The Toll of Higher Oil Prices

The Toll of Higher Oil Prices

The oil industry is known to be a global game where what happens in political and economic scenes impacts the price of oil. However, with prices of the oil barrel passing $100, the black gold may emerge as a gamechanger itself in the economics and geopolitics of the world.

Bushed by rising demand and uncertainty created by the Russia-Ukraine war, oil prices soared to record high. Many experts believe that these higher prices are likely to stay, for a while at least.

The consequences of the rising oil prices will not only hit the countries’ economies and households but also the world politics and alliances while altering energy transition roadmaps.

Everyone Will Feel the Pinch 

The Russian military operation in Ukraine prompted a series of Western sanctions and disrupted global energy markets. The rise in oil prices is expected to increase inflation and reduce world economic growth. The oil prices don’t only affect the prices of goods made with petroleum products, but also costs such as transportation, manufacturing, and heating; thus many people around the world will feel the pinch.

The problem is even more complicated for Europe, which depends on Russia for most of its energy imports. While Ukrainian cities have fallen to the mercy of the Russian missiles, the European countries were under the mercy of the Russian energy supplies, as all attempts to compensate Russian gas have fallen.

Even before the beginning of the Russian operations in Ukraine, the United States was desperate to secure the energy needs of its European allies. It was impossible to dispense with the large supplies from Russia amid the increased demand and the limited world supplies in the wake of the coronavirus pandemic.

The pressure of increased prices amid the Russia-Ukraine war and the refusal of big producers to ramp up production pushed the US to change some of its tactics and policies.

The crisis has brought Gulf energy exporters, such as the UAE and Saudi Arabia to the spotlight again and even sent Biden administration officials
to Venezuela and accelerated nuclear talks with Iran.

New Alliances on the Horizon

Most of the Gulf states, which for decades have been viewed as US allies, have pursued a neutral stance to preserve co-operation with Moscow on geopolitical and energy issues, rejecting Western accusations that refusing to condemn Russia is tantamount to supporting the invasion.

Officials from Gulf states expressed their belief that taking sides would only lead to more violence and encouraged at the same time all parties to resort to diplomatic action and to negotiate to find a political solution.

Even with oil prices soaring above $100 a barrel, Saudi Arabia has resisted US pressure to pump more oil; even with Prince Mohammed bin Salman insisting that the kingdom was committed to Opec+.

Some analysts see the Gulf States’ behavior as an indicator of their desire to build multiple alliances and relationships with other major powers, primarily China and Russia.

There are also analysts who think that Gulf monarchies’ refusal to side with the US and Europe against Russia is only an approach to protecting national interests and avoiding the costs of strategic alignment.

Regardless of the real reason behind the Gulf States’ stance, one clear thing is the shift in their relations with the US, which was viewed for years as the guarantor of the Gulf security.

Saudi and Emirati officials have signaled that the relationship with Washington has deteriorated during the Biden administration and expressed that they want more support for their war in Yemen. They also expressed their opposition to the US attempts to return to the Iran nuclear deal.

According to a Wall Street Journal report, Saudi Arabia has even entered talks with Beijing to price some of its oil sales to China in yuan, a move that would dent the US dollar’s dominance of the global petroleum market and mark another shift by the world’s top crude exporter toward Asia.

Biden administration officials traveled to Venezuela for talks on potentially allowing the country to sell its oil on the international market, helping to replace Russian fuel. They also hoped that a looming nuclear deal with Iran could bring significant volumes of Iranian oil back to the market.

However, experts indicate that for now, Saudi Arabia, which leads the OPEC producers’ cartel, and the UAE are the only two oil producers with significant spare capacity that can stabilize the market, thereby preventing prices from reaching — or even exceeding — $150 per barrel. This puts Biden in a quandary over his deteriorated relations with Gulf countries.

Despite being the biggest oil producer in the world, the US is going to suffer too as +$100 oil barrel is set to squeeze American households, push up inflation, put a dent in the economic recovery and create a new headache for the Federal Reserve as it moves to raise interest rates.

Political Dilemma

The crude oil shock is not only more likely to cause electoral turnarounds in several countries where the population will be affected by the severe economic consequences.

As a World Bank study suggests, voters usually tend to act on a rise or decline in the price of fuel as oil price movements are politically significant and have the power to displace governments. The higher prices may even cause a reversal in the political leaning of the voters with some right-wing supporters go to the left or vice versa.

Using polling data from 207 elections across 50 democracies over the past 40 years, the study shows that oil price hikes a year before the election drastically reduce the ruling party’s chances of retaining power. Specifically, the study finds that a 0.1% increase in crude oil prices, adjusted for each country’s oil imports as a share of gross domestic product (GDP), reduces the re-election chance of the ruling party by 0.5-0.8 percentage points.

Moreover, rising oil prices will encourage companies to try to find more oil supplies, even if it is expensive. Since the oil shock of the 1970s, a new wave of countries has started producing oil such as Venezuela, Russia and remote places like the Antarctic.

If oil prices remain high, that could lead to a rush to drill more oil, as hydrocarbon companies look to cash in on the higher price and ramping up fossil fuel production runs counter to urgent calls to decarbonize to slow global warming.

For decades, oil has been caught in a boom-and-bust cycle, where high prices spur investment in oil and gas drilling which, in turn, leads to lower prices that increase demand for oil. There is little reason to think this time would be any different.

Also, higher oil prices have always led to an improvement in the position of oil exporters like OPEC countries, while leading to a deterioration in the position of oil importers. There is little reason to think this time would be any different too.


Welcome! Login in to your account

Remember me Lost your password?

Don't have account. Register

Lost Password