‘Greasy’ times. Much? (Part 1)

It was the year 1933 when the sagacious King, Abdul Aziz Al Saud, founder of the Kingdom discovered oil fields and granted Standard Oil of California the right to prospect oil for the Kingdom.

Referred to as black gold, 5 years later the oil refineries were discovered on a larger scale.

By 1940, Arabian American Company came into existence (Aramco).

Since then, Saudi Arabia hasn’t seen a fall, and has become the top producer of oil in 1970s to the full ownership of Aramco in 1980. Vast deposits of crude oil have since then been discovered. In the south of Riyadh, nearly 175 miles away from the Capital, one such was discovered around a decade ago.

Saudi Arabia has one fourth of the oil reserves nearing about 260 billion barrels. Most of them located in the Eastern Province.

The Kingdom has repeatedly acted during the hard times, be it the Gulf War of 1990, the fluctuation crises of late 90s or the Iraq War of 2003.

It has helped in preventing major shocks to the global economy from a loss of supply or sharp increase of prices.

With the formation of OPEC (Organization of the Petroleum and Exporting Countries) in 1960, to maintain the price stability, the Kingdom played a vital role.

Post-Gulf war till the Iraq war, from 1991 to 2003, there was a drastic increase in the price mainly due to the increased demand in South East Asian countries. By 2008, until the crisis came into effect, the price rose to $145 per barrel. The lowest was in the end of the year by costing $40 per barrel.

It was rebounded in 2009 at $80 which again reached a height just within a year at $100 in 2011 (the highest since the financial crisis of 2008).

Never has there been a continuous fall in the price. But then, what is the cause for the drop in the price of oil and the increased rate of petrol in the Kingdom recently? Has the demand reduced? Certainly not. It’s the ongoing Syrian crisis and the sanctions of Iran to be lifted in the coming days that have led to this increase in prices.

For a while the price was maintained at $100 but the ongoing crisis and mess in the Arab world has made it the lowest in 6 years at $36 per barrel in December 2015. Analysts are speculating that the price would further go down to as low as $18.

Apart from other bench marking classifications like OPEC Reference Basket, Dubai Crude, Oman Crude and West Texas Intermediate (WTI). Brent is the lead in the pricing globally with a hold of two third of the worlds internationally traded crude oil supplies.

Brent is light crude oil (not as light as WTI). It is best suited for petrol and middle distillates.

The other classification, WTI’s (West Texas Intermediate) price had gone to as low as $30 per barrel which was once $140, that is, before the financial breaking of 2008.

It is estimated to go even lower with regard to the present conditions.

There have been oil crisis in the past, which haven’t influenced the Kingdom’s market much. Let’s have a look at some of the earlier crisis:

Oil Embargo of 1973

The first time price of oil was affected was during the Arab-Israel war of 1973, also known as Yom Kippur war, which was fought in the month of October. This conflict between the Arab and American ally, Israel led to bringing the price up to $12 per barrel which was earlier $3 per barrel.

This was an outcome of the oil embargo by the Organization of Arab Petroleum Exporting Countries.

This short term embargo effected global economy and politics but did less harm to the oil rich Arabia.

The ban was lifted in 1974 after the then US Secretary of State, Henry Kissinger convinced Israel to pull back from Sinai Peninsula and the Golan Heights.

The embargo followed stock market crash also referred to as ‘first oil shock’ defining Saudi Arabia’s power in global politics.

Second Oil Shock of 1979

Also during Iranian revolution, the price of crude oil doubled in a span of 12 months reaching up to $39 which was quiet unjustifiable. It was then the highest price of all times until March 2008.

The outbreak of Iran-Iraq war again led to increasing the price of the crude oil as Iran and Iraq both had stopped its production

The rise in oil prices benefited other OPEC members like Saudi Arabia, Qatar and UAE.

Financial crunch of 2008

With price going from $140 in early 2008, price of oil dropped to $40. The economic downfall all over the world didn’t really affect the Kingdom as the price went up again in a year up to $80 and soon touched $100.

Keeping in mind the above, the fluctuating oil prices didn’t hamper the quintessential image of the Kingdom until 2015.

The reasons that can be penned down for the increase in oil prices are:  

1)      The sanctions of Iran which are to be lifted, allowing it to bring in half a million production of oil in the International market.

2)      The oil fields under the control of ISIS who are using this crude oil at much cheaper rate, nearing around half of the actual price to its bordering areas.

With the untangling of the sanctions on Iran and terminating all the economic and nuclear embargoes including the export of Iranian crude oil, Iran, as per the economists, would emerge as a vigorous competitor in the oil market from 2016.

Michael Tockuss, Managing Director of the German-Iranian Chamber of Commerce said that this was the day they were waiting for as it would bring great changes.

