Jessica Rush
Arguably the biggest economic story this year has been the fall in oil prices across the world. This one event has had an incalculable number of knock-on effects, illustrating just what an interconnected world we live in. This article briefly touches on the impact it has had in four different countries: Saudi Arabia, Russia, the USA and the UK. While the economic effect on each country requires in-depth analysis to fully appreciate its scope, this article argues that the prima facie diversity of consequence on key global players goes a long way to demonstrating their economic differences.
In basic terms, global oil prices have fallen because supply has outstripped demand. The US has experience a boom in shale oil, due to an increase in hydraulic fracturing and directional drilling activity in Texas and North Dakota. This means that Americans are importing far less oil from other countries, leaving a surplus in their would-be suppliers. Although in many other markets, powerful players will artificially reduce supply to prevent price deflation, the Organisation of Petroleum Exporting Countries (OPEC) has made a deliberate decision not to do so. Furthermore, the oil-rich countries of Iraq and Libya have not suffered the fall in oil production the market expected when they became conflict zones, and their output still continues. It is the combination of these factors that has led to a dramatic fall in price across international borders.
Saudia Arabia seems to be at the epicentre of this economic earthquake. An important member of OPEC, being the largest producer at around a third of the organisation’s total production, its opposition to a co-ordinated cut in the production of oil was decisive, despite calls for such a move from Venezuela and Iran. It appears that the country was reluctant to risk losing its market share to non-OPEC suppliers, as happened when production was cut in the 1980s in response to a drop in demand, for which the country suffered financially. While Saudi Arabia will likely take a financial hit, the country has enough wealth to ‘wait it out’. This appears to be a calculated move, accepting losses in the short term in order to maintain market dominance in the long term. The very recent death of King Abdullah has prompted questions that a regime change might also trigger a turn-around in policy. However, reports have indicated the long standing oil minister Ali al-Naimi would continue in his current position. For the moment, at least, it appears the House of Saud is willing to endure temporary financial setbacks to ensure its country's long term future in the industry
These shifting economic plates have destabilised an already fragile Russia. In Time’s nomination for person of the year, it was asserted that Putin was enjoying a jingoism-driven popularity surge reminiscent of that which followed his invasion of Chechnya in response to Russia’s involvement in Ukraine. This may well be short lived as the country enters recession. The BBC estimated in January that for every dollar the oil price falls Russia loses two billion dollars in revenue. Like its Gulf State competitor, Russia has refused to reduce production for fear of losing its market share, yet it is in a far more precarious financial position than the wealthy Saudis. Coupled with the sanctions facing the country from western powers in retaliation for its intervention in Ukraine, the fall in oil prices is doing significant damage to the Russian economy. Prime Minister Dmitry Medvedev has publicly admitted that the situation is difficult and that Russia will have to abandon some projects and programmes. Certainly, the country has seen a significant rise in interest rates, which is potentially bad news for Russian businesses. The full impact of its financial constraints remains to be seen and western nations have indicated that sanctions are unlikely to be lifted in the absence of a substantial change in eastern Ukraine.
Across the Pacific Ocean, it appears the fall in oil price is leading the USA into fertile economic ground. In January it was reported that US oil production was at a 30 year high. The fall in prices has directly affected the American consumer, the dollar-per-gallon price plummeting in a way not seen in countries that maintain a more artificial price. To some degree, there is arguably a general feeling that decreased imports of oil are releasing the US from dependence on the Middle-Eastern states of which it has traditionally been wary That said it isn’t all good news for America. This drop in profits, as a result of the plummeting oli price, has coincided with the biggest strike in oil refineries since the 1980s, putting a fair amount of pressure on the boards America's oil companies, as the unions negotiate three-year employment contracts. More local impacts can be seen as well. In 2013, the National Geographic ran an in-depth article on the effect of companies moving to take advantage of the North Dakota's oil fields. Quiet, rural communities have strained under the weight of a large influx of new workers and significant environmental damage. The rest of the country may benefit, but the areas where the Shale boom is originating are reeling from the intrusion on a personal level.
The shockwaves can be felt here in the UK too with George Osborne proclaiming that the inflation rate is the lowest seen in modern times, there is certainly something to be said for lower oil prices (and its repercussions for travel, household energy bills and grocery shopping), giving UK consumers an extra boost as we slowly emerge from a period of economic hardship. However, the fall of prices at the petrol pump just isn’t at the same level here as it is in the US. Many travel and utility companies are locked into contracts to buy at a certain price for a fixed period of time, so it will take a while for the cheaper wholesale prices to filter through. In turn, this depends on the prices staying low, which at the time of writing seems unlikely in the long term. The advantage of this is that there is little risk of major deflation that would do significant damage to the economy. A downward spiral of prices can stall an economy as consumers wait to buy and investors hold back, which was a major issue for Japan (for whom the falling oil prices present a major economic danger that must be managed). At the same time, the UK’s North Sea oil companies will struggle to make a profit at current prices., Although certain areas such as Aberdeen, “the Oil Capital of Europe”, have been adversely effected, the UK as a whole does not have as large a portion of the economy relying on the oil market, so the lack of profits and investment is unlikely to seriously damage our economy. However, for this reason the UK does not have the leverage to manipulate the market. We cannot match the might of OPEC, and this jeopardises hundreds of thousands of jobs in particular in many northern communities if the domestic industry cannot stay afloat.
The four countries have showcased four very different relationships to this economic phenomenon. A close look at this shift in the business world illustrates two things. The first is the depth and complexity of our world’s economic connections. There is not a global player that has been unaffected by this. Secondly, we can see the differences in individual economies. They may be interdependent, but they are not identical. The rumbles of an earthquake may be absorbed by a robust economy like Saudi Arabia, rattling the reserves but not the foundations. Yet it can topple a shaky superpower like Russia. Western countries like the UK and USA may be able to take advantage of a shift in the markets without being destabilised, but we must be wary lest the ground move under our feet. Commentators have suggested this event is nearing its end, the oil price gradually returning to its previous level through a cyclical process. But there are no guarantees. The oil which transports us, warms us, feeds us and moves our economies has also exposed a diverse and complex economic world.