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Oil producers seek new economic models

by Michael Stürmer

Oil producers seek new economic models

Europeans may indulge in Schadenfreude and enjoy low oil prices while they last. But it is unlikely that the shift in markets, demonstrated by the breakdown in the April oil talks in Doha, will persist. Serious conflicts and market disruption are in the offing.

The cartel power of the Organisation of the Petroleum Exporting Countries may be broken for the moment, but no one can tell what will follow. The Near and Middle East, deeply troubled since 2011 by the aftershocks of the Arab revolt, will continue to send migrants from war, persecution and economic malaise to more hospitable places, mostly in Europe and, more specifically, Germany.

The petrostates’ economic model was simple: forever rising demand for an ever scarcer commodity, managed at predictably rising prices. The business plan was introduced into geopolitics after the October 1973 Yom Kippur War that saw the Arabs defeated by Israel and, less visibly, by the US. En revanche, the Arabs discovered the oil weapon and have used it ever since – though with increasing sophistication, even-self restraint.

The revenue generated by supply maintained a fraction below demand appeared to assure rising incomes. The bounty was transferred into bricks and mortar at London’s posh addresses or guaranteed social benefits and a tax-free life to the people at home to keep them quiet. If neighbours created trouble, money could keep unpleasantness at bay through fighter jets and battle tanks.

A fight for market share
The business plan no longer works, killed by worldwide competition and – for the time being – boundless supply in world markets. Oil producers draw daggers, fighting for market share while seeking higher prices: mutually irreconcilable policies. Iran, liberated from United Nations sanctions, and in existential need of much more oil revenue, is prominent among the spoilers.

The US and Russia, whatever their differences, are united in wanting to steady the market: the US at the lowest possible price, Russia at the highest possible. No magic formula short of, God forbid, a major war raging through the Middle East, possibly between Iran and the Saudi Kingdom, Shia against Sunni, is going to change the present uneasy equilibrium.

It is worth dwelling on past turning points. The 1973-74 and 1979-80 oil price hikes were driven not by scarcity but by political turmoil and fears of worse to come. Globalisation as experienced over the last 30-40 years, whether influencing supply or demand or both, turns predictions into a game without rules.

In Germany, in the early 1970s, the oil price rise helped shift the public mood away from technocratic left-wing can-do optimism into a deep pessimism. The high-flying social democratic dreams of Willy Brandt collapsed, replaced by the stern crisis management of Helmut Schmidt.

Western economies entered a spiral of gloom, intensified by the fall of the Shah of Iran and his replacement by Ayatollah Khomeini. The Iranian upheaval sent oil prices sky high, and depressed western and developing economies alike, bringing down governments and triggering war with Iraq.

By July 1986 the theatre of war shifted from the Persian Gulf to the global oil market. As a result of Arab-American joint action the price of oil dropped as low as $8 a barrel, signalling the death knell for the Soviet Union, by now a petrostate dependent on ever rising oil and gas income and a dominant position in world markets, and the loss and dismemberment of its post-war European empire. The Brezhnev doctrine – that Soviet dominion could never end – was abandoned. Massive oil income from western Siberia and the overstretched Soviet Union both petered out together.

After a decade of energy price setbacks for the Soviets’ heirs, Vladimir Putin, master of the Kremlin after 1999, drew advantage from a fresh rise in prices, enabling consolidation of his rule and enhanced public support. At $150 a barrel, just two years ago, Russia’s social contract looked assured.

In late October 2014 Putin told visitors that at $95 everything was under control. When the oil price continued to fall, as a result of higher US shale production and increased supplies from other parts of the world, the Kremlin began to worry much more seriously about western sanctions imposed after the annexation of Crimea.

As always, markets will not stagnate; they can move either way. Whatever the direction, history is on the move again. As Putin once put it when fortune was smiling at him: ‘Everything depends on the price of oil.’

Oil price decline following highs of $120 a barrel 

Brent Crude and WTI prices, 1938-present

Stuermer Oil Chart b

■ Michael Stürmer is Chief Correspondent at Die Welt and former adviser to Chancellor Helmut Kohl