Oil Prices Could Soon Reach 100 dollars a Barrel
It is important from the outset to state that oil does not necessarily mean wealth. The CIA world factbook officially classes 112 countries as oil producers. This is out of a total list of 232 countries, which means that almost half of the world’s nations are classed as oil producers.
In addition to this, it is not true to say the more oil a nation produces, the richer it will be. Romania produces over 12 times the amount of oil that Finland produces, yet Finland is over three and a half times as rich as Romania. Conceptions over the production capabilities of various nations are also often inaccurate with many non-experts being surprised to learn that OPEC, the Organisation for Petroleum Exporting Countries, producing just 40% of the worlds oil in 2004.
This said however, producing oil is certainly a very lucrative activity for any nation, and there are some nations that derive so much of their income from oil, that they are rightly perceived as oil rich. In fact, the 11 members of OPEC rely on oil for approximately 45% of their GDP and 90% of their export earnings. These are the countries that most people are referring to when they say oil producing nations and the ones that I will direct my argument against.
Oil prices currently stand at just over $63 per barrel but they have been breaching the $70 per barrel mark as a matter of course in recent months. While it is impossible to predict, analysts are speculating that if oil were to hit $100 a barrel, the chief gainers would be OPEC members, as well as Russia, Norway and Canada. The losers of this would be pretty much all other countries, with the United States, the European Union, Japan and China being hit the hardest.
The question of whether a country deserves to gain from higher oil prices, or that these oil prices represent a long overdue remuneration owed to oil producing nations, is more a value judgement than a question of economic fact. While a neutral observer would certainly concede that the gains of any one nation are necessarily a good thing, it must be taken into account that these gains will be paid for by the other nations of the world. A dollar flowing into Saudi Arabia must come from somewhere. Therefore, it is prudent to ask if the oil exporting nations deserve this gain, and if the countries that will pay for it in higher oil prices deserve this burden.
The first fact to concede is that oil reserves are basically a bounty from heaven. In the vast majority of cases you cannot say that any nation deserves the oil reserves that it has been blessed with. It is true that wars have been fought by some nations to gain access to oil reserves. The current US/UK led coalition invading Iraq, or the Iraqi invasion of Kuwait in the first Gulf War are examples of this. It is also true that political dominance has been sought and maintained in order to gain control of oil reserves. Examples of this would include the political interference by the US and European colonial powers, contrary to international law, in the internal affairs of many African and Middle Eastern oil exporters, or the USSR and now Russian dominance of the Caucasus. However, these active attempts to gain access to oil reserves have been almost exclusively undertaken by oil importers. Of the nations that export oil, most have had to do little or nothing to get their reserves. They were literally in the right place at the right time. They are sitting on the oil by a geopolitical fluke. What’s more, the discovery and development of these oil reserves has been undertaken completely by multinational corporations. It is the corporations that find the oil, develop the technology to extract it, refine it, and transport it to markets. There is really no sense in which you can hold that the large oil exporters have earned or deserve their oil reserves.
My second point, ignoring the fact that oil exporters have done nothing to justify their oil reserves in the first place, is that they have also done nothing to justify the current high price oil. In the last year or so, oil prices have almost doubled from below $40 dollars a barrel, to over $70. Whatever else you say about this, one thing that is clear is that this increase in price is not due to the addition of value by the oil exporting nations. It is not because oil exporting nations have made their oil better, or cleaner, or more efficient that we are paying more. In fact, it is not even because they have come together in their OPEC cartel and decided to cut back supply that prices have gone up.
I would argue that the reasons for increased oil prices is twofold. The first is the increased demand for oil, fuelled by economic growth in China and India, as well as high consumption in the US. The second is the insecurity in supply due to uncertainty and instability.
More precisely, the instability in supply has been caused by four factors. The first is the invasion of Iraq. Iraq has the world’s second largest oil reserves and before the invasion was exporting over 2 million barrels a day. This supply has been hampered by the security threats and political instability in the country.
The second factor is the uncertainty caused by the Iranian nuclear situation. Iran is in breach of UN requirements regarding nuclear non-proliferation and there is a very real prospect that the UN Security Council will impose trade sanctions against Iran. Iran is the world’s fifth largest producer and second largest exporter of oil and such trade sanctions would cut off a large oil supply.
Thirdly, there is the general instability across the rest of the Middle East at the moment. There have been massive riots this week in response to Danish cartoons portraying the Prophet Muhammad in a way that would be blasphemous under Islamic Sharia law. This follows recent riots by mainly Muslims in France, and other indicators that tensions between East and West are high.
The final factor I wish to mention is the recent dispute between Russia and the Ukraine regarding gas prices. This resulted in a brief closure of the gas pipeline that connects Russia to the EU. Since 90% of Europe’s gas comes via this pipeline, and given the ease with which a relatively unimportant bilateral dispute could affect European energy supplies, oil prices have been kept elevated.
Again, none of these factors, would indicate that the oil producing nations deserve a benefit. If anything, they only show that they deserve to be penalised. As the facts stand, Iran is benefiting enormously from the nuclear dispute it cause simply because the sanctions that would be implemented to punish it have elevated oil prices. The same is true across the Middle East. It seems that the more trouble they cause, the more money they will get from high oil prices, and certainly this is not a result that they deserve. Therefore, I strongly disagree with the above statement and conclude that a $100 dollar price for oil would be an unwarranted reward for the actions of the Middle East.
Tags: oil prices, oil producers, oil producing nations, opec members, petroleum exporting countries
