An ancient Greek theorist better known with the pseudonym, The Unknown Philosopher once said “There are as many views as there are as many minds”. Looking at the recent drop in oil prices and the various explanations offered from different scholars, it is not hard to appreciate the beauty in the aforementioned statement. While there have been many explanations as to the drop in global oil prices, an in-depth investigation into the matter reveal interesting facts.
Q: Who is in charge of Oil sale in the first place?
A: The Organization of the Petroleum exporting countries (OPEC)
Organization of the Petroleum Exporting Countries (OPEC)
The Organization of the Petroleum Exporting Countries (OPEC) is a permanent, intergovernmental Organization, created at the Baghdad Conference (Sept. 10–14, 1960) by five countries at inception. They were Iran, Saudi Arabia, Kuwait, Venezuela and Iraq. Presently, there are 14 member states and is headquartered in Vienna, Austria.
OPEC’s objective is to organize and amalgamate petroleum policies among Member Countries, so as to secure fair and stable prices for petroleum products, and to control the global supply of petroleum products so as to ensure a fair return on capital and to have a certain level of market control.
Q: Why did the price of Oil drop in the first place?
A: There are a couple of reasons why this would have occurred. Let take a concise approach and explain some of the major reasons.
Increase in the production of Crude Oil by the United States of America (USA)
According to the US Energy Information Administration, UEIA, as at May 2001, the United States imported about 9.8 million barrels of crude oil per day and produced an average of 6 million barrels per day. While in 2015 the US produced an average of 9.4 million barrels per day and had reduced drastically the level of country’s gross import. In fact, by October 2013, the United State’s domestic production of crude Oil had surpassed its net import for the first time in over 18 years. This increase in production had a negative domino economic effect on the world market because the United States drastically reduced its import of petroleum and countries like Nigeria suffered a cessation as the US brought crude imports from the African giants to a complete zero. This marked a dramatic reversal for one of Africa’s largest economy at the time, which in 2010 was still among America’s top 5 oil suppliers and exported at its peak 1.3m barrels per day to the United States. The surplus supply of crude oil in the global market definitely dragged the prices down
The Asian market became extremely choked!
With domestic increase by over 45% in the production of crude oil in the United States as earlier explained, coupled with the introduction of bio-friendly fuels OPEC countries like Nigeria, Algeria and Saudi Arabia all needed a new fertile market for their oil exports and as expected they all to Asia. Soon they were all competing for Asian markets, and the crude oil producers were forced to drop prices.
Activities of non OPEC members in the global market.
Countries like Canada and Russia are not members of OPEC which denies OPEC complete control of the market trend unlike in the 70’s when significant cut in production of crude oil by OPEC members yielded a robust rise in the global market at the time. Oil production and exports have kept rising year after year thereby altering whatever balance OPEC may have hitherto wanted to maintain in the global market. Yet again, this dragged prices down.
Conflict & Crises.
It is an open secret that crime thrives in the era of anarchy; an offshoot of conflict and crises. Since mid 2011, Libya’s oil industry has been literally jittery and far from any form of stability. There has been a significant drop in production and exportation in countries like Venezuela, Iraq, and Nigeria; countries all enmeshed in some sort of civil unrest characterized by violence and attack on oil facilities. The shortage in supply that has arisen from the violence has allowed the black market to thrive and yet again, the global prices took a nose dive.
The market share ‘kidnapped’ by the black market.
The civil war in Syria has given ISIS a certain level of control of oil installations and fields and they have taken advantage of the goldmine to raise revenue by selling crude oil in the black market. The same is the case in Yemen, Pakistan and Iran. ISIS is one of the wealthiest terrorists groups in the world; according to a United Nations, UN study, ISIS sells the hijacked oil in the black market for a price as low as US $20 per barrel as compared to global price that is between $50-$55 per barrel, which is less than half of the current oil price and militants are earn as much as $2 million a day, from crude sales to finance their wars and activities.
The blatant refusal to cut production
Despite OPEC’s several moves to reduce global supply, Iraq is actually pumping out more crude oil, and Iran refuses to freeze production now that it is finally exporting large loads since international embargos were lifted. On Sept. 28 2016, OPEC came to a tentative agreement to moderately lower production towards the end of the year. The cartel, however, did not decide which countries would actually cut production, leaving that decision for OPEC’s next formal meeting in Vienna in November. Iran and Nigeria have been tipped as countries to be left out of the reduction, most likely to help cushion the economic crises in both countries. It is worthy to note that specialists have argued that setting production limit caps near the present high level might only have limited value in controlling the global prices simply because the market either needs radical cuts or/and increased demand to return to the supply and demand balance that could yield to higher prices. Previous agreements that have been broken by OPEC member-states have not really come with strict adherence because there is no firm mechanism for enforcement.
The introduction &discovery of bio-friendly fuel and other means of renewable energy
Global demand for fuel is dropping and has experienced a decline over the last decade and most western countries have made great success in discovering renewable energy.
One of the first steps President Obama took to implement his energy and climate strategy was to direct the Environmental Protection Agency, EPA and Department of Transportation to develop new fuel economy standards. In the same vein, new research at the Department of energy has helped to unlock sources of energy supplies in places like North Dakota and Texas. Efficient vehicles & alternative fuel technologies like electric vehicles have all reduced demand for crude oil.
Q: How has this affected Nigeria in particular and what can be done?
A: It is worthy to note that the problem is not peculiar to Nigeria as most of the ordinary citizens may rather believe. Saudi Arabia, Venezuela, and Iran have all suffered a fall in the revenue and their economies are not as strong as they used to be.
The call for diversification of the Nigerian economy can never be overemphasized and now more than ever we need to change the mind set of our citizens and commit more energy and resources towards entrepreneurial endeavors. One may forced to mention that recently, the Saudi Arabian government that used to be a financial power house had to sell government bonds to finance its budget.
The government, civil society organizations and the entire citizenry all have to be hands on deck.