed at drastically reducing external dependency even to aim to turning the United States into an independent country at the energy level, which explains, in large part, the fall in demand global oil.

Some analysts suggest that the US strategy  to weaken a Russia dependent on its oil exports. Thus, the drop in oil prices reduces revenues obtained a country already hit by economic sanctions imposed as a result of the intervention in the Crimea and the Donbass . At the same time,  this strategy also erodes the benefits of the Gulf monarchies  and Saudi Arabia and above all  attacks the economies of other producers "enemies" of the US as Iran and Venezuela . In the Iranian case, taking into account the economic sanctions that the country has received from the West and negotiations over its nuclear program, it seems clear that a drastic decline in profits from exports of oil acts as an added pressure gives a dominant bargaining position to Western states.

Second, Saudi Arabia as are the other key actor.  The monarchy  Wahhabi is the only country that would be able to enhance oil prices by restricting output by 2,000,000 barrels per day  and, moreover, it is one of OPEC leaders, as such, would promote joint restriction of global oil supply. However, the Saudi state, along with its allies Kuwait and the United Arab Emirates,  has opted for a patient strategy , dropping prices without initiating any reply.

While this attitude is detrimental to Venezuela and Iran, which have come out in favor of a policy of restricting production within OPEC is unlikely to be a change of direction in the organization. This is due to  the falling prices favors Saudi Arabia in various ways :

1. On the one hand, the  costs inherent in the use of  fracking  make these companies can not produce at levels below $ 40 / barrel. Thus, continued falling prices make this  business viable and America will see increasing external dependence.
2. Second, the  weakening of the Iranian economy  , which can only produce oil viably in the $ 130 / barrel represents a direct benefit to the state  Wahhabi , rival Shiite country in the competition to become the regional hegemon Middle East; and more at this time when both countries are waging a battle indirectly by supporting opposing sides in wars in Yemen, Iraq and Syria.
3. On the other hand, an  attack on the Russian economy  , which like Iran is affected by economic sanctions Western- is also useful for the Saudis as punishment given the support that Russia is offering pro-Assad Shiite government in Syria and previous disagreements on the conflict in Chechnya.

Finally, although  Venezuela is being undermined by the "inability" of OPEC , Nicolas Maduro's government focuses its criticism of the Obama administration, who accused of flooding the world with oil extracted by hydraulic fracturing, distorting the market and causing serious crisis dependent on its oil exports States, as is the case in Venezuela.

Oil a double-edged sword for Saudi Arabia

Although the Saudi monarchy has been one of the states that has used oil as a weapon of war in the economic sphere, the text  The IPE (International Political Economy) of OPEC (Organitzation of the Petroleum Exporting Countries) and Oil , of Michael Veseth see that this country may not have complete control over his own weapon.

Salman bin Abdulaziz Al Saud, a member of the House of Saud and current king of Saudi Arabia. Photo: Georgethewriter via Wikimedia Commons. 

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First, it is necessary to note that  Saudi Arabia has the capacity to carry out attacks in the global oil market in two ways : through the traditional method used by OPEC to reduce oil production  by restricting supply and triggering the price Resource ; and by a large increase in production to flood the oil market, supply and destroying shooting competition , which would be incapable of producing at too low prices while Saudi Arabia can sell crude (a profit) less than 20 $ /barrel.

However, it is possible that the internal composition of the Saudi state, it often has no choice.  Saudi Arabia has consistently used oil revenues to finance social welfare programs while preserving the structures of an Islamic State . So, if the market situation, those benefits decrease, the Saud family can not afford such policies and this is likely to lead to social tensions that threaten his reign.

Therefore, faced with a decline in sales, or trim the welfare model or lower the price of oil to increase such sales; which obviously leaves a monarchy only viable option: the price decrease, collapsing oil industries in other countries.

The current state of the market

In recent months the trend appears to have stabilized, although the reasons are unclear. Saudi Arabia has been increasing its production rate , a fact that has led many analysts to believe that the country wants to offset the drop in overall prices (as points in the previous section) or intends to absorb market share taking advantage of the instability.However,  the Minister of Petroleum and Mineral Resources of the regime concludes that the recent slight rise in prices is the result of an increase in global oil demand.

Moreover, it became clear during last August that the price increase could lead to certain statements made ​​by OPEC  in pointing his concern about the low price of oil and its commitment to defend the interests of the organization. In other words, a mere  threat of action to restrict supply from OPEC were enough to boost oil prices slightly.

In short, it appears that it was not until a few months to see what the end result of this last battle in a constant war the oil market. However, finally it is necessary to patent  a key and very important concept in the Western world: energy dependence.  How dependent are we in the West?

Energy dependence. Gristo caricature.

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Spain: a model of energy dependency

To illustrate the energy dependence on oil suffered by many Western countries, let's see if Spain. Taking as a source of information the  Statistical Bulletin of Hydrocarbons  in December of the years 1997-2012, we see that the total primary energy consumption of the Spanish state, the oil was 53'5% in 1997, while in the 2012 this consumption was reduced up to 42.2%, reaching the moment of maximum dependence in the year 1998 with a 54'4%.

Despite the reduction, it can be seen that  almost 50% of primary energy consumed in Spain comes from oil , which shows the dependence of this country on the remedy.Moreover if we consider that the degree of self-sufficiency is only 0.3% in 2012, meaning that the  41'9% of the primary energy consumed in the Spanish State goes on imported oil.

Thus, the external energy dependence is demonstrated country. But  where did the oil come from?  Following the example of 2012, recourse to higher imported-from less as a percentage of total Russian oil importers (16.3%), Mexico (14.8%) , Libya (12.6%), Saudi Arabia (12'2%), Nigeria (7.9%) and Iraq (7.7%), while the remaining 28.5% came from a variety of countries specified as "others". In other words,  the 56'8% of the oil imported into Spain in 2012 came from member countries of OPEC.