Crude is the second largest contributor of the world primary energy consumption and according to the analysis done by BP, the crude oil will continue to play a significant role in the world’s economy until 2035. Being one of the biggest drivers of the countries’ economy, crude oil demand and supply dynamic affect to great extent the price. Based on the historical analysis of the crude oil exploration and production, there are numerous instances of crude oil price fluctuations. In most instances, the variations of the unpolished oil value affect both the oil rich and oil deficit countries in one way or the other (Li, 2016). Considering the unpolished oil worth variations 1998-2018, the phenomenon has far reaching impacts beyond the demand –supply dynamics.
Factors Responsible for the Crude Oil Fluctuations, 1998-2018
One of the factors which have significantly affected the prices of crude oil over the time is the demand-supply dynamics. Considering the fluctuations witnessed during 2010-2014, while many factors are said to be responsible, the supply crunch from the conventional oil field played a great role (In Yoshino " In Taghizadeh-Hesary, 2016). With the rising price of the oil, most of the higher earnings upstream companies and stakeholders used the surplus fund derived to create unconventional sources of oil such as tight oil and shale. With the exploration and production of unconventional sources of oil being successful, the price of conventional oil went down. Figure1 shows the fluctuation of the OPEC crude oil basket from 2007-2017 due to the rise of unconventional sources of oil in different parts of the world.
With major development being observed in different countries of the world due to industrialization and integration of technology in the operation of business, one of the drivers has remained crude oil as a source of energy. According to the study done by De Santis 2003, the growth of global economy has greatly been linked to energy sources and crude oil as remain a major driver to this economic growth. The rising of energy-intensive industries both in the developed and developing countries has pushed the demand of energy (De Santis, 2003). Various industries and sectors growth such as electricity, transportation, and shipping have depend on oil for their operation over the time leading to a decline in supply.
Different agents are involved in controlling the exploration, production and the oil market. Some of these agents include Organization of The Petroleum Exporting Countries (OPEC) in addition to Brent which have played significant role in the crude oil price fluctuations over the time. The policies put in place by these organizations influence the market value of oil in great ways. Considering OPEC rules, the OPEC nations distribute over thirty percent worldwide unpolished oil demand and with its policy to supply 32.1 million barrel/day calculating to 33.6 percent, the price of the crude is likely to be affected. The decision by the OPEC therefore to cut the level of production by reducing the number of barrel its countries produce from January 2017 is likely to see the price of crude oil moving upwards. With the cut of the oil production in January 2017, the price of crude oil fluctuated from $52.51/barrel to $64.7/barrel as shown in the figure2 bellow (Wasberg, 1998).
Other than the crude oil fluctuations arising from the demand-supply dynamic, the political factors witnessed across the world have shaped the crude oil market share to great extent. Based on the analysis of the crude oil prices, the geopolitical events witnessed across the globe affect the value of the unpolished oil. In most instances, these geopolitical events lead to supply disruption, output loss, and inefficiency in the market functioning. The major problem comes when the geopolitics events affect countries perceived to be major producers of crude oil. The geopolitics event which took place in the Arab spring 2011-2012 showed the price showed the price of the oil rising from $107.46 per barrel to $109.45 per barrel as shown in the figure2 (Saari et al., 2016). Major fluctuations which have been witnessed over the years result from the political instability witnessed in the major oil producers.
The US dollar has played a significant role in the variations of the unpolished oil value to great extent. The appreciation witnessed in the US dollar across the globe influence the oil price since it is the benchmark currency of operation. Anytime the US dollar appreciates, the price of oil becomes more expensive for the importing nations outside the United States. As a result of these, countries within the united states sale more crude oil in order to get the best out of the situation leading to sluggish demand for oil. The overall effect of these is the downward price correction a factor which affects both the importers and exporters of crude oil. The US dollar appreciation witnessed in 2011 resulted to increase of the crude oil price from $107.45 per barrel to $109.46 per barrel (Rafiq " Curtin University of Technology, 2009).
While as discussed above the OPEC policy play significant role in the fluctuating crude oil prices, the monetary and fiscal policies also have a significant role on the observed fluctuating crude oil price. In most of the instances, the monetary and fiscal policies arising from various countries and trading blocs such as United States, Japan, China and European Union affect the capital flow, demand for oil and the investment needed to have more conventional sources of crude oil (Pak, 2017). One of the effects which have been witnessed over the year is the increase in the United States dollar interests’ rate which negatively affected the oil industry investments due to the rise of the cost of the capital. The rise of the United States dollar interest rate from 0.75 percent to 1.00 percent in March 2017 led to the increase in the price of oil significantly.
Impacts of the Crude Oil Fluctuations 1998-2018
The variations in the unpolished oil values witnessed in the globe with a drop of 57 percent from June 2014-januarry 2015 resulted to the lower revenue generation for the oil exporting nations. The economies of the countries in the Middle East which entirely depend on the production of crude oil sustained a lot of revenue loss leading to severe budget pressure. Most of the trade balance which have early been witnessed between the nations such as Kuwait, Saudi Arabia, Iran and UAE began to crumble as a result of the decline in the price of the crude oil (Taghizadeh-Hesary et al., 2015)
Looking at the Middle East countries such as Saudi Arabia which is the globe’s prime distributor of unpolished oil as well as supplementary petroleum products accounting for about 89 percent, the country has witnessed a lot of economic impacts with the fluctuations in the crude oil price. During the 2011-2015 periods which showed crude oil price declining, the country observed a major budgetary pressure impacting to social programs, projects and support to other countries by Saudi Arabia. Based on the analysis done by Mullen " Lynn 2012, the falling crude price affected negatively the fiscal deficit which widened from $47 in 2011-2012 to $99 in 2014-2015. The increase in the price of crude oil in 2016 help Saudi Arabia to bring the fiscal deficit to $79.2 billion with the international monetary fund (IMF) forecasting the deficit to decrease to 9.6% in 2017 (Mullen " Lynn, 2012).
The crude oil price fluctuations have resulted to a major blow to countries such as Kuwait which entirely depends on petroleum exports for the its economic growth. Considering the data provided on the Kuwait crude oil exports, the country has been generating in the range of 98-64% of the revenue during 2011-2015 crude oil productions. With the factors such as geopolitics arising and the OPEC policies taking control of the exploration and production of crude oil, the Kuwait national revenue have decline from $128.4 billion in 2011-2012 to $76 billion in 2014-2015 (Ge " Wu, 2017). The effects of these decline in the total revenue generated is the inability of the government to provide for the people and the slow growth of development. As a result of the erosion trade balance, Kuwait total revenue has observed a serious decline with the revenue generated coming to $23 billion in 2014. In order for the government to completely take control of the crude oil fluctuations and the overall effects witnessed in the total revenue generated, there is need to enhance the private participation in the energy production.
Conclusion
While it is clear that crude is the second largest contributor of the world primary energy consumption and according to the analysis done by BP, the fluctuations in its price affect the country’s economic growth significantly. Being one of the biggest drivers of the countries’ economy, crude oil demand and supply dynamic affect to great extent the price and much of the attention should be given on the oil producing countries to counter the fluctuations. Based on the historical analysis of the crude oil exploration and production, there are numerous instances of crude oil price fluctuations majority resulting from the policies and geopolitics in the producing countries. In most of the instances, the fluctuations of the crude oil price affect both the oil rich and oil deficit countries in one way or the other. Major impacts of the crude oil price fluctuation have been witnessed in the Middle East with severe impacts being observed in the budgetary allocation and developments.
References
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