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TopFX Vice President of Business Development Paul Orford takes a look at the market landscape that surrounds oil, detailing his perspective on how energy independence intersects with oil prices and asks if falling oil prices are creating a new uncertainty in the global economy
Many of us are more happy than a year ago when it comes to filling up our car at the petrol station. However, what is this low price doing to the both the global economy and the relationship between the energy producing nations?
A simplistic answer would be that lower prices mean the cheaper production of goods, the growth in employment and increased economic output. However does it?
Since the advent of the US led shale boom, the Americans, much like all nations, have craved energy independence. To be independent or to have control of the international market forces means that you have a freer hand when it comes to foreign policy.
However, what this appears to have triggered is Saudi Arabia driving down the price of oil. According to some analysts the reason for this is to undermine the US oil industry when it is at the most critical time in the development of its home grown shale industry.
What is at stake for the Saudis and their allies in OPEC is a multi- trillion dollar industry which they will not quite rightly relinquish without a struggle. When you have a 40 year hegemony over a market, it is very hard to give up without a struggle.
With geo politics it is never black and white. This is outlined in by the famous 19th century British Prime Minister Lord Palmerston who argued “Nations have no permanent friends or allies, they only have permanent interests”, the Americans decision to strike a deal with the Iran who have more oil reserves than all of OPEC combined perfectly illustrates this point.
Having gone from sworn enemies, to meeting a common understanding has changed the landscape dramatically. The Iranian supply is predicted to be around 1million barrels a day, with many analysts believing that this could lead to a further drop in prices.
What does this mean for the main protagonists and the world economy in general?
The Saudis need higher prices to fund their economy. They require an extraction cost just to make an external breakeven to be around the $70 USD mark, with its neighbours just a little below that. With this sustained lowering of the price, it could perhaps lead to increased unrest in the region with its public and social policy being completely funded by oil revenues
Moreover, with lower prices this also puts tremendous pressure on other oil producing countries such as Venezuela could face more fiscal uncertainty in the very near future.
One positive that the American government will draw from this is their continued aggressive foreign policy against Russia. A low oil price can affect their economy tremendously, but at what price to their own growing shale industry?
As this is an embryonic industry, it is incredibly expensive to extract from source. Lower prices will mean more unemployment and a potential collapse of the industry.
It will prove to be an interesting balancing act for the American administration as they will have to choose between an aggressive foreign policy and an appeasing domestic policy.
One thing we do know is that any market is notoriously hard to predict over a 1 year period as there are so many global actors involved. However, lets all enjoy this summer of cheap petrol and the extra money that we all have from it!
This is a Guest Editorial which was compiled by, and represents the viewpoint of Paul Orford, VP Business Development, TopFX