The Plummeting Oil Prices: Comparison of Policy Between Kuwait & the UAE
Introduction
The Gulf Cooperation Council states (GCC) are heavily dependent on oil to generate economic growth. Oil and natural gas are the two main sources of capital inflow that enters into these countries. GCC countries’ dependency creates economies that are sensitive to any decline in oil prices. After four years of relatively stable oil prices of around $105 per barrel (bbl), a sharp and notable decline occurred in June 2014. In the face of the plummeting oil prices, most GCC countries have cut their spendings to cope with the significant reductions in their revenues.
Given than oil prices fell by 29% in 2015 and 44% in 2014, the GCC countries are facing economic crisis that could translate into economic deficits for some. Economists suggested that Bahrain and Oman are the two GCC states that are most severely affected by the drop in oil prices, while Kuwait, Saudi Arabia, the United Arab Emirates, and Qatar are in good standing. The reasoning behind it, is that Kuwait, Saudi Arabia, the United Arab Emirates, and Qatar, are considered as major oil producers. Whereas, Oman and Bahrain do not contribute as much to the production of oil and natural gas. Major oil producers among the GCC are well-equipped to deal with such economic upheavals, as they own financial wealth in the form of foreign exchange reserves, as well as in sovereign wealth funds. Regardless of the economic standing of some
Currently Saudi Arabia is one of the leading producers of oil in the world. However, it is losing its foothold on the market. Many countries, like North America, are increasing their oil production and are looking for ways to become less dependent on foreign oil. The increased competition has caused oil prices to decrease. By producing their own oil, countries not only will increase their revenues, but will also reduce their need to rely on foreign oil. By reducing their need foreign an oil a country does not have to worry that their oil supply will be cut off if they go to war.
Several oil-countries have been facing economic and political turbulence as a result of the crash in oil prices, and there is disagreement among OPEC as how to handle the situation. (Krauss) While this is happening, America’s oil production continues to rise, as it inches closer to becoming an energy superpower in production and consumption; and countries that depend on their oil exports face recession.
In a revealing article by George Perry (2001) the author discusses the economic impact that a disruption in the oil supplies would have on world oil prices. He states “Currently 28 percent of the world's crude oil comes from the Organization of Arab Petroleum Exporting Countries (OAPEC) consisting of Arab Muslim nations, some of which are not part of the OPEC cartel. The governing regimes in all these countries are at some risk [due to the war on terrorism].” He goes on to state that in a worst case scenario the economic consequences of oil supply disruption would be “oil prices rise to $161 per barrel driving gasoline price to $4.84 per gallon. The increase in the nation's bill for products of crude oil rises by about 10 percent of GDP, which adds perhaps 15 percent to the inflation rate in the first year. And the recession is the steepest and deepest of the postwar period, with GDP declining nearly 5 percent the first year.”
When trading oil it pays to keep an eye on the major consuming nations, as any increase or decrease in usage is sure to have an impact on the commodities performance. Something that is also worth monitoring – with this tying into the performance of major consuming nations – is OPEC, the Organisation of the Petroleum Exporting Countries. This international organisation works to ensure both the stablisaiton of the oil markets, along with coordinate and unify petroleum policies. Current members of OPEC include mass-producing oil nations (13 in total, including Saudi Arabia, UAE, Iran, Iraq, and Qatar). Considering that OPEC has the power to decide policies related to the production and sale of petroleum oil, it certainly has the power to impact the price, flow, and distribution of oil worldwide.
According to current estimates, more than 80% of the world's proven oil reserves are located in OPEC Member Countries, with the bulk of OPEC oil reserves in the Middle East, amounting to around 66% of the OPEC total (OPEC Share of World Crude Oil Reserves, 2014). Competition amongst the U.S. and the Middle East has never reached this level before. There is a constant tension between the two countries and refuse to collaborate in dividing the market share equally. Furthermore, as both nations refuse any bipartisan agreement, there is no limiting the production of oil. Each nation is looking to drive out competition by any means. What they don’t realize is if they cooperated and reached an agreement amongst the international community, oil will remain profitable just as it was a few years ago. Though, this is unlikely to happen any time soon, but will eventually cause Saudi Arabia and other Middle Eastern countries to take a drastic decision when their main source of capital plummets due to the current price of oil. Profits are no longer seen in the oil industry. The Price of oil has been selling at around $50-$60 per barrel, not enough to cover production cost. The United States is able to withstand any contraction within the oil sector, as their financial portfolio is diversified, not solely reliant on the price of
This research paper provides an overview on why there is oil price falling in the United States. It will examine the reasons that are influencing fall of oil prices. Additionally, the paper will seek to explore the effects caused by the fall of oil prices in the American’s economy.
