The following article is based on my own interpretation of the said events. Any material borrowed from published and unpublished sources has been appropriately referenced. I will bear the sole responsibility for anything that is found to have been copied or misappropriated or misrepresented in the following post.
NOOR MOHAMED M, MBA 2015-17, Vinod Gupta School of Management, IIT Kharagpur
One of the important essential of the world economy is oil. When the world economy restructured after major recession on 2008, oil price sharply increased in the market from 2009 to last quarter of 2014 and it sold at more than $100 per barrel and touched peak $147. According to data from U.S. Energy Information Administration, Short-Term Energy Outlook, December 2014. In the beginning of 2009, oil production and consumption was 84 and 82 million barrel per day respectively. Both reached 92 million barrel per day at the end of 2014 worldwide.
Demand consistently increases from US, European, China and other developing countries to develop the nation economy in the globalization and competitive environment. Oil is necessary for transportation and power generation. Huge demand of oil in the market paved way to explore more oils in worldwide. Major importers like USA and Russia started to utilize oil from their region. It cause production of surplus oil in the world market and minimized its price promptly.
OPEC (Organization of the Petroleum exporting countries) is major exporter of oil to the world and it has market share of around 42% of total production. It members includes Saudi, Iran, Iraq, Kuwait, UAE etc. The price fall affected the revenue of OPEC members. Countries like Saudi mostly belongs to oil trade are under tremendous pressure. Saudi’s budget deficit grown bigger and forced to issue bonds with maturities over 12 months for the first time in eight years.
OPEC members especially Iran urged to bring down oil production to upsurge oil price. When all OPEC members consider it, But Saudi refused. It has reason that it lost largest exporter tag to Iran on 1985 when followed similar decision during oil price down. Additionally, Iran is expected to increase its output by hundreds of thousand barrels a day this year if international sanctions on the country are lifted.
Moreover, Sunni dominated Saudi kingdom has cold relationship with Shite dominated Iran over long time. It peaked when Saudi executed 47 people including Shiite cleric leader Nimr al-nimr on January 2, 2016. It led to violent broken out and protesters attacked Saudi’s embassy at Tehran. Saudi enraged and led to break bilateral relations with Iran. Saudi ordered Iran’s officials to evacuate the country within 48 hours.
If Current scenario leads to war; it has high chance of increasing oil price. When both major exporters in trouble, Oil price may touch historic high.