If there is anything that affects anything from economy to weather, it’s oil. The demand for oil comes mainly from transport and energy sectors and they are often the sectors to bear the impact of a sudden oil price hike.
In 2003, the world consumed approximately 80 million barrels of crude oil per day. From August 2014 to March 2015 crude oil prices plummeted from $ 96 a barrel to $ 44. Experts posit that this is due to world’s slow economic growth, technological growth leading to fuel efficiency, which all contributed to the decision of not restricting the output by oil producing countries. Yet, others put it to the demand-supply flux in the global oil market. Both Saudi Arabia and US reacted to the rising demand by increasing supply.
In an interview with BrandeisNOW John Ballantine points out that oil has been a geopolitical issue since the Middle-East was divided up after the fall of the Ottoman Empire. But with the increasing political instability of the Middle-East oil is an even more potent geopolitical issue. Such is the effect of oil on geopolitics. (BrandeisNOW, 2015)
Believe it or not what Russia, Exxon Mobile and ISIS have in common is the shift in oil prices. Such ‘social’ relationships hark back to the oil shock between 1973 and 1974, when the oil prices surged from $3 to $12 per barrel. This quadrupling of oil prices turned geopolitics topsy-turvy. The oil shock turned oil producing countries in the Middle East and North America into new economic powers, undermining the economic advantage hitherto enjoyed by countries the likes of US, Europe and Japan.
The social results of the oil shock are two-fold. Naim Moisés, in his article ‘The Hidden Effects of Cheap Oil’ of The Atlantic, explains that the oil shock created ‘oil wars’ while fuelling the propagation of Islamic Fundamentalism, funded with oil money.
It has been forewarned that the dip in oil prices in 2014 may bear similar consequences as that of the oil shock back in the 70s. It almost immediately resulted in the devaluation of the Russian ruble. The economic chain of events taking place in Russia: plummeting stock market prices, dwindling Central Bank reserves, capital flowing out of the country, reduced export revenue, lack of foreign investment, is all a result of contracting oil prices.
Oil experts have gone so far as to link the economic sanctions imposed by the US on Russia in answer to Russia’s stand on Ukraine to a possible ploy by the Kremlin to cover up the country’s economic downfall by creating trouble abroad.
Chevron abandoning the Ukraine shale-gas exploration project, when oil prices again plummeted, has probably shot down the country’s one chance to become independent from Russian gas. Moreover, scrapping such projects may increase oil prices in the long run again, which in turn would result in higher energy prices. This is a vicious cycle.
Technological advances and new resource discoveries have realigned the oil market demand and supply trajectories, (Brown, 2014). Such factors lead to higher supply and lower prices in the global petroleum market. Environmental effects of petroleum price fluctuations are depicted in consumption. Usually, pollution and rise in CO2 is concurrent with increase in consumption. Consumers have been found to react to lower oil prices by overconsumption; purchasing larger, less fuel efficient vehicles.
Burning more oil than necessary can lead to a host of environmental issues such as air pollution and acid rain. Burning of fossil fuel causes nitrogen gas in the atmosphere to oxidize, creating nitrous oxides. Nitrous oxides, along with sulfur dioxide from the sulfur in the oil, combine with water creating acid rain. The gamut of environmental issues that acid rain entails, include acidification of lakes that render these ecosystems unconducive to aquatic life, coral bleaching and forest dieback. In fact it is believed that the forest dieback of the Horton Plains is caused by acid rain.
On the other hand, higher oil prices have discouraged new ventures, as in the case of Chevron abandoning $10 billion shale-gas exploration project in Ukraine. This has negative social impact on Ukraine. It is an industry-wide trend to scrap or postpone projects that are too risky or less economically viable at low oil prices. Scrapping such projects is good environmentally, but bad socially.
Environmentally any oil out of the equation is good. It means less oil is burned and less CO2 ends up in the atmosphere. Various polluting activities that exploration involves also stops. Oil price dips have been found to be conducive to more sensible energy and climate change policies. Dips in oil prices allow policy makers to revoke oil or energy subsidies. Energy subsidies stimulate consumption and undermine energy conservation efforts leading to adverse environmental repercussions such as pollution through energy generation by burning more and more fossil fuel.
Lower oil prices is generally considered bad news for alternate energy, since such expensive technology cannot compete with lowered oil prices. It has been observed that biofuel use has been considerably affected between August 2014 and March 2015, during the recent oil price dip.
However, lower oil prices has its benefits too. Naim observes that lower oil prices may render the development of extra heavy, extra polluting oil found in reserves such as those in Orinoco River, Venezuela, economically unviable due to the high production and upgrading costs. Moreover, energy experts believe that lower oil prices would force renewable energy producers, wind and solar for example, to improve technology and production methods to make such sources cheaper. Experts argue that this would help to popularize renewable energy once oil prices rebound.
According to British Petroleum Geologist, Dr. Rishard G Miller, conventional oil peaked in 2008. In fact increasing oil prices is a clear indication of dwindling oil resources. Miller warns that, at the current rate of consumption global oil reserves would last only another 53 years. He warns that era of cheap oil has ended. It has been observed that most recessions are linked to oil price hikes. The economy of countries decline as more money is spent on buying oil instead of other goods and services.
An oil shortage with its accompanying price hike will affect everything in an economy. It could trigger anything from energy costs, resource wars, famines to drought and everything in between.