Source: China.org.cn
In recent months, the international price of oil has dropped significantly, and as of now has already fallen below 60 dollars per barrel. Compared with its value in mid-2014, when it was nearly 120 dollars per barrel, prices have already fallen by nearly half. This rapid decrease has done tremendous damage to countries such as Russia, Iran, and Venezuela. These countries that have been hit hardest just so happen to be ones that do not have cordial relations with Western countries, such as the United States. Recent issues over Iran’s nuclear program and the crisis in Ukraine have made Iranian and Russian relations with Western countries extremely tense. The United States and some European countries have hoped that economic sanctions will force Iran to make concessions in the nuclear negotiations. They have also employed wide-ranging economic penalties against Russia over the past few months to compel Putin to soften his position on Ukraine.
These sanctions already have had crippling effects on the Iranian and Russian economies, for which the recent plummet of oil prices has caused further trouble. The exchange rate between the Russian ruble and the U.S. dollar has fallen to dangerously low levels, and inflation in Russia has rapidly increased. As a result, public anxiety has led to a massive assault on the Moscow Foreign Exchange Trading Center. Experts point out that Russia’s economy is already on the edge of collapse, and Putin is facing unprecedented challenges and pressure.
In contrast, the United States is a major oil consumer and has benefited greatly from lower oil prices, which have reduced production costs for American industries and contributed to the U.S. economic recovery. Given these realities, some people suspect that the fall in oil prices is a result of Western manipulation for geopolitical ends. Such a viewpoint has exaggerated the effects of geopolitics. It also ignores both the decisive influence that supply and demand plays within the market as well as other economic factors that can affect oil prices. This kind of one-sided explanation can be misleading for policy discussions.Fundamentally, change in supply and demand is the leading reason for the recent drop in oil prices. For a number of reasons, forecasts of future demand for oil in international markets have continued to predict declining growth. For one thing, China’s economy has entered a “new phase of normalcy”— although the country is the world’s leading oil consumer, increases in its demand for oil will gradually slow down. In addition, the U.S. economy has not yet completely recovered, and growth in its demand for oil also will be limited. Finally, Europe’s economic prospects have been dim for quite some time, and oil consumption there will not rise greatly either.
Looking at the supply side of the equation, the development of new technologies has caused a rapid increase in U.S. shale oil production. Large oil-rich countries such as Russia also have steadily increased their production yields. Meanwhile, unrest in the Middle East has not seriously curtailed oil production in countries such as Iraq, as many feared it would. On the whole, sluggish worldwide demand for oil as well as ongoing increases in its supply has basically guaranteed a downward trend in oil prices.
Secondly, the ability of the United States to manipulate and cause drastic changes in the international price of oil is greatly limited. The U.S. oil industry is highly privatized, which indicates that oil companies are primarily focused on maximizing economic returns. Their policies will not closely coincide with the U.S. government’s foreign policy objectives. On the contrary, more often than not it is oil groups that sponsor lobbying efforts in the U.S. government to shape policy in directions sympathetic to their own interests. In addition to this, the emerging U.S. shale oil industry is in a critical period of development. Its excavation costs are still relatively high, and the sector is ill-equipped to cope with the harm associated with low oil prices. If prices continue to drop or remain low, this could be a serious setback for U.S. shale oil companies, and could bury their future prospects of survival. This has already prompted a great deal of domestic pressure on the U.S. government.
Furthermore, the likelihood that the United States and Saudi Arabia are working together to depress oil prices is not great either. Saudi Arabia has gone against its previous practices and has refused to reduce its oil output, primarily out of hope that the country can maintain its international market share by sacrificing some short-term oil revenue. The idea is to reduce Saudi competitors’ margins for survival, especially those of U.S. shale oil companies. The U.S. government could not possibly cooperate with Saudi Arabia on this issue. Besides, the alliance between Saudi Arabia and the United States has long shown signs that coordination is lacking. Saudi Arabia sees Iran’s nuclear capabilities as a huge threat and is dissatisfied with the flexibility and willingness to compromise that Washington has shown in its negotiations with Iran. By refusing to prop up oil prices, Saudi Arabia has taken advantage of an opportunity to put additional pressure on Iran’s economy and force Tehran to make further concessions in the nuclear negotiations. Saudi Arabia’s current actions have done more to reveal fissures—as opposed to cooperation—in the Saudis’ relationship with the United States.
Therefore, the central issue is that the recent drop in oil prices reflects a lack of balance between supply and demand of world oil markets in the near future. The impact of political machinations has only been secondary. That said, if the price of oil continues to remain low, its impact on international politics could become very difficult to control, and the situation will not necessarily develop in a direction that fits the strategic interests of the United States and other Western countries. Serious economic problems will not necessarily force Russia or Iran to make political concessions. This is especially true when it comes to important issues that are seen as “core interests;” it is often the case that strong pressure brings greater resistance. It could possibly stoke nationalist sentiments, and could encourage riskier, more assertive diplomatic policies.
Historically, large-scale economic hardship has been unable to force North Korea to forgo nuclear ambitions, nor compel Iran to abandon its principal positions in the nuclear negotiations. Likewise, there are no signs that economic trials will force Russia to make great compromises on Crimea and Ukraine. In recent days, Russian Foreign Minister Sergei Lavrov has openly discussed the country’s right to deploy nuclear weapons in Crimea, which further reflects a trend toward greater brinksmanship. These realities will all heighten the risk that security situations in these regions could spin out of control.
For China, it is not necessary to play-up the so-called “political conspiracy” behind the drop in oil prices. Instead, China should clearly understand the market factors driving this trend, soundly assess its future trajectory, adjust its investment strategy and foreign policy accordingly, and prevent negative economic and political consequences. Overall fluctuations in the supply and demand of the international oil market are unlikely to prompt a fundamental reversal in prices in the near future. Because of this, oil prices in the short to medium term will probably remain at modest levels. This will have an important effect on the next step of transformation in the structure of China’s energy sector. Developmental polices for industries such as the petrochemical, automobile, and alternative energy sectors all face the need to make timely adjustments to further optimize operations.
When it comes to foreign policy, China’s influence in major oil exporting regions such as the Middle East will continue to increase, as the country becomes an increasingly important importer of oil. Russia and major oil exporting countries in the Middle East will continue to adopt new measures after experiencing this great decline in oil prices, by making their economies more diverse and working hard to reduce their economic dependence on oil exports. This will fit nicely with the implementation of China’s “One Belt, One Road” strategy. Chinese advantages in financial investment and infrastructure construction can drive upgrades of these countries’ infrastructure, can help to transform their economies, and can assist relevant economies to move gradually along the road to sustainable development. This strategy also will have positive effects when it comes to improving local social stability as well as eliminating fertile soil for extremism. Because of this, China’s regional economic initiatives (such as “One Belt, One Road”) can be employed to meet urgent needs for these countries, to carry out focused investment and cooperation, and therefore to achieve win-win, mutually-beneficial development to the greatest degree possible.
This article was originally published in Chinese by China.org.cn.