Nearly 300 Iranian organizations would be allowed to do business with Europe post the lifting of sanctions which would bring about a big change in the world economy.

US won’t be applying the crippling sanctions on the Iranian economy meaning that Iran is free to produce as much crude oil, estimates say around $10 billion by next year. Quite an estimated amount it is!

Iran’s GDP in the coming year may rise up to 5% as per experts, stating that the sanctions would bring an enormous difference in the world economy as well.

With Iran exporting as much oil as it ‘wants’ or depending upon the ‘need’ of the oil, there would be a drop in the already slugging oil prices and breaking the monotonous level of oil in the market even further.

Tehran has claimed to increase the production of oil up to half a million as soon as the sanctions and ban is lifted and is set to increase the exports by 2.5 million barrels in the coming year.

With more oil and less buyers, the demand and supply ratio is tend to be affected and after Iran’s claim of providing discount to its customers, the already low price of oil in 11 years is further expected to go down.

This is a massive setback to the already existing producers of oil. This is undoubtedly shackling the age old monopoly.

Iran’s return in the market could trigger a price war with its all-time rival, Saudi Arabia, which is already selling the price at a lower rate than the market.

Saudi Arabia doesn’t seem to be happy with the lifting of sanctions and is in no mood to create a room for Iran in the production, it isn’t willing to reduce its production so as not to lose its customers to Iran.

Many international companies are waiting for the guidelines to do business with Iran. The Treasury’s financial and asset control office (OFAC) would soon release the documents regarding the same.

British as well as German business leaders have asked the Treasury to give a ‘yes’ to the banks so that the financial institutions are confident in handling Iran-related requests by their European clients.

So how low could the price of oil go down to? Well, as per the economists of the Royal Bank of Scotland, the oil could fall to $16 while the prediction of Standard Chartered is that it can go to a flat $10 per barrel too.

In a nutshell, the supply is more than the demand. Saudi Arabia produces one third of the OPEC cartel’s output and is not willing on cutting the production in order to boost the price.

Well it is not just Iran, the bigger threat is ISIS. Yes you read that right. This terrorist organization has a hold on the oil refineries of Iraq. Iraq and Saudi Arabia contribute to the 2/3rd of the oil production alone in OPEC.

All are affected by this extremist organization but appear powerless to prevent it due to the widening sectarian schism between Sunni Muslims and Shia Muslims since the rise of Arab spring in 2011.

The ISIS, being a threat to the regional stability has affected the oil prices too withholding major oil fields.

Oil ministers last year met at the OPEC’s secretariat building in Vienna to discuss the same.

According to Daniel Yergin, vice chairman of IHS, the biggest threat is the chaos in the Middle-East, combined with the West’s reluctance to intervene.

Mr. Yergin in an interview debated that the prices could sky rocket to $100 given that the ISIS is pressed deeper in Iraq, the second largest producer after Saudi Arabia.

ISIS needs to be shunned from these oil wells so that their operational functions can be bridled.

During the invasion of Iraq in 2003, the price of oil steeped to a leap of $40 per barrel from $25 in just a span of few days and went to $60 in few weeks. But then, the increase in price of oil was relatively minor as compared to cost of other commodities like gold, which shot up to around $50 per ounce.

It is equally important to mention why isn’t the same happening today when ISIS is threatening to cut the supply completely unlike the 2003 invasion, when the militarization only reduced the operational supply? The conjectured reason would be that the domestic oil production of the largest consumer of oil, America switched to the Persian Gulf after the discovery of oil since 1920 which was once dependent on Pennsylvania and West Virginia, located in the country’s northern side which have either run dry or are far more expensive such that importing it from the oil rich Gulf was a wiser idea, but then, the 1950’s discovery of oil reserves in the Bakken area of North Dakota adjoining with Montana and Manitoba in the country is believed to have enough oil that could fulfill the energy needs of the US in the foreseeable future.  

Coming back to Iraq and Syria, the so called ‘Islamic Caliphate’ controls the northwest of Iraq and the adjoining plain areas of Syria. While the former area has less oil as compared to the southern part of it, the latter plains under the siege of ISIS are undoubtedly rich but the civil war has crippled the infrastructure needed to collect and export, thus not bringing any profit and so the price of oil would more or less remain stable unless this terrorist group marches towards the south of the country which is an unlikely event to happen as the US and the world nations would put a much harder foot down on their operations.

The big question is, how can these prices be controlled or at least the stability be maintained in the near future? The only possible answer would be that the all-time rivals, Saudi Arabia and Iran should come to a common solution and an agreement which favors both the nations without undermining either in order to let things flow steadily. With the recent tensions brewing between Saudi Arabia and the Shite Iran, the price conflict seems to be difficult but not impossible. After all, a nation in need is a nation indeed.