Political Economy of the Global Oil Market

Many countries have acquired an insatiable need for oil fuel in recent decades. There is no substitute for this level of energy, after years of looking and experimenting. Oil is a natural resource that not all countries can produce due to its scarcity (Gilpin 201). Oil is one of the export commodities that allows a country to sustain political power. The oil sector determines a state’s ability to expand into agriculture, develop industries for raw material processing, build infrastructure, and improve in technology. The production of oil fuel also performs a vital role in the national and international politics, which indicates that the nations which control vast oil fields produced and sell at a reasonable price are in the position of ruling other countries in the world (Henriques, Irene, Perry & Sadorsky 998). This paper will discuss the global oil market on the political economy.

Global Oil Market in Political Economy

There are characteristics of oil fuel that make it a valuable item in the economy of the world. Oil energy is “universal” because it plays a vital role in almost every aspect of people globally. The production of oil energy has facilitated the advancement of technology and the improvement of the transport infrastructure (Yang 107). The fuel is unique because when compared to other sources of energy, oil has no replacement because it contributes to the improvement of the transport sector in all the countries globally (Salameh 133). The transport industry worldwide uses oil energy for different purposes, for instance, vehicles and airplane need oil energy for propulsion. Oil energy also plays a double role because it can also be used to produce electricity apart from usage in the locomotion purposes. Another characteristic is that oil energy is rare because oilfields are redistributed differently in the world. Every president desires to have oil fuel production as a significant economic activity (Smith 145). Scientific research has revealed that oil energy is progressively depleting at an alarming rate.In the year 1900, coal was the leading source of energy at 55%, while oil and gas fuel was at the rate of 23%. Over the last few decades, oil energy is leading at 40%, followed by gas at 23%, and coal that dropped to 25% (Kaufmann 165). The statistics show how fast the production and usage of oil are growing globally. In the year 2000, the demand for oil fuel globally rose to approximately 74 million barrels per day (Kaufmann 165). The consumption is predicted by the International Energy Agency (IEA) to double by the year 2030.

Most of the economic activities that occur in any country require oil fuel. For instance, planes, trains, and automobiles rely on oil as a source of energy for smooth operation. Such activities as driving kids to school, transportation of foodstuffs from the garden to the market, powering a warship, and missile launchers depend on oil fuel (Borenstein 71). The countries that have oilfields prosper while those that lack will spend more on purchasing oil fuel. It is, therefore, not something new when international geopolitical conflicts arise because of oil fuel. The companies that supply the fuel also usually disagree because they want to dominate the world market to enjoy the economic benefits (Kaufmann 166). Over the years, there have been conflicts over the control of oil deposits in the world such as the one that erupted between Iraq and Iran. Some of the confrontations have risen because of lack of keeping the agreement signed by different countries (Kilian 1054). These disagreements have led to boycotts, United Nations criticisms, and invasions and wars among parties that are involved.

The countries involved in the war for oil market domination include the United States of America, Russia, which was formally known as the Soviet Union, Iraq, Turkey, England, Saudi Arabia, United Arab Emirates, Libya, Algeria, Nigeria and Germany (Falola, Toyin& Genova 20). These countries have been forced to get into a war to defend their oil deposits and their position in the global oil market. Many prosperous nations get ample supplies of oil at reasonably low prices for an extended period to remain the primary supplier of the product in a given region (Cohen 201). These countries use the political power they have to manipulate the nations with enough supplies of oil to protect their position of prominence globally.

In some countries such as Mexico, Venezuela, China and India high prices of oil have always served to bring political stability because the nations receive capital from countries which do not have oil deposits (Henriques et al. 1001). Every aspect of a nation’s economy, currency exchange, the overall sense of security and political stability depends on the oil market. The success or failure of any ruling system of a nation and the survival of its citizens is not only affected by possessing oil fuel but also the effective control of the oil prices is vital (Yang 108). Nearly all governments are in agreement with the importance of maintaining the stability of the oil market and ensuring that oil fuel is supplied to the nations which do not have access to it. The oil industry will determine the geopolitical composition of the universe in the next 50 years to come.

