By Rishit Jain
If theres anything that has constantly emerged in the international sections of newspapers, it is the fluctuating stance of the Organization of the Petroleum Exporting Countries (OPEC) regarding increasing and decreasing production. While these wild oscillations and the ripples they cause in global markets can often be misinterpreted as incompetence to assess the given trade scenario or indecisiveness on the part of the OPEC, it has more to do with the instability prevalent in these nations. In recent times, the epicentres of the same have been Venezuela and Iran.
Independence of oil
There is often a common narrative for most nations that depend on a single, valuable natural resource. While they may claim to be independent on paper but in reality, they are clutched in handcuffs by the volatility of oil. Thus, when these nations prosper as oil prices skyrocket, instead of diversifying themselves, they remain focused on expanding efforts in the oil sector. Thus, when this rocket tips back down, the nation faces absolute turmoil.
This is also the story of Venezuela, where crude oil makes 95% of their exports, with no other major source of income. Under Hugo Chavez, we saw oil reach more than $140 in 2008 from $17.29 in 1993, an increase of almost 710%. This was a time of Venezuelan prosperity as an economic powerhouse in South America, and the ambitious administration of Chavez, using their new-found wealth, introduced a myriad different benefits to the nation in the form of aggressive poverty reduction programs such as price controls and other expensive social projects such as government housing units for the poor and heavily subsidized government-based food retailers.
However, in 2014 as oil prices dipped down from $105 in June 2014 to roughly $33 in just a few months, the new government was no longer capable of funding the same benefits the nation had been used to, leading to large scale unrest in the nation. The economic damage completely wreaked havoc as Venezuela now suffers from roughly 18,000% inflation and 25% unemployment. From an 18.3% growth of the economy in 2004, Venezuela has witnessed quite the economic landslide.
As a result of this colossal damage corruption, rising debt and a lack of investment in production infrastructure have caused Venezuela to decrease oil production. Due to the same, oil prices have globally risen, which has led OPEC to increase production in order to mitigate this rise. A part of this can be associated with the fear that if oil prices rise to an amount too high, they may witness the resurgence of American shale oil producers, the same party that led to the destructive oil price war between in 2014.
Nuclear meets Oil
In another disruptive move, the Donald Trump administration decided to recall the Iran agreement reached during former President Barack Obamas administration. The consequent ripples of instability and questions of global eco-political hostility further sent oil prices rising. In fact, oil prices have crept up to more than $75 from less than $45 a year ago, illustrating a 63% rise in just a year.
In just the last 2 months there has been a lot of uncertainty surrounding the prices of oil. However, two causes emerg for the same, namely, one nation that drowned in its own hubris and over-dependence caused the change, while another is the powerful international force of the US.
Here is where we witness the tragic flaw of the OPEC, an organization that has constantly shown its inability to maintain price ability and collusion for one of the most vital commodities that powers the entire world. The OPEC is merely an organization that recommends nations to follow their collusive methods and is only capable of subduing nations with lesser eco-political strength than them. Therefore, once an entity more prevalent than these heads arises in the oil markets, the OPEC is rendered absolutely redundant, for there is nothing they can do to stop them.
This was perfectly illustrated in 2014, where once American shale oil flooded the markets, the OPEC was torn by parties fleeing the collision to seek self-benefit, leading to days where articles read that the barrel cost more than the oil within. This was also seen when the US decided to impose sanctions again, leading to turmoil and inadvertent peaks in oil prices.
While the OPEC attempts to represent itself as a liberalizing, democratic union of independent oil exporting nations, it is nothing more than a group of countries trying to survive the torment of more powerful nations that play through economic and political instruments. This is the only certainty in an otherwise uncertain environment.
Rishit Jain is a writing analyst at Qrius