Politics of Oil: Should oil importers be worried of geopolitical consequences?

By Tanya Ashreena | Last Updated: Mar 08, 2015, 15:40 PM IST

A strong US dollar and soft demand has brought down oil prices. But it is improved technology, such as hydraulic fracking, that has brought about abundant supplies of shale oil from the US onto the market, along with the Middle East, which despite conflict, has not budged on supply.

It seems excess oil supply is here to stay.

Saudi Arabia, a senior member of the Organisation of Petroleum Exporting Countries, has kept up its supply. It may not change stance any time soon, in order to maintain its market share and force high-cost producers, such as shale, oil sands and deep water, to cut supply. Saudi Arabia also wants to keep its rival Iran under check. The country is banking on its USD 736 billion of forex to make up for losses.

Meanwhile, not all countries are having it easy.

Countries with a huge amount of foreign exchange, such as Saudi Arabia and Norway, are able to fund their budget shortfalls from their reserve funds for now. But oil exporters with smaller fiscal cushions, such as Malaysia, Mexico, Oman, Bahrain and Columbia are finding the going getting tougher. They may have to depend upon austerity measures and increase borrowing to meet their shortfalls. Most of these countries, however, can easily tap international capital markets, because they have low external debt.

But countries with little cash and poor access to global debt markets are particularly feeling the stress. Venezuela and Nigeria are particularly vulnerable. For example, though energy comprises 97 percent of Venezuela's exports, its foreign reserves are a mere 2 percent of GDP.

However, geopolitical risks also overshadow the oil markets.

Cheap oil in Iraq and Nigeria can also hurt the country's economies ability to fight militant groups in these countries, such as the Islamic State in Iraq. Volatility is expected in Libya's oil production, due to civil war, with periodic supply gaps and surges, and economic sanctions loom over Russia. Any impact on Russia's energy exports can affect the Eurozone's economy as well.

So should oil importers be worried? Not really.

Lower oil prices will inevitably force the high cost producers, such as shale gas, to cut capital expenditure, jobs and costs. As US shale operators have comparatively little capital invested, their supply will run out fast. This will eventually lead to falling production.

The impact of low prices on developed markets, such as the Eurozone and Japan, has made it tough for their central banks to meet their inflation targets. To avoid deflation, these markets have started bond-buying programmes to increase asset prices.

Meanwhile, falling oil prices are a game-changer for oil-importing emerging markets, such as India and China. They should make the most out of short-term effects of lower inflation and allow their central banks to ease monetary policy in order to stimulate their economies. These lower-income countries should also make the most out of declines in agricultural commodities due to low energy prices. For, the oil markets are unpredictable.