Drop in fuel prices can also affect the producing countries negatively. This is because the production cost may be high yet the prices are low. These countries still are spending the same amount of time to get crude oil from the ground and they have to stay on the same price that the market is
Oil-The article”OPEC #1”explains the oil prices.The Oil of the Middle East is the price of oil has fallen by nearly half in just six months.Anyone who buys oil or gas is happy because the prices are low.Car and truck drivers, airlines, and shipping companies are all happy because they don't have to spend as much money on gas. Oil companies are not very happy. They are losing money.A barrel of oil now costs $58 and last summer it was $107.Oil prices have gone down and people are happy,at least some of
Saudi Arabia is in possession of vast quantities of crude oil, currently larger than the US. [2] Due to the ease of access for Saudi Arabia to extract their oil, they have much lower production costs, giving them the flexibility to sell their oil at much lower prices. [3] This has forced many international oil companies to match these low prices to stay competitive. As other companies are not able to produce oil at such low prices they are forced into smaller profits, making extraction more costly. [4]
With many of Europe’s economically struggling countries the increase in production of oil which in return yields lower prices has benefitted them. Europe’s weak economy is able to contribute to this drop in oil prices in that Europe’s currently low inflation rate and weak economy has greatly lessened the demand for oil. The lack of demand for oil in one of the most prominent import continents in the world has forced oil manufactures to lower their prices in order to retain Europe as a top oil export. Large oil exporters do not want to lose Europe as an export because that would also mean losing billions of dollars per year.
High flying oil price benefited oil producing countries past 5 years until recent petroleum price plunge. Russian was the one of beneficiaries who has enjoyed the high oil price. The Russian economy stabilized without much of restructuring the economic system or economic growth by developing new industry. High oil price created budget surpluses and keep Russian economy afloat; However, increase of the US oil production, oil price war between Saudi and Kuwait, debilitating European economy, and decreasing oil consumption in Asia contributed to drive oil price down quickly and substantially. Russian GDP signals that its economy gets pounded and affected hardest among major oil exporters. The Russian budget has been in balance with small portion of public debt in comparison to national GDP. Falling price of petroleum drastically reshaped the Russian economy. Financial forecasts and analysis predict that economic recession could come back to Russia. Crumbling Russian ruble and dwindling exports slashed 2014 Russian GDP, and its GDP will fall lower than Spain or South Korea. Without serious police changes or development of technology, already battling Russian economy will be much worse place than 2014. The Russian economy suffers from three severe blows: debilitating structural policies and strict financial sanctions from the West, and continually falling oil price.
The 1973-1974 Oil Crisis was a result of a myriad of issues. The Organization of Arab Petroleum Exporting Countries (OAPEC) took concerted action in continuously reducing their oil production “until their economic and political objectives were achieved.” The production was reduced so much that in some areas the oil prices dramatically rose “six-fold.” The OAPEC countries production cuts disrupted the industrial countries’ necessary oil supplies and there was nothing that could be done to alleviate the price spike, thanks in large part to the industrial countries insufficient spare oil capacity (Scott 28). Moreover, the Yom Kippur War, the fourth of the Arab-Israeli wars, was waged, in which Egypt and Syria led a coalition of Arab states against Israel from October 6. Within a week, Iraq had “nationalized American interests in Basrah Petroleum’s southern Iraqi production” and three eastern Mediterranean pipeline terminals had been shut down. Furthermore, on October 27, ten Arab states had announced “a progressive step-by-step production cutback and embargoes” against the United States, the Netherlands, and Denmark due to their alleged support for Israel (Lantzke 219). Essentially, the embargoes were politically employed by the Arab producers’ as a weapon of coercion, in that the embargoes were designed to influence policy changes in the countries that were friendly to Israel.
Given the important role that the Middle East plays in the World Economy, there is no doubt that the collective economy thereof is very diverse (Paczynka 5). This is brought about by the important role that oil has played in the various economies in the Middle East. Essentially, oil was also considered as one of the main factors behind the impressive development of various countries in the region. Unfortunately, while there are several countries in the Middle East that have developed drastically over years, there is also no question that there are countries that remain to be negatively affected by severe poverty (Paczynka 5).
Saudi Arabia has an economy that is largely dependent on oil, with the government maintaining the biggest control over the country 's significant economic activities. Saudi Arabia owns about 16% of the global oil reserves and is the number one exporter of oil (Saudi Arabia, 2013). In addition, the Kingdom of Saudi Arabia was instrumental in the formation of the OPEC (Organization of the Petroleum Exporting Countries) group, which initially comprised Iraq, Venezuela, Iran, Kuwait and Venezuela (Energy indicators, 2004). Currently, the petroleum industry constitutes about 80% of the country 's budgetary incomes; about 40% of the country 's GDP and 87% of Saudi 's export earnings. Agriculture, in addition to petroleum products, has been a major contributor to the kingdom’s economy since 1970s (Saudi Arabia, 2013). The country has been able to produce enough agricultural products for their consumption as well as surplus for exportation to the GCC member countries.
Countries in the Middle East and Africa are the main source of East Asian countries’ crude oil supplier, For example, by 2011,