The Fluctuation of International Oil Price Is Closely Connected with The Changes of World Economy and Politics
With the increasing tension of international energy issues, oil has become a mutual game process between countries in the field of economy and politics. In the 1970s, the oil crisis broke out twice, and the international oil price became the center of attention in the energy war. Actually, the international oil price implies not only the supply and demand relationship of the world crude oil market, but also the focus of competition among countries. As oil price is traded in dollars, the United State has been very influential in the international oil market. The drastic fluctuation of international oil price affects the operating performance of oil companies in various countries and even the national economy of the countries. The world economy has been complex and changing rapidly, whereas the fluctuation of international oil price and the development of oil market have been closely linked with the changes of world economy and politics. In fact, the oil market has changed from over-supply to underproducing, and the pattern of oil supply and consumption has also changed dramatically. Therefore, the petroleum strategy has been considered a significant development tactic and diplomatic strategy by countries all over the world. What’s more, the United State, out of the demand for petroleum energy security strategic interests, has become a driving force for the fluctuation of national oil price.
Economic Reasons for International Oil Price Fluctuations
In recent years, countries around the world have been competing for oil resources fiercely, and the overall international oil price has been constantly rising. In detail, the growth of price is mainly caused by the following reasons.
First, the demand in the international oil market always affects the price of petroleum. Since the Iraq War in 2003 and the Iranian nuclear crisis, international oil price has been rising, which had a negative impact on the economic development of all countries. Oil is one of the non-renewable strategic resources, and George W. Bush, the former President of the United States, once referred directly to oil as the world’s most important primary product. However, rising oil price has not led to a decline in oil demand, which is different from the general supply and demand relationship in accordance with economic principle. For example, the annual oil production of the United States is 312 million tons, accounting for 8% of the world’s oil production, while its annual oil imports are as high as 627 million tons, accounting for 27% of the world’s oil. It revealed that the demand for oil in the United States does not show a downward trend while the international oil price rises. To ensure the development of national economy such as industrial production, oil demand countries provide opportunities and favorable space for the rise of international oil price.
Second, plentiful uncertainties in the international oil market would affect the oil price. In addition to the supply and demand, the international oil price is also affected by the relationship between economic equilibrium and various uncertain factors in the oil market. For example, the conflict between Turkey and Iraq, the tense relationship between the United States and Iran, the continuous depreciation of the American dollar, the occurrence of the Subprime mortgage crisis in the United States and other issues, all these factors have triggered the changes of international oil price.
Third, the rapid growth of international oil demand sparked fears that demand could outstrip supply. In 2002, a new round of industrial progress led to the development of the fossil economy, which depended on oil consumption. For example, China, India and Brazil are the most populous countries in the world, and the fast economic growth in these countries drive up the international oil demand, which causes the rapid rise of oil price. From the perspective of demand, the increase of international oil price has not decreased the demand for oil in industrialized countries. From the perspective of supply, oil producing countries are not sensitive to the rise of international oil price, and the soaring international oil price has not stimulated the increase of oil production. Thus, with both the increase of global oil demand and the shortage of oil supply, the oil market is bound to keep driving up international oil prices.
The Status Quo: Multiple Factors Are Driving Up Oil Price
With the combined influence of various factors, the international oil price has been increasing continuously, and it has refreshed the highest price in seven years. According to investment institutions, 90 dollars per barrel has broken through, and a few days ago, the oil price even exceeded 100 dollars per barrel.
Political unrest in Kazakhstan and Libya, as geopolitical factors, temporarily affected local crude supplies and helped push up international oil price in the short term. Besides, Houthi rebels in Yemen launched a drone attack on ABU Dhabi, capital of the United Arab Emirates, causing an explosion and a fire on a fuel tanker as well as death and injury. It became one of the most serious attacks the UAE has ever seen. Later, the Saudi-led coalition launched airstrikes on the Yemeni capital. As a result, the region’s crude oil export security risks again upgraded. The United Arab Emirates is an important oil producer in the organization of The Petroleum Exporting Countries (OPEC). The crude oil production of it accounts for approximately 10% of the total figure for OPEC, ranking third in the organization of the Petroleum Exporting Countries.
Due to the risk of deteriorating security in the Middle East, oil price has surged to their highest level since October 2014. According to analyst, Houthi attacks in Yemen that did not cause major damage to ABU Dhabi oil facilities, but the event could raise concerns of supply disruptions in 2022. Meanwhile, heightened political risk in the Middle East could have a direct impact on nuclear negotiations between the United State and Iran. Therefore, the crude produced by Iranian would be less likely to access to the global market, which could boost demand for substitution goods because of insufficient crude products supply.
Oil price has been slowly recovering since 2014, when the shale oil revolution had a severe negative impact on the global crude oil market. Although the COVID-19 pandemic in early 2020 made oil price plunging again, two years later, oil price has rebounded at a higher speed than people expected. In addition to the problems in the Middle East, tensions and conflicts between Ukraine and Russia continue to affect the European gas market, and crude oil, an alternative energy source, also affected severely. Moreover, spare oil production capacity in oil producing countries seems to be struggling to increase further, and the market’s expectation is still that supply will not meet demand, leading to higher price.
Both supply and demand will have an impact on oil price in the short term, with the Russia-Ukraine situation remaining the most influential uncertainty. As for the supply side, the market has not effectively alleviated the concerns of crude oil supply shortage, the International Energy Agency estimates that Russia’s crude oil production may decline by about a quarter, which will cause supply shock to the global market. So, other countries and regions cannot underestimate the impact of Russia’s oil export reduction. About 35 per cent of Russia’s budget revenues came from oil and gas last year, though Russia has been working to reduce its dependence on hydrocarbons, oil and gas are still the most important source of the country’s budget. Also, major oil consumers in Europe and the United State and OPEC are still jockeying over whether to increase production. In terms of the demand side, high oil price and the resurgence of COVID-19 in some regions have dampened demand for crude oil. In general, the later oil price will be volatile; it is possible for oil price to fall if Russia and Ukraine reach a truce agreement.
By Xin Wang
