LONDON: The drop in oil prices to their lowest in two years has caught many observers off guard, coming against a backdrop of the worst violence in Iraq this decade, heightened tensions between the West and Russia, and sanctions against Iran.
But as rising supplies of North American crude and tepid demand have pushed prices below $100 a barrel, the move underlies how the shale oil revolution is creating a political and economic advantage for Washington and its Western allies.
Know more: US gets ready to ‘open floodgates’ of crude oil export
Russia and Iran are heavily reliant on oil sales and face budget shortages at current price levels, analysts say, weakening their position when negotiating over Ukrainian sovereignty or the Iranian nuclear deal.
And higher oil production from the United States as well as Canada is providing a buffer against the threat of retaliatory supply curbs from Russia or further disruptions to supplies from the Middle East.
“The increase in production is definitely benefiting the United States,” said Professor Paul Stevens at the Chatham House think tank in London. “The Russians are very exposed to lower oil prices. We don’t know to what extent it will influence their behaviour in Ukraine, but they’re certainly going to feel pressure on their budget.”
Russia’s rouble currency has already fallen to a historic low against the dollar as its economy is hit by sanctions from the United States and European Union over its involvement in Ukraine. That increases the price Russians must pay for many imports, from vegetables to luxury goods.
Daily oil production in the United States has risen sharply since the financial crisis. In 2010 the country still imported half of the crude it consumed, but the US Energy Information Administration forecasts that will fall to little more than 20 per cent next year.
Even as the United States has largely maintained its ban on exporting crude, it has left a lot of barrels from West Africa and the Middle East looking for new homes. While US energy company profits might take a hit from lower prices, consumers will benefit more from spending less at the pump.
For Iran, a lower oil price not only harms its economy, already hit by sanctions that specifically try to cut its oil sales. It also means there is less pressure on the West to reach a deal quickly over Tehran’s nuclear programme.
With oil prices falling, the immediate economic incentive of getting Iranian barrels smoothly back to the world market is diminished, analysts say, allowing Western powers more leeway to drive a harder deal.
Published in Dawn, September 13th, 2014
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