Finance ministers in several oil-guzzling countries like India and China are smiling, as global oil prices have fallen about 40 per cent since June when the price of a barrel of oil was US$115 to $70 currently. The public in these countries might think that this is due to the hard work of their governments to cut inflation and give them an opportunity to go for long drives. However, the real story is quite different.
One reason for the decline of oil prices is that the biggest consumer of oil, the US, has adopted a new technique of “fracking” to produce its own oil. The US domestic production could hit 9 million barrels by next year, leading to a global glut. But this method is highly polluting. Moreover, it takes 2-4 million gallons of water to “frack” the average well. The environmental movements in the US and millions of people who live near these fracking regions are starting to object and a town in Texas that had started this fracking has voted to shut it. Further, since oil prices are declining, the profits of fracking companies are also decreasing and this is making them reconsider this expensive exercise.
The conflict in Syria had led to speculation that oil prices would actually rise. This expectation increased with the rise of the Islamic State (ISIL), civil war and the lowering of production in the oilfields in Syria and Iraq. The price of oil rose briefly in 2013. But in 2014, the picture suddenly underwent a radical change.
The decline of oil prices coincided with the US secretary of state’s meeting with the Saudi King Abdullah in June this year. Reuters and other agencies reported that the Obama-Kerry team put pressure on the Saudis to increase oil production and reduce prices, even as the US’s needs declined in order to create an artificial glut. The reason for this deal was to put pressure on key oil-exporting countries in order to pressurise their leadership.
Russia is the first target. Oil and natural gas form almost 70 per cent of its total exports. A cut in oil prices would negatively impact the Putin government. The US has imposed unilateral sanctions on Russia, because of Russian support to Ukrainian separatists and their opposition to Ukraine joining NATO. But the US has not factored in China. Russia has increased its oil exports to China and their supplies will reach 31 million tonnes by 2030. The Chinese are also making plans to bypass the dollar in such deals and use their own alternative currency. The US unilateral sanctions against Russia have not only failed, like other sanctions before, but have led to increased Russian nationalism, brought Russia and China closer. Also, Russia can give old allies like India a better deal. Moreover, sanctions has given Russian manufacturing new fillip and Chinese cheap goods a better chance than European ones. So, Europe is being hit, too.
The US wanted to lower oil prices with their main ally—the Saudis—in order to hit out at the Bashar al-Assad regime in Syria and to put pressure for a regime change in Iran. The US has placed unilateral sanctions against both these countries, with little impact on the regimes. The civil war in Syria has led to the rise of the worst kind of militia, which cannot be controlled by anyone. Another oil producer, Libya, is polarised between Islamists and others. The Iranian regime is the most stable in the region, despite sanctions and low oil prices. The US is being forced to negotiate with them.
So, things have not gone according to the US and Saudi plan. The growth of the ISIL is causing havoc in the entire region and the conflict can spill over to Central Asia, Afghanistan, Pakistan and further. It is alleged that the Saudis fund fundamentalist militias. But the US turns a blind eye in order to cut a deal with the Saudis in exchange of calibrating oil prices to hit out at Russia, Syria, Iran and others.
The decline in oil prices is also impacting America’s own entrepreneurs in the fracking industry, because international oil prices are less than what it is requiring to produce fracked oil. The Saudis are getting restless, after all a decline in oil prices does not help the regime that is parasitic on high oil profits. Worse, the Iraqi regime has become totally dependent on US aid for survival.
The US spent millions on training the Iraqi army that collapsed in front of the ISIL militia. Now, president Obama has asked for authorisation to send more air power to contain ISIL. They have to assist the Kurds to fight back this terrorist militia from Kobane, where there have been 270 airstrikes in the last weeks. The US is sending an additional 1,500 troops to Iraq. But these are not enough. Iraq will have to have more of its own soldiers. The decline in oil prices means that Iraq will not be able to pay salaries to its own army.
It appears, therefore, that the fall of oil prices is going to be a short-lived phenomenon. Primarily for the following reasons: one, because it is an artificial glut. Two, because the transnational corporations that own oil shares want high prices and feel with all these Middle East conflicts they should actually be getting more money to burn. Three, because the new fracking industry in the US can only be sustained if they are allowed to pollute and profit. Four, because, the world is no longer a chessboard where the US can move countries and people as pawns while their knight is safeguarded. Five, because deals on oil prices between the US and the Saudis, where local people pay the cost of being killed in wars, is no longer a secret. Six, because the US attempt to retain hegemony through the use of force and shady deals is fast losing international legitimacy. And yes, we could go on. But the bottom line is that oil prices are linked to international politics and this politics is changing.
The writer is professor at the School of International Studies, Jawaharlal Nehru University.
Email: chenoy@gmail.com