The dynamics of oil policies between producing and consuming countries have far extended beyond traditional supply-demand mechanisms, and increasingly intertwining with geopolitical considerations. The Russia-Ukraine conflict exemplifies this, triggering as it significant volatility in oil markets.
To shed light on this complex interplay, it’s crucial to consider the strategies adopted by oil producer and consumer parties. These are shaped by divergent interests, particularly as the oil policies of producer nations have gained independence through the diversification of major consumption hubs. This was driven in part by certain Asian countries evolving into significant consumers of oil and gas.
Meanwhile, the oil policies of Western consumer nations too have undergone significant transformations since the onset of the Ukraine crisis in late February 2022. In an effort to reduce dependence on Russian energy sources, these countries have tolerated heavy financial burdens and escalated inflation rates. This shift was driven by stringent sanctions imposed on Russia as a response to its military intervention.
Western nations assumed these economic sanctions would be sufficient to dissuade Russia by threatening the stability of its economy. Despite the potential for economic collapse, Russia’s economy has proved resilient, continuing to draw substantial revenues from oil.
Higher oil prices have allowed Russia to offset losses brought about by Western boycotts and sanctions. The Paris-based International Energy Agency reported that Russian oil exports in March recorded their highest level in three years - despite the sanctions.
This situation has prompted NATO countries to seek alternative strategies to impact Russia’s primary revenue source. One such has been an attempt to drive oil prices down to a bare minimum, aiming to strip Russia of its main economic lifeline.
US shale gains too
Despite oil prices dipping below $80 per barrel, a level generally unable to significantly impact Russia’s revenues even with discounts on its oil and gas sales, we observe a concurrent increase in US shale oil production. Recently, production of US shale oil had risen by 41,000 barrels per day to 9.33 million barrels per day. This is in contrast to the current US administration’s policy, aimed at reducing shale oil production due to environmental concerns.
However, geopolitical interests seem to have taken precedence, with the US leveraging its oil reserves to exert influence over price levels and try to drive them down. This approach, while strategic, has led to a significant decrease in oil storage, posing tangible risks to US energy security.
The ensuing need to replenish reserve tanks to their previous levels subsequently raises the demand for oil, potentially causing prices to increase. This policy has encountered several hurdles, not least being the oil policies of producing countries. These nations aim to protect their interests and execute their development programs by securing equitable revenues from exports.
Therefore, they intervene to maintain prices at current levels, achieving positive outcomes so far in their collective efforts. This holds significant economic importance for some members, especially developing countries, while for others it carries economic and geopolitical implications.
Producing nations have their rights
The divergence in the oil policies of Western consuming countries and oil-producing nations presents a significant obstacle to West’s efforts aimed at lowering oil prices. The producers cannot be faulted for adhering to these policies; Western efforts may not only damage the Russian economy but may cause more severe harm to OPEC member-countries and developing oil-producing nations in general.
This could result in economic crises that will be difficult to manage in the near term. Notably, these countries are not involved in the Ukrainian conflict and, in fact, are making significant efforts towards a peaceful resolution, given their good relations with the conflicting parties. And which contributes to global economic and security stability.
A fluid balance of power dynamics
It can be asserted that the recent contention over oil has taken on new dimensions, coinciding with significant shifts in the balance of global powers. This has led to the prioritization of interests by producing countries, diverging from past trends where alliances played a key role in maintaining optimum price levels.
This shift in focus is apt, considering that oil and gas are finite resources that need to be exploited judiciously to accelerate development rates and create alternative income streams. If interests became the determinant of policies, no one would care about - or ensure - fair prices for their oil and gas exports.