Oil prices in the global market drive the economy and the geopolitics of the world. Alliances between nations rise and fall over petroleum because the parties involved will fight to dominate. Due to the high amount of money collected as a result of supplying oil fuel to other regions, revenue is given to extremist groups in Nigeria and Iraq. Some of these acts are supported by the political leaders who want their countries to have control over most of the oil fields in the world (Henriques et al. 1000). The high oil price has made states to develop alternative sources of energy to avoid the global energy crisis. The fall of costs in the world will have profound effects on the economy of various countries (Henriques et al. 1001). The attempts to destabilize regimes and the alteration of the global economy in lasting and unforeseen ways are some of the consequences of energy crises.

The drop in oil price is the topic of discussion for the last two years and in the present days. One challenge is that the cost of oil fuel is usually difficult to predict because of the difference in the amount of oil production in various parts of the world (Borenstein 72). However, there are indications that the costs are not going to increase anytime soon. Countries such as Saudi Arabia and the United Arab Emirates cannot manipulate prices with the OPEC agreement because they have lost the ability to convince their partners such as Venezuela and Iran (Cohen 203). The country which supplies oil energy globally has a more significant market share than other nations.

Furthermore, if a producer of oil fuel looks for supply-cut allies apart from the OPEC, then it has high chances of dominating the oil market globally (Kaufmann 167). If there is a rise in the price of oil energy, the United States oil shale enterprise is energized giving its regime more power to control the oil market (Kilian 1055). Investments are also reduced because there is no money to circulate in the country’s economy. The political impact on the oil trade is adverse among various countries such as Iraq and Iran. For instance, the nations along the Persian Gulf have invested billions of dollars in creating social programs and subsidies to discourage the government triggered protests (Yang 107). The Russian government has also faced political threats which are related to the oil industry.

Geopolitically, the low prices of oil fuel are in the Middle East where the political structures have become stable, and the minimum cost of oil fuel is supported by the wealthy patronage (Salameh 135). In this region, there are immediate and exact security threats because the social and the economic reforms have not provided the rules that help in addressing the security challenges (Smith 147). Countries such as the United State, China, and Japan have an economy that grows at a faster rate because they do not have the insecurity issues that are affecting other nations.

The rise of gas fuel costs in the United States was one of the major topics during the past three presidential elections (Kaufmann 167). Such situation encouraged politicians to address one of the challenges at that time, which was the dependency on oil fuel as the primary source of energy for powering the transport sector (Henriques et al. 999). However, since the decrease in the price of oil energy the politicians have remained silent. Alternative sources of energy have been developed, but still, oil is mostly used.

The response to the oil crises in the year 1970 led to the decrease in the price of oil fuel globally because there was increased production worldwide and energy efficiency was enhanced (Smith 149). The oil prices did not remain low because between the year 1998 and 2008 the cost increased tremendously causing a great recession. The scenario may be repeated if the global economy improves. The prices will still rise as long as the transportation system relies on oil fuel and also the world’s conventional reserves remains in control by the dominant regimes (Borenstein73). If alternative sources of energy are not considered an urgent matter, then energy crises will remain a problem in most of the nations in the world.

Politics has taken center stage in the oil market. It is evident in some countries such as Saudi Arabia and Iraq, which are working to ensure that the United States of America is phased out in the world economy (Falola et al. 23). The two countries are taking risks to ensure that they gain control over the world market and the oil and gas industry. Saudi Arabia and Iraq had shut down thousands of rigs and shed over two hundred thousand jobs in the year 2016 to have more share in the oil market (Borenstein 74). There were also no investments from outside going on in Saudi Arabia and Iraq. Furthermore, nations around the world such as those that were in the Middle East and the Central America for which the economies largely depended on the export of oil were almost economically collapsing (Kaufmann 168). The low cost of oil fuel is favoring the American consumers because of the suitable foreign policies. The policies will remain as long as the prices last for five to ten years to come. The reduction in the cost of oil energy comes with consequences. There are increased carbon-emitting fossil fuels, low profits for the private oil companies. Firms that seek to introduce clean-energy technology face challenges, especially in the implementation stage because the political leaders interfere with the process since they have shares in the supply of oil fuel to some of the countries (Cohen 202). The nations that are affected by the low price of fuel include Venezuela, Russia, and Saudi Arabia. These countries may have political instability as a result of lower costs of oil in the international market.

