The fall of oil prices during the last year and a half has been dramatic, starting in autumn 2014 where the price kept fluctuating in downward spiralling cycles, until it reached its current level of under $30 per barrel.
For those who does not remember, repairing the oil price collapse that occurred in 1986 after some OPEC members followed a dumping policy took 14 years until prices returned to the above $20 per barrel level, with the exception of the nine months around Iraq’s occupation of Kuwait when oil wells were in flames.
It is likely that the recovery of oil prices now will be difficult in the light of the huge improvements in the economics of electricity produced from solar and wind energies, the increase of natural gas production (which is far less expensive than oil) and the increase in manufacturing electric cars or hybrid cars that are using gasoline or diesel fuel and/or electricity.
In addition to the technical factors, there are several political factors that might interfere in fixing oil prices for a long period. Equally important are the anticipated consequences of the decline in oil prices on growth, trade and inflation in the world economy.
The consequences will principally affect the economies of oil exporting countries, on top of which comes the economy of Arab oil exporting countries, the economies of Arab oil importing countries, such as Egypt and Morocco, and the international importing economies on top of which comes China, the US, Europe, Japan, South Korea and India. It will also affect the Arab and Asian labour movement in the Arab Gulf and their remittances to their respective countries as well as the dollar’s movement against the world’s major currencies.
Price collapse due to politics and market forces
Before tackling the different factors that led to the oil prices collapse, we must point out that the huge increase from $23.1 per barrel in 2001 to $94.4 dollars per barrel on average in 2008 was not logical as much as it was linked to huge speculation, leading in the end to the collapse of the US real estate market and the world financial crisis in 2008.
Moreover, the companies seeking to achieve economic feasibility from extracting shale oil contributed in driving prices to rise, so as to achieve such feasibility. Furthermore, American interests moved from lowering oil prices to raising them after US companies’ share in the work in the oil producing countries increased above the value of combined American oil imports.
Thus, raising oil prices was in the interests of these companies, which are economically and politically predominant, even if it was not in the interest of American citizens for whom the cost of consuming oil products or commodities rose.
This pattern of moving prices up and down irrespective of cost factors or supply is a kind of manipulation and tampering with the global economy by big oil corporations and subordinate or cooperating countries in this respect.
The strange thing is that when the market rectified itself and the price per barrel reached $61 on average in 2009, it returned to rising sharply to reach $77.4 per barrel in 2010. A further large rise happened in 2011, reaching $107.5 per barrel, due to fears that Libyan oil exports might stop. Those fears were augmented in order to drive the market in this direction.
Although the market proved the capacity of large oil exporters — especially Saudi Arabia, Russia and the US — to compensate any loss of exported Libyan oil, prices remained steadily on the rise, reaching $109.5 per barrel on average in 2012. Although the price dropped a little, to be $105.9 per barrel of the OPEC basket of crude in 2013, it stayed at high levels.
When the Ukrainian crisis broke out and Russia regained the Crimea province and tension escalated with the West, American and Western oil companies tended to push prices down in order to harm the Russian economy, for which oil and natural gas constitute the most of its exports, as well as the extracting industries sector contributing about 21 percent of Russian Gross Domestic Product (according to World Bank data published in its 2015 World Development Indicators report). This was done through direct influence on the volume of the supply of oil in world markets.
For instance, the OPEC monthly bulletin pointed out in November 2015 that the volume of oil supply was around 98.5 million barrels daily in September 2015, while the volume of demand was about 94.9 million barrels daily in the same month. Thus, there was a surplus of 3.6 million barrels daily. In August 2015, the surplus was about 2.5 million barrels daily.
As a result of this imbalance in oil supply, which was much greater than demand and was made so by American companies and some main oil exporting countries, crude oil prices declined rapidly until they reached the current collapse.
With Russia’s entering the war against terrorism beside the Syrian state, and what it revealed of the falsehood of the US campaign against terrorism and how several countries in the region — on top of which comes Turkey — are strongly supporting terrorists, financial pressure accelerated on Russia through pushing down the prices and royalties of its main export — i.e., oil.
This has led to rapid deterioration in the exchange rate of the ruble against major currencies. For instance, the dollar has risen against the ruble by 25 percent in the last 12 months. Its value rose from 65.5 rubles in January 2015 to 81.8 rubles this January, according to The Economist.
It was noticeable that Russia kept a large surplus in the current account balance, where this surplus reached $65.5 billion in 2015, equivalent to 5.2 percent of Russian GDP. This Russian performance rendered decreasing oil prices ineffective in damaging the Russian economy, at least to the extent of bringing it to its knees, as the West had desired.
For the reader's information, the rest of the oil exporting countries suffered grievously in 2015 due to the decrease in oil prices and it is expected that this suffering will increase in the present year.
