The global oil price has been staying below $55 a barrel for the past two years. While lower price of crude continues to offer benefits for the import dependent countries, a sustained dip can adversely affect the producing regions as well as the economies that increasingly invest on cleaner energy development. This provokes questions on the possible changes in the price trajectory as well as about the upcoming strategies from OPEC (Organisation of Petroleum Exporting Countries) members to regain better price.
As the petroleum fuels continue to be a critical component in the global energy mix, import dependent countries will face serious challenges to their economy if ever the oil price surge back to 2008 level or more. It is a relief to many import dependent developing economies that oil price has not surged over the April 2011 level, during which it touched $123.37 a barrel.
The last time the global energy market witnessed oil price above $100 a barrel was in August 2014. In the subsequent months, the price fell even further touching below $30 a barrel during the peak winter in January 2016 – lowest ever price in the past one decade.
It is especially important to note that unlike previous two years, price did not face much of huge fluctuation this year. Currently, with the price of WTI oil stands at $47.29 as of September beginning, it is reasonable to expect that a quantum jump in price may not happen immediately.
The fact that neither the announcement of production cuts from OPEC in November last year nor the continued concerns about the geopolitical turbulence in the Persian Gulf region had any major impact on price levels, gives hope to import dependent countries on a relatively stable oil price.
However, the current oil price levels are seen as a challenge to most of the OPEC members, both for the economically weaker ones as well as the richer ones. Two notable examples are here. The first example is Iraq which is the second largest oil producer of the bloc and has been undergoing serious challenges to its domestic economy.
Iraq has been rebuilding its economy depending heavily on the oil revenues to revive its economy. As part of its domestic plans, it recently proposed a new pricing for its Basra crude for the Asian market.
This pricing approach, which would give little time for customers to prepare for price changes, is seen as a strategy by Iraq to ensure higher revenue to its products as well as to gain more control over OPEC that has been traditionally under the Saudi leadership.
However, there are apprehensions on its feasibility as the oil industry has been using other price assessment mechanisms for decades, and are not keen to adopt Iraq's approach. It is also feared that consumers may not agree to this new mechanism.
On the other hand, Saudi Arabia which has been the biggest producer of oil in the bloc is equally concerned about the low price trend. As the concern continues, Saudi plans to diversify its source of income to non-oil economy, especially to 'religious tourism'.
The government aims to make huge investments towards infrastructure development related to religious facilities and generate revenue from increasing number of pilgrims. However, energy continues to be the major source of revenue to the Saudi Kingdom which holds more than 21.9 percent of the total proven oil reserve of OPEC.
As more than 80 percent of the available proven oil resources are still with the OPEC countries, it is of great interest for the import dependent global community to learn about the possible strategies the members of the cartel would adapt to steer the respective country's economy.
A possibility of another production cut cannot be ruled out completely as happened in the 1990s and in the last decade when output was slashed up to five million barrels a day.
Compared to the previous times, production cut in 2016 done by OPEC was relatively a weaker plan as the quantity they cut was significantly small. Due to this weak planning, the output cut did not make any significant impact on the oil price globally.
While the oil industry feels that a surprise cut can surge oil price, OPEC needs to tread carefully to ensure that such a plan will not impact its poorer producing member states as well as the consumer base that has been actively seeking to diversify its energy consumption.
Moreover, the trends in global energy sector indicate that a transition towards clean energy has gained momentum whenever a production cut happened and price of oil surged.
Hence a bigger challenge for OPEC will be about how to meet its long term economic ambitions without making a significant cut in output that may lead to wider global sentiments against the 'uncertain petroleum' industry.
(Dr. Nandakumar Janardhanan is a teaching faculty at Energy Studies Programme, School of International Studies, JNU. Author can be reached at nanduj123@gmail.com)