The prediction of oil price changes is not easy because most of the countries do not have a high or low season for production of oil fuel (Salameh 134). The seasons make the prices challenging to predict. If the consumption of oil energy rises, the cost may increase or not depend on the rate of oil production

The production of oil energy is high as compared to the past because the United States has doubled its oil shale output since 2008. Saudi Arabia has also supplemented oil and petroleum products to this competitive market (Gilpin 204). At this time the lifting of sanction against Iran oil will increase the production of oil fuel globally. The prices of oil that ranged between $20 to $30 U.S dollars per barrel were once considered to be beneficial to the economy which is not the case in the modern day. Low prices of oil fuel have led to budget cut down in most of the states in the US such as Texas, Alaska, and California so that the primary needs such as education and proper housing are provided to the citizens (Gilpin 205). There has also been bankruptcies and undercutting of incentives in most of the energy companies due to lower costs of oil energy.

Low prices of the fuel are also a relief to the economy because cheap oil products translate into a massive increase of revenue and reduced levels of poverty in nations such as Russia, Mexico, and Brazil (Kaufmann 168). For the ten OPEC countries which have oil fuel comprising of more than 85% of their export revenue, the consequences are usually extreme. In nations where the stability of the regime depends on the provision of the economic benefits to constituencies in exchange of political support, low prices will bring more revenue, and there will also be inflation (Smith 148). Such a practice signifies the downfall of a fragile government and sometimes a regime that appears unstable. For instance, in Venezuela, there existed a constitutional crisis that led to economic contraction. There were also dangerous situations in the Middle East and North Africa that intensified to the point that the economies of the various countries were sabotaged (Salameh 137). The scenarios occurred because the disputes in the boundaries of those regions were not resolved and the politicians were also struggling to lead the people. The grim economic forecast on the oil-producing nations shows that they are less capable of meeting the needs of their citizens or securing the oil fuel facilities and the pipelines (Falola et al. 27). The situation has enabled insurgents to move into the various nations and create economic and political instability. Some of the groups that cause such confusion in the countries are financed by those that have significant shares in the oil energy exporting companies (Henriques et al. 1006). For instance, the Islamic State gets their earnings from the oil fields in Syria and Iraq (Falola et al. 28). The Boko Haram of Nigeria is also funded through the Al-Qaeda affiliates who are majorly in the Central Asia and Caucasus.

One of the likely impacts of the politicians financing the militia groups is increasing in the cost of oil fuel. Despite the current calls by the United Nations Organization to end the atrocities caused by the militia groups, the security of the citizens in the countries involved is in jeopardy (Gilpin 204). The production of crude oil in the United States of America has dropped substantially, especially in the year 2008. The delay by oil energy supply companies such as Chevron and ExxonMobil to kick off the numerous large-scale oil energy projects has the potential to cause an increase in the prices of fuel (Yang 109). The supply of oil energy can also be disrupted by the wider conflict in oil field regions caused by low and unstable costs of oil fuel. The disagreement associated with oil energy entails conflict that solely appears to be ethnic and religious. Some of the examples of such wars include the tension between Saudi Arabia and Iran, the civil war between Iraq and Syria, the continued civil unrest in Yemen and those in South Sudan, Nigeria and Libya (Kilian 1056). Most of the governments such as Russia and Saudi Arabia were compelled to take aggressive political actions abroad so that attention could be shifted away from the deteriorating economic conditions in their nations (Borenstein 73). The rise or fall of oil prices together with the consequences perilously affects both the losers and the failures. The destabilization of the economy, politics, and the civil wars have compelled governments to look for alternative sources of energy (Cohen 201). Dependence on oil fuel will create an impact on the performance of most of the oil-producing nations in the global market.

