From a price of over 100 USD/bbl in the summer of 2014, crude oil prices have dropped dramatically and are now lower than 60 USD/bbl. The idea of ‘Peak Oil’, first expanded upon by M. King Hubbert, where oil production peaks and then enters into terminal decline, has been pushed further into the future as new reserves of oil are discovered and the fracking revolution in the United States has made the largest consumer of oil a net exporter. This drop in prices is also partly caused by the oil cartel OPEC which in November pledged to maintain production levels in its member states – ostensibly to maintain their market share.
However, despite this dramatic drop in oil prices, they are still significantly higher than they should be, and artificially so. This is due to instability in oil producing regions such as Syria and Iraq where ISIS has been taking over production of many oil facilities in order to raise money for their Jihadist crusade. In addition, Libya, once one of the largest producers of crude oil, has been torn apart by civil war and instability in the aftermath of the overthrow of Colonel Gaddafi. Sanctions against Russia, the world’s largest producer of oil and refined petroleum products, have also resulted in decreased production as they are unable to sell to Europe and cannot acquire the Western-made technologies which allow them to drill in previously uneconomical oil fields.
The sanctions which the European Union has imposed on Russia for their proxy war in Eastern Ukraine and illegal annexation of Crimea expire in July of this year, with unanimity needed amongst EU member states to keep the sanctions in place. Any one member state may veto these proposals which seem increasingly likely as the new Greek Prime Minister Alexis Tspiras’ administration has made overtures to Russia in recent weeks, possibly in an attempt to increase their bargaining power with their European creditors ahead of negotiations on their repayments. This, therefore, means that sanctions against Russia will likely be lifted in July and the country will once again begin exporting oil to Europe and the West in general – thus further decreasing oil prices.
The fight against ISIS in Syria and Iraq is making slow and steady pace. There has been more cooperation between Iraqi and Kurdish Peshmerga forces – due in part to a recent deal signed between Baghdad and Erbil, giving wide ranging autonomy to the Kurds of Iraq. Furthermore, Jordan has stepped up efforts to destroy the Islamic State in response to the murder of Jordanian pilot Muadh al-Kasasbeh, conducting 56 airstrikes against ISIS positions on the 8th of February. The UAE has also re-joined the air strikes campaign, having previously voiced concern about a lack of search and rescue missions over Syria.
This is in addition to the group suffering defeat on the ground, losing the strategic border town of Kobane to the Kurdish YPG militia. Indeed, John Kerry, US Secretary of State said that ISIS has lost around 700 square kilometres of territory of ‘one fifth of the area they had in their control’. This means that more and more oil fields will fall out of ISIS hands and into the hands of legitimate governments, which means that production can once again resume at full capacity, thus pushing oil prices lower still. Although, this is a long term driver of the oil price drop as ISIS shows no sign of being defeated entirely and has proved resilient whilst fighting on multiple different fronts.
A third factor which will drive oil prices lower is the fact that new reserves which were previously regarded as unobtainable are now far easier to extract due to hydraulic fracturing techniques – or fracking. Indeed, European countries have large shale deposits and analysts predict that there could be as much as 600 trillion cubic feet of recoverable shale gas reserves which can increase Europe’s energy output, thus reducing prices of all fossil fuels including oil. In addition, Europe is not the only place where there have been significant deposits of shale gas reserves. Nations such as Argentina and China have also discovered large reserves of shale gas, therefore increasing the chances of more countries having an energy revolution and being able to create a domestic energy surplus, and thus decreasing crude oil prices.
However, predictions such as these on oil prices are notoriously complicated and therefore it is incredibly difficult to correctly predict what – if any – effect geopolitics and the invention of fracking will have on oil prices. Indeed, many analysts argue that the drop in oil prices is a temporary blip and that they will soon rise as more countries industrialise and demand outstrips supply. Certainly there are significant doubts that Europe will enjoy a shale gas boom similar to that of the US. Chevron one of the largest oil companies in the world has pulled out of a natural gas venture in Poland – one of the most shale rich countries in the European Union – and the Scottish Parliament has announced a moratorium on fracking subject to further studies on the effect it will have on the environment.