To analyze the oil market, it is important to keep clear that it is not about a common competition market, but if an imperfect market on the basis of oligopoly, dominated by a small number of providers that have advantages in large resources and low costs.
Many analysts are concerned counting minor changes in the number of barrels of supply and demand sides, but methodically this is a wrong track because participants have different backgrounds and different market power.
The alternative is to analyze the key players out of their market power, interests, means and freedom.
Saudi Arabia and Iran
Counting barrels gives at best a short-term view of the oil market, while long-term interests can motivate key players.
in the current situation, in autumn 2016, it is particularly Saudi Arabia and Iran, which involves oil market; in addition, Russia and Iraq importance.
As the leading powers in the Gulf, Iran and Saudi Arabia both rival and common interests.
Historically, relations between Iran and Saudi Arabia has been changing. Before the Islamic revolution they cooperated in OPEC. Iran’s Islamic Revolution in 1979 was perceived as a threat by Saudi Arabia, but after the ceasefire between Iraq and Iran in 1988, the relationship relaxed, even more after the Kuwait war in 1990-91.
In 2001 signed Iran and Saudi Arabia a security pact. With the election of Mahmoud Ahmadinejad to Iran’s president in 2005, the ratio hostile.
Saudi Arabia felt threatened by a radical Islamist rule in Iran, isolated from the world. Today seems Saudi Arabia to believe themselves threatened by a more moderate government in Iran that opens to the world.
Iran’s significance in the Gulf has been characterized by discontinuities, in contrast to a high degree of continuity in Saudi Arabia. The reason is Iran’s unstable domestic politics, in contrast to the stability of Saudi Arabia, which with a smaller population, but a larger economy, has been able to make a stronger force in the region.
Long-term strategy
the reason for Saudi Arabia’s reorganization of its oil market strategy of prioritizing volume rather than price, was primarily to ensure provision for its oil in the long term.
the driving force was the fear of shale oil in the United States and consideration of long-term provision of oil and earnings, the competitiveness of conventional oil and its own share of the oil market. There is concern that oil in the ground that can not be sold, are worthless.
The instrument’s price and volume, to get oil prices down to a level that weakens the competitiveness of unconventional oil, especially American shale oil.
This is a long-term economic strategy that is largely shared by other major oil exporters such as Iraq, Iran, Russia and the United Arab Emirates. Common interests can in principle provide a basis for an agreement in OPEC, but the question is whether such an agreement is necessary in the current situation.
In the light of competition from shale oil in the United States, perhaps in Argentina and China, prioritises the major exporters of conventional oil market, not price. With any new government would probably also apply to Venezuela.
The resource base allows these major exporters to some extent offset the price declines with increased volume. For a time, the outcome could be a downward price spiral
New partners
In addition dictate political conditions a moderate oil prices. The power struggle between Iran and Saudi Arabia have an impact on the oil market. As the leading powers in the Gulf, Iran and Saudi Arabia both rival and common interests; historically, relations have been changing.
Reform Friendly forces in both countries can lay the foundation for pragmatic cooperation, but reform hostile forces can strengthen its position and tapered relationship further.
The gradual reduction of US engagement in the Middle East and the improvement of relations with Iran encourages Saudi Arabia to consider new partners, primarily Russia, China and India.
Saudi Arabia’s oil exports is increasingly being directed to Asia, but is facing stiff Russian competition in the Chinese market.
When Saudi Arabia considers its traditional leadership role in the Gulf as threatened and are facing a difficult economic and social restructuring, designated Iran as the arch enemy and as the cause of the region’s many problems.
Forces in the saudi prince house can actively desire a confrontation in order to weaken Iran and again to get USA supporter. A tense relationship between Saudi Arabia and Iran contributes to polarization and destabilization of the Gulf and the Middle-East.
In the civil wars in Yemen and Syria are Iran and Saudi Arabia indirectly counterparties by deputies. The risk is that Iraq is further destabilized and that the country disintegrates, with negative consequences for both Saudi Arabia and Iran.
Iran’s large population and economic potential indicates that the country’s influence in the region will increase . The country’s military and religious oligarchs are politically conservative; they oppose economic reform and opening to the world, but the capabilities are not creating enough jobs.
Reform Friendly forces will be strengthened by increasing trade and foreign investment; they will be weakened by new crises in relations with the outside world and unless the US were to raise their own sanctions.
