Thursday, January 7, 2016

Crude OIl: No Longer The Geopolitical Leveraging Tool It Used To Be?

Even though the Saudi-Iran tensions only managed to generate a “slight” trading price rise in crude oil a few days ago, is crude oil no longer the geopolitical leveraging tool it used to be?

By: Ringo Bones 

Since the Saudi Arabia-Iran tensions due to the execution of a prominent Saudi Shia cleric Sheikh Nimr al-Nimr only managed a “slight” increase in the trading floor price of crude oil despite of the subsequent riots that had resulted in a fire that gutted parts of the Saudi embassy in Tehran, crude oil prices still continued its inevitable terminal decline during the second week of January 2016. If the current Saudi-Iran tensions happened back in the 1980s or the 1990s - i.e. the Iran-Iraq War and Saddam Hussein's invasion of Kuwait back in August 2, 1990 to cite some examples - crude oil prices would have tripled by now. But given the lack of crude oil’s geopolitical leveraging that has global economic repercussions that it used to have back in the 1980s, 1990s or even during the George “Dubya” Bush administration part of the first decade of the 21st Century, does the current downward trend in crude oil prices spell bad news for the global economy? 

The current bargain basement prices of crude oil can be squarely blamed on the current “oil glut” that the world had been experiencing since the latter half of 2014. Given the high-level new oil strikes in the state of California back in 2013 and the American and Canadian tar-sands crude oil extractions that has since become economically viable during the past few years which made the United States now the world’s number one producer of crude oil and Capitol Hill even recently voting to end the Federal ban on U.S. oil exports is just one of the pieces that resulted in our current global crude oil supply glut. The last OPEC meeting of 2015 where Saudi Arabia and the rest chose to stick with sticking to their then current crude oil output quotas in order to drive the American tar-sands crude oil extraction industry only exacerbated the global crude oil supply glut problem. As Iran is now slated to reenter the global crude oil export market as a “reward” for the recent Nuclear Deal – the global crude oil supply glut will likely to worsen – rather than get better – further into 2016. 

A few hours ago, crude oil hits 33 US dollars per barrel – quite a far cry from 18 months ago when it used to trade within the 100 US dollars per barrel mark not to mention that “extreme peak” back in July 2008 when crude oil hit the 147 US dollar per barrel mark. Overall, crude oil lost 70-percent of its value since 2014 thanks to the global supply glut and the waning demand due to improvements in renewable energy power generating systems like wind and solar during the past 10 years. Not to mention that the ongoing downward trend in global crude oil prices caused most of the trading losses incurred back in 2015 and the continuing hardship of crude oil producing emerging economies like Brazil, Russia amongst others who rely on crude oil prices staying at 100 US dollars per barrel or more just to keep their government programs above water.