Oil prices vs. world order
By Gulgiz Dadashova
History rarely offers a second chance, but it surely repeats itself. And the world again floats in a glut of oil…
Few people remember the time when oil prices were $22 a barrel and how they hit $100 a barrel, giving trillions of dollars of benefit to energy producing countries. But the 50 percent drop in oil prices over the past six months has been shocking for all.
Observers and industry itself give plenty of reasons for the trend ranging from the Saudi Arabia’s wish to “crush” the U.S. shale industry, to the U.S. colluding with OPEC to flood the oil market to put Russia on knees and weaken Iran.
Journalists and analysts around the world claim that this is the end of the world, as Saudi Oil Minister Ali al-Naimi responded:"We may not" when asked if oil markets would ever lift prices to $100 a barrel again. Today, the fact is that oil prices have dropped and they may stay “low” for a while given the firmness of Saudi Arabia to keep the oil output unchanged and America’s wish to bankrupt Russia.
The importance of money
The oil prices began to decline amid the growing debates over ineffectiveness of the Western sanctions alongside the rising number of opponents of Moscow over intervention in Ukraine.
The sanctions began to bite the economy but the West needed to wait for a real effect. But, the real damage to the Russian economy, which earned enormous petrodollars since beginning of the 21st century, came with an epic collapse in global oil prices.
Russia’s oil and gas revenues contributed about $73.5 billion annually from 2001 to 2004 to the country’s GDP. Russia’s growing wealth kept going on. From 2005-2008, annual hydrocarbon revenues were $223.6 billion higher than in 1999- $45 billion. In 2011-2013, Russia’s annual oil and gas income reached $394 billion, above 1999 levels.
Bright days of the Russian economy changed for “cloudy weather” with the introduction of sanctions and later with the plummeting oil prices. Russia’s finance minister estimates that the country’s losses since last spring have surpassed $140 billion. Moreover, the ruble has lost almost 50 percent of its value over the past six months.
Although the reasons behind the Saudis' decision to drive down the oil price is not clear enough, Russian analysts began to claim that the US and Saudi Arabia are conspiring to bring Russia to "its knees".
Back to history
The crude prices had peaked in 1980 at over $35 per barrel ($100 per barrel today), fell in 1986 from $27 to below $10 ($58 to $22 today). The glut began in the early 1980s as a result of slowed economic activity in industrial countries and the energy conservation spurred by high fuel prices.
The drop in oil price led the Soviet Union to earn less profit for the oil it exported. Meanwhile, oil production stopped rising and by 1988, began to fall.
The Soviet Union lost $20 billion a year, funds without which the country simply could not survive. The country found itself in a financial difficulty - it failed to pay for food imports and to calm down its business circles, bringing the country to its ultimate collapse. The world powers kept the oil prices at low level for two years to fully crash the Soviet Union in the mid-1980s, and two more years to make sure that the Bolsheviks wouldn't come to global scene again.
Oil industry did not see a rise until the end of the 20th century, when oil prices began increasing again and a different political system was in power - new Russia.
The price of a barrel of oil first broke the $100 mark in 2008, and frequently crossed it in the six years since then. But prices of oil have plunged since Brent crude oil hit $115 a barrel in early June.
Reverse effect
How history would be, if the Soviet Union had another sources? The answer for this can be given by Russia's case.
If the Soviet Union had not collapsed, one of the things that likely would happened was that the world oil prices would have headed higher as the growing demand for oil would have helped holding world oil prices up.
Can this very scenario work in the present situation given that major energy producers will not be able to keep the low figure further than 2016? It will indeed be a heavy blow to their economies, while another opponent - China is emerging which can grow even more after weakening of Russia. The growing Chinese economy may be more dangerous for the United States.
So, countries imposing sanctions and interested in downing oil prices now must be prepared to address their own vulnerabilities. The West should understand that Russia is better to be acknowledged as an integral part of Europe, i.e. the country acting as a major consumer market for European producers. The Western strategy should be centered on a simple idea that the world cannot give a final rejection to Russia.
Although, the West has relied on a strategy of economic sanctions and international isolation to weaken Moscow, Russia gained several diplomatic successes by warming ties with Iran, North Korea, and Pakistan to evade the negative effects of its Crimea annexation.
As Russian President Vladimir Putin declared in one of his interviews, his country is committed to ensuring that Russia does not become internationally isolated behind a new iron curtain, the Kremlin had gone forward in strategies with countries of Iran, Turkey, North Korea and Pakistan, boosting Russia’s diplomatic leverage.
Russia’s recent maneuvers have hampered the Western diplomatic efforts considerably. Moscow in fact has become an alternative to key regional actors and countries of vital security importance to the West on issues like nuclear program. Thus, a dangerous global security situation could become even more so.
Thoughts for tomorrow
The collapse of the Soviet Union showed how dramatically the things can change in the world. The Union collapsed and the rest of the world was doing fairly well, although the effects were long lasting.
Today, a major part of the world’s economy is facing financial difficulties as bad effect of the plummeting oil prices seem to be even greater. Even the Saudi Arabia, the major oil producer in the OPEC, can withstand two or even three years at the current price relying on its over $740 billion foreign exchange reserves.
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The article was first published at Eurasiareview.com.
Follow Gulgiz Dadashova on Twitter: @GulgizD
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