Saudi Arabia takes reform package put forward by Deputy Crown Prince Mohammed bin Salman aimed at fundamental changes in society, but the encounter strong opposing forces and constraints.
It can not be excluded that the reforms succeed, deputy crown prince modernizing and gathers power. Another possibility is that the reforms create unrest and might lead to a military coup, where Princes deposited.
A further possibility is that the reforms causing chaos which empties into a fundamentalist religious regime. In any case, the consequence could be unstable oil prices.
Saudi Arabia’s market power
Saudi Arabia’s decision in autumn 2014 to prioritize volume over oil prices has historical precedent.
the country has for decades been “swing producer” residual provider and de facto regulator of the oil market.
The foundation is large reserves, low cost, free recovery capacity and at times a significant trade surplus and the state budget, and freedom of action on short notice to adjust oil production up or down.
the country also has large inventories of oil and refined products in ships and tank facilities around the world, making it also the stock sell-off could affect inflation, which is sensitive to real or perceived changes in volume balance.
why Saudi Arabia linchpin of the supply side of the oil market. Kuwait and United Arab Emirates are supporters virtue of its reserves, capacity and financial surplus.
Since 2014 invests all three countries in expanded production capacity, which together will be able to reach 20 to 24 million. Barrels / day in 2020. The goal is to recover the high volume of oil for a long time.
Today’s oil market exhibits parallels with the situation in the middle of the 1980s. US occupation of Iraq in 2003 led to the loss of volume, not increase as expected, while the financing of the war by budget deficits stimulate the US economy and oil demand, with spillover first to China, then to the rest of the world.
the gradual rise in oil prices from 2004, driven by demand growth. Demand and price proved robust, except during the financial crisis, when demand fell in 2008 and 2009; as did also award a dip.
Historical had real price of oil has never been so high for so long. High oil prices spurred investment in conventional and unconventional oil, especially shale oil in the United States.
Already from 2011-12 was the prospect that some years into the future would supply of oil increase more than demand, so a fall in prices was on the cards.
Saudi Arabia’s changing oil market strategy can be understood from this historical context and country experiences from the 1980s.
the change seems in retrospect proactive, anticipating a drop in oil prices led by others supply growth by itself to increase volume and lower the price, and for to compensate the fall in prices by volume growth and market share.
the alternative could have been to cut production and lose market share to defend high oil prices might further one or two years. Other considerations were long-term deposition of oil and earnings, the competitiveness of conventional oil and its own share of the oil market, as well as position in key markets, primarily the United States and China.
The breakthrough for shale oil in the United States involves a qualitative change on the supply side of the oil market. Saudi Arabia’s concern is that oil in the ground that can not be sold, are worthless.
A possible related motive could be to pump out its oil reserves before oil technology becomes obsolete and worthless, but financially, this seems little sense in view of the reserves scope, the need for investment and the impact on oil prices.
the question is how far and under what conditions Saudi Arabia will be able to have freedom of action to pursue the new oil market strategy.
the experience of the 1980s and 1990s suggests that Saudi Arabia is likely to be continuing moderate budget deficit and balance of payments over many years.
the country has huge financial reserves; it has no government debt. Estimates from the International Monetary Fund, IMF, suggests that the deficit on the balance of payments will be reduced quickly, while the state budget is expected to show continued large deficits because of low oil prices and high cost items.
IMF prerequisite is an oil at $ 35 / barrel in 2016 and $ 41 / bbl from 2017. Higher oil prices mean better prospects for Saudi Arabia to succeed.
A further fall in prices for oil would complicate strategy, likewise any difficulties in oil production. Until now, Saudi Arabia succeeded in increasing oil and
The decline in US oil production, the decline in drilling rigs operating in the US and the rise in gasoline consumption worldwide suggests that volume strategy succeed.
A continuation requires volume growth in order to meet a growing demand; technical progress lowers gradually cost of unconventional oil.
Other important OPEC countries, primarily Iraq and Iran, it seems that Russia understands that they are currently better served with volume growth in the market than with high oil prices .
OPEC comes criticism from Algeria, Nigeria and Venezuela, but the latter has a huge potential for volume growth.