The USA is one of the countries that produce oil fuel, but the state does not depend on it as the only source of energy. One of the weaknesses of the USA is the slow pace in which it changes its foreign policies. The radical changes taking place at the international energy market gives the United States of America an opportunity to streamline its systems with those of the global economy to benefit from the oil trade (Falola et al. 27). The past performance of the country in the world market is not good. The policies should act as a guideline for choosing partner nations to ensure there is a profitable business (Smith 148). The United States of America for decades were forced to embrace the foreign policies which were set by the Persian Gulf sheiks because they needed their oil fuel and support for them to take control of the oil market (Henriques et al. 1000). The reduction in the prices of fuel and an increase in the production along with the end of the cold war in most nations rescued the United States from the bondage. It was appropriate for the country to have its agenda for the Middle East (Kaufmann 170). One of the plans includes the search for its security rather than those for other partners.

According to Smith (158), the prices of oil fuel will not rise anytime soon. Saudi Arabia will always produce oil energy in large quantities not only to preserve the market but also to deny the Iranian governments all forms of sanction relief (Smith 160). The Saudi Arabian government also aimed at reducing the incentive and investing in new pipelines to keep the oil fields operational. The Saudi Arabian government was optimistic that it would affect the supply of oil energy and increase the prices of the fuel. These actions required patience on their part so that they rule over the oil market once again (Smith 161). The maximum time that it took the Saudi Arabian to stabilize in the production of oil was three years.

The Russians and the Iranians suffered in the period when the cost of oil decreased. In the case of the Russians, the fall in the price of oil fuel increased the pressure exerted on the Saudi Arabian government (Gilpin 233). They were forced to raise the production of oil fuel to maintain their performance in the global oil market. The costs also created incentives for Russia and Iran join hands so that they could apply direct or indirect pressure on Saudi Arabia. The nation had no option but to develop ties with the United States of America to subdue the stress exerted on it by the two countries (Salameh 148). Although the Saudi Arabian government has different views about the prices in the oil industry, they have no option than to depend on it for their security.

Conclusion

The global oil industry is influenced by the politics of the various nations that produce and export the fuel. Each of the countries is trying to outdo one another so that they rule over the market. The fluctuations in oil prices have brought a lot of impact on the world economy, and the most affected are the nations which depend primarily on the imported oil fuel. The civil war has also been witnessed in some countries due to the increasing interest to control over the oil fields. The United States of America is one of the nations that have had the benefits that come with the production of oil fuel. Various militia groups that are being funded from the oil fields have emerged in different parts of Africa such as Nigeria and Somalia (Yang 116). Global energy crises are some of the effects that come with over-reliance on oil fuel as the only source of energy used in transportation. Politics has also played a vital role in the global oil market because it has influenced the cost and the supply of oil energy. The dominating nations include the United States, Saudi Arabia, Iran, and Iraq.

Works Cited

Borenstein, Severin. ”Cost, conflict and climate: US challenges in the world oil market.“ Center for the Study of Energy Markets (2008).

Cohen, Benjamin J. ”International political economy: an intellectual history.“ Princeton, New Jersey (2008).

Falola, Toyin and Ann Genova. The politics of the global oil industry: an introduction. Greenwood Publishing Group, 2005.

Gilpin, Robert. Global political economy: Understanding the international economic order. Princeton University Press, 2011.

Henriques, Irene and Perry Sadorsky. ”Oil prices and the stock prices of alternative energy companies.“ Energy Economics, 30.3 (2008): 998-1010.

Kilian, Lutz. ”Not all oil price shocks are alike: Disentangling demand and supply shocks in the crude oil market.“ American Economic Review, 99.3 (2009): 1053-69.

Kaufmann, Robert K. ”A model of the world oil market for project LINK Integrating economics, geology and politics.“ Economic Modelling, 12.2 (1995): 165-178.

Smith, James L. ”World oil: market or mayhem?“ The Journal of Economic Perspectives 23.3 (2009): 145-164.

Salameh, Mamdouh G. ”China, oil and the risk of regional conflict.“ Survival, 37.4 (1995): 133-146.

Yang, C. W., Ming-Jeng Hwang, and Bwo-Nung Huang. ”An analysis of factors affecting price volatility of the US oil market.“ Energy Economics, 24.2 (2002): 107-119.