Oil Prices: Energy Investment, Political Stability in the Exporting Countries and OPEC’s Dilemma

During the summer of 2012, there were growing concerns that, faced with global economic upheaval originating in the problems of the eurozone, there was increasing oversupply in the oil market, which threatened prices. At the same time, geopolitical concerns in the context of the Iranian nuclear programme were helping to provide upward support for prices. This paper attempts to consider possible future paths for crude oil prices and their implications.

Summary

-The oil market currently suffers serious contradictions. In terms of supply and demand, it is possibly oversupplied. This is not least because higher prices to final consumers are beginning to bite. At the same time prices since June 2012 have increased by around 30 per cent, driven by geopolitical concerns.

-The future price trajectory depends upon politicians. Failure to manage the eurozone crisis could lead to much lower oil prices while an Israeli attack on Iran would cause a major price spike.

-A key outcome of the Arab uprisings has been a significant increase in the prices needed by the producers to manage their fiscal position. This is a serious indictment of producers’ failure to diversify their economies away from dependence on oil revenues over the last 20 years.

-If the oil price goes much lower, three scenarios could ensue sequentially: a price war forcing prices even lower, a period of internal repression as revenues fail to buy compliance among populations, and internal unrest among producers, which could lead to supply disruption followed by prices bouncing back.

-Underlying all this is a fundamental dilemma for OPEC. Its members need higher prices, but these will cause demand to fall and other supplies, including unconventional resources, to increase. This will force prices lower. Thus OPEC members need the golden eggs at a rate that may well kill the goose that lays them.

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