Implications
The consequences are primarily unstable oil prices. To the extent that Saudi Arabia would continue its volume strategy in order to take market share and weaken Iran, Russia and the US oil industry, the oil price could remain moderate, perhaps at a level of $ 40-50 / bbl, occasionally perhaps lower.
to the extent that an understanding between Saudi Arabia and other major oil exporters within and outside OPEC could be achieved, would oil prices could stabilize at a somewhat higher level, depending on the response from shale oil in the US and elsewhere.
to the extent that the regime in Saudi Arabia would be destabilized and oil recovery are affected, would oil prices could rise significantly, but probably only temporarily, depending on a crisis scope and duration, and the supply of oil from other sources.
every regime in Saudi Arabia will have to export oil to feed the population. Probably Iran has the greatest economic potential and perhaps better prospects for political stability than neighboring Saudi Arabia.
Both Saudi Arabia and Iran reorient themselves foreign policy in a changing world order. The center of gravity of economic activity, capital formation, investment and consumption moves from the North Atlantic to Asia.
The market for oil from the Gulf is no longer North America and Europe, but Asia, primarily China. Here emerges a new oil order, where an oligopoly, few sellers, in the Gulf, faces a Oligopsony, few buyers in Asia.
oligopoly in the Gulf, which formed the basis for OPEC, meets a bundle major buyers, India, Japan, China and South Korea, which both individually and together have a strong bargaining position and a significant market power.
In the foreseeable future, China will probably be the main buyer of oil from Iran and Saudi Arabia. Chinese policy is to develop close bilateral economic relations and preferably to conduct trade in the Chinese currency, yuan, not in US dollars.
Iran’s new oil contracts between China and South Korea are quoted in euros. China pays Russian oil in yuan.
A high degree of self-sufficiency with oil and small imports from the Middle East to marginalize the United States in the world oil market. Nevertheless, the US has strong economic, political and military interests in the Gulf, but must balance relations with Iran and Saudi Arabia.
Russia has had a remarkable reappearance as a military and political player in the Middle East . With a relatively modest military action in Syria is Russia become a force in the region, the importance of the Gulf and the oil market.
Russian oil industry has proved unexpectedly robust against low prices; devaluation of the ruble has lowered costs and improved competitiveness.
Russia will in the foreseeable future be one of the leading producers and exporters of oil, with competing and coinciding interests with Iraq, Iran and Saudi Arabia. Therefore Russia an obvious interlocutor for OPEC.
In connection with the political game in the Gulf on the oil market, both Russia and China participants; Russia as a producer and competitor, China as a buyer and perhaps most important actor.
In this triangle is the United States still in the city as a political driving force and with a quest for confrontation to assert his position.
- To the extent relations between the US and Iran would become more acidic, the latter will have an incentive to further cooperation with China and Russia, not only in economic matters but also militarily.
- About relations between the US and Russia should acidified further, the latter will have an incentive to closer cooperation with Iran and China.
- And to the extent that the relationship between the US and China were to deteriorate, the latter would have an incentive to weaken the former’s position in the Gulf, not least with financial means.
New conflicts
Ahead of the US presidential elections in November 2016 it may be asserted that whatever the outcome, new foreign policy conflicts occur in the Gulf, in addition to a domestic conflict potential in all major countries.
From a historical perspective it is striking that this time acute conflicts in Iraq and Syria not driven the price of oil in the air, in an at least not yet.
the oil market may have been more robust to political crises.
for Norwegian suppliers are prospects new sales opportunities in Saudi Arabia and especially Iran, provided that quality and price are competitive.
Historically Norwegian industries have been very prominent in Saudi Arabia. In the upstream petroleum industry, a high level of activity provide opportunities for the Norwegian supplier facing Saudi Aramco.
The focus on armaments production may provide interesting opportunities for Norwegian defense industry. The country needs terms of investment, jobs and the transfer of knowledge.
In Iran Norwegian industry historically been more involved. Norwegian Hydro and Statoil have previously participated in the upstream petroleum industry.
With the opening of foreign participation should Statoil have good cards. Likewise, it will be good market opportunities for Norwegian suppliers. In this context it is important not only to focus on competitiveness in price and quality, but also on cooperation local partners and the transfer of knowledge.
At this point there is a certain analogy between the current needs of Iran and Norway’s needs in the 1970s. Norway has a good starting position and opportunities to build on the goodwill of earlier involvement in the country.
Norwegian foreign policy should therefore prioritize cooperation with Iran. Notwithstanding any American prejudice and obstacles are economic relations between Iran and the rest of the world likely to increase significantly, and Norway should join the competition.
Stability in the Gulf is in Norwegian interest and the question is whether and if so, how Norwegian diplomacy could contribute.
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