Fears of Geopolitics around Oil Impacting Global Prices Grow

  •   Tue, Oct 24 2023
  •   By Girish Linganna

October 24, 2023

  • Israel’s continued bolstering of its Gaza operation, involving more Palestinian targets and heightened engagement with the militant Hezbollah in Lebanon, has considerably raised the risk of a broader conflict
  • Iran, unambiguously proclaiming support for both the Hezbollah and the Palestinian Hamas, has issued a clear and stern warning about the potential escalation of the conflict if Israel is not restrained immediately. The assault on the Gaza hospital has caused the Arab alliance to further solidify their stance
  • The vigorous backing from the Biden Administration and Western nations during Prime Minister Benjamin Netanyahu’s critical time, besides the arrival of US carriers, has failed to alleviate the situation in any way

As indications of a broader Middle East conflict intensify, oil market analysts are anxiously watching to see how this developing situation will impact the future of oil and the global economy. Indeed, the potential engagement of Lebanon, Egypt, Syria and other Arab nations has grown increasingly tangible and the IMF has hinted at unexpected scenarios unfolding and the urgent need to prepare for another possible disruption to the world economy.

While no one foresees a shock akin to the one in 1973, which caused a four-fold surge in crude prices—impacting consumer prices and inflation—the looming prospect of oil prices disrupting the global economy, already grappling with the risk of stagflation and growth hindrance, is increasing concerns.

REDUCING THE DEPENDENCE ON OIL

Currently, the market has managed to absorb the challenges, with oil prices declining from the critical $100 per barrel threshold and settling in the early- to mid-’90s range. But analysts are cautious about dismissing the possibility of a significant surge, potentially reaching around $150 per barrel, should a broader conflict materialize. This scenario could be influenced by any disruptions in the transportation of oil through the Strait of Hormuz, responsible for roughly 20 per cent of all worldwide oil shipments.

A crucial point to consider is that the Organization of the Petroleum Exporting Countries (OPEC) no longer holds the same dominant influence it wielded in the 1970s. In addition to grappling with internal disputes, the cartel’s ability to exert significant control has been weakened by the fact that nations have diversified their economies, reducing their reliance on oil as the primary engine of economic growth and development. According to research at Columbia University, the contribution of oil to generating $1,000 worth of a nation’s gross domestic product (GDP) has declined by over 50%.

According to the World Resources Institute, these countries had lower oil intensity in 2003 than they did in 1973. For instance, the US decreased its oil intensity from 0.62 barrel—where one barrel of crude oil is roughly equivalent to 159 litres—per $1,000 of GDP in 1973 to 0.22 barrel in 2003. China reduced its oil intensity from 0.51 barrel per $1,000 of GDP in 1973 to 0.23 barrel in 2003. Brazil, India and the UK also achieved significant improvements in their oil efficiency over this period. These countries have diversified their energy sources, increased their use of renewable and alternative fuels and improved their energy conservation and management practices.

OPEC: OIL POLICIES AND INFLUENCE

  • OPEC is an intergovernmental organization that coordinates and unifies the petroleum policies of its member-countries
  • OPEC was founded in 1960 by five countries: Iran, Iraq, Saudi Arabia, Kuwait and Venezuela. Since then, it has expanded to include 13 members as of 2023: Algeria, Angola, Equatorial Guinea, Gabon, Iran, Iraq, Kuwait, Libya, Nigeria, Republic of the Congo, Saudi Arabia, the United Arab Emirates (UAE) and Venezuela
  • OPEC countries collectively produce about 30% of the world’s oil and hold about 70% of the world’s proven oil reserves
  • OPEC aims to stabilize the oil market and ensure a fair return for its members and a steady supply for consumers
  • OPEC also cooperates with other oil-producing countries, such as Russia, in a larger group, called OPEC+

DESCENDING ORDER BY NATION OF OPEC+ COUNTRIES’ OIL RESERVES

1. Venezuela
2. Saudi Arabia
3. Canada
4. Iran
5. Iraq
6. Kuwait
7. UAE (federation of 7 emirates)
8. Russia
9. Libya
10. Nigeria
11. Kazakhstan
12. Qatar
13. United States
14. Angola
15. Algeria
16. Oman
17. China
18. Brazil
19. Mexico
20. Norway

INDIA: SHIFTING IMPORT DYNAMICS

Although India’s oil demand is projected to jump 8.2 per cent to 5.15 million bpd in 2022, the level of concern surrounding India, fortunately, appears to have diminished. This is partly due to Russia taking on the role of India’s primary oil provider, which has reduced the significance of Middle Eastern supplies in the country’s energy management. According to the most recent industry data, Russia’s share of India’s total oil imports increased to around 40% in the first half of the fiscal year 2023-’24. This solidified Moscow’s position as the leading supplier, while refiners reduced their purchases from the Middle East.

India has risen to become the primary purchaser of discounted Russian seaborne oil following Western countries’ imposition of a ban on Russian oil shipments in response to the Ukraine conflict. Seaborne oil refers to oil transported by sea. It includes crude oil and refined petroleum products moved via tankers and ships across oceans and seas. According to a Reuters report, India’s average daily import of Russian oil from April-September stood at 1.76 million barrels per day (bpd)—more than double the roughly 780,000 bpd during the same period the previous year. India’s Russian import, which had declined in July-August, rose to 1.54 million bpd, an increase of 11.8 per cent from that in August and 71.7 per cent from the level it was a year ago. Russia was the top oil supplier to India in April-September, followed by Iraq and Saudi Arabia.

On the other hand, India’s imports from Iraq decreased by 12 per cent to reach 928,000 bpd and from Saudi Arabia by 23 per cent to 607,500 bpd in April-September. Conversely, imports from the Middle East during April-September experienced a reduction of roughly 28 per cent to 1.97 million bpd, resulting in a decrease in the region’s contribution to India’s total oil imports from 60 per cent to 44 per cent compared to the same period the previous year.

Saudi Arabia, as a major influencer in oil price determination through output control and coordination with other oil producers, would prefer to witness a steady increase in oil prices. However, it is mindful of the potential risks associated with a rapid surge in oil prices, particularly concerning the impact on oil demand, a critical factor that influences prices. This consideration serves as a key factor in how it assesses the current conflict, the outcome of which remains uncertain and could unfold in various ways, contingent on future developments.

 

 

 
By Girish Linganna
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