International Monetary Fund data published in the World Economy Outlook point to a deficit amounting to 3.5 percent in Saudi GDP, about 12.7 percent in Iraqi GDP, about 16.9 percent in Omani GDP, about 17.7 percent in Algerian GDP and three percent in Venezuelan GDP.
Despite the erosion of large surpluses in the rest of the Arab oil exporting countries, Kuwait, the Emirates and Qatar continued to see surpluses in their current accounts, albeit at much lower levels than previously.
The world economy and oil price collapse
In the light of the great status oil and its products occupy in the global economy, and their presence as an input in a large number of commodities and services, the oil price decline in this manner will help improve the world’s economic growth through decreasing the cost needed in varied enterprises.
The IMF’s estimations point out that the real growth rate of gross world product will increase from 3.1 percent in 2015 to 3.6 percent in 2016. The product rate will meanwhile increase in advanced industrial capitalist countries from 1.8 percent in 2015 to two percent in 2016.
As for the developing and rising economies countries, the growth will increase from four percent in 2015 to 4.5 percent in 2016. It is important to assert that oil is one of the important factors, but not the only factor determining growth opportunities in different world economies, whether they are exporting or importing it.
If there is a positive effect in the decline in oil prices on the global economy in general, oil exporting countries will be affected negatively while importing countries will be affected positively.
For instance, the IMF’s estimations in its World Economy Outlook report mention that the real growth rate of American GDP will increase from 2.6 percent in 2015 to around 2.8 percent in 2016. The rate will increase in the Eurozone from 1.5 percent to 1.6 percent, and in Japan from 0.6 percent to one percent.
The same report points to expectations concerning the decline in the real growth of the GDP of Saudi Arabia, which is the world’s biggest oil exporter, from 3.4 percent in 2015 to 2.3 percent in 2016.
As for inflation, it is logical that the oil price decline will lead to a decline in global inflation rates, if other influencing factors were fixed.
The IMF’s estimations in its World Economy Outlook report mention that the rate of the consumer price (inflation) index in the developing and rising countries will decrease from 5.6 percent in 2015 to 5.1 percent in 2016. In the Eurozone, the index will drop from two percent to one percent. In Japan, the index will drop from 0.7 percent in 2015 to 0.4 percent in 2016.
As for the value of global trade, it is likely that it will be stable or will even drop in the light of the oil price decline, which constitutes along with its products a main component within this trade, as well as a factor on commodity and services prices where energy is a component. This will happen even if global trade remains stable or increased in consistent rates with global economic growth.
Egypt and the Arabs in light of declining oil prices
Egypt is a net importer of oil and its products. The value of Egyptian oil exports was $8.705 billion in the fiscal year 2014/2015, while the value of Egyptian oil imports was $12.358 billion in the same year. Thus, the Egyptian oil trade deficit was $3.653 billion in that fiscal year.
Consequently, the direct effect of the oil price decline can be considered positive in relation to the Egyptian trade balance and external balances in general. It will also lessen the pressures connected with the need for foreign currency in order to finance oil imports. Thus, it may positively affect the status of the Egyptian pound against other major currencies.
However, there are indirect negative effects where large numbers of Egyptians work in the Arab oil exporting countries. It is certain that the decline in the incomes of these countries will result in salaries standing still, and perhaps will lead to job opportunities declining, especially in the private sector. This matter may affect the remittances of expatriate Egyptians working in the Arab oil exporting countries.
The total of remittances of Egyptians working abroad amounted to $19.3 billion in the fiscal year 2014/2015, making it the second most important source of foreign currency in Egypt after commodities exports. If these remittances were affected negatively, this would negatively affect the status of the Egyptian pound against the dollar and other major currencies.
Moreover, a third of Egyptian commodities exports are directed to Arab markets, in top of which comes Saudi Arabia and Libya. Thus, any move to ration imports in such countries may lead to stagnation in Egyptian commodities manufacturing.
As for the Arab oil exporting countries, the collapse in oil prices will affect their growth rates negatively and also their general budgets, in which oil royalties constitute the overwhelming majority of public revenues. The Unified Arab Economic Report points out that oil royalties have constituted 71.5 percent of total public revenues in Arab countries combined. The percentage increases to more than 90 percent in some Arab oil exporting countries.
Arab countries have to deal with this new reality in an effective and flexible way through activating new sources for public revenue and by developing their tax systems, provided that they collect taxes from the rich not the poor so as the approach is fair. They will also have to adjust their budgets to austerity terms that rationalise expenditure as far as possible.
In parallel, they will have to proceed in developing and diversifying their economies in order to develop their processing industries and the most effective services sectors by financing them from the accumulation made in the oil boom period, extending from 2003 until 2014.
All Arab countries and Egypt at the core have to intensify their reliance on work and science as sources of income and wealth, not on the royalties of depleting natural resources, even if their exploitation was important. For this region won’t progress except through the path by which the world’s economies and countries progressed.