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The global politics of falling oil prices

By Peter Westmore - posted Thursday, 4 December 2014


OPEC controls oil prices by imposing production quotas which are designed to keep supply and demand in line.

If oil prices rise unexpectedly, the OPEC states increase production, thereby pushing prices down.

However, if oil prices start to fall, OPEC's ability to cut production is limited by the fact that 60 per cent of the world's production comes from countries outside OPEC, including the United States, the world's largest consumer, and Russia which is one of the world's largest producers.

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Russia has consistently refused to join OPEC, because it would have to accept OPEC's rules to control production.

Saudi Arabia and other OPEC states believe that Russia and other non-OPEC states have exploited the organisation to extract good prices when supply is short, but refuse to accept OPEC's discipline to limit supply when prices are falling.

Additionally, the Saudis are alarmed by the expansion of US shale oil production which is squeezing them out of the lucrative American market.

Over the past six months, as prices have been falling, OPEC responded by maintaining production, and called on the non-OPEC countries to curb their output as a condition for cuts by OPEC.

The effect of this has been to accelerate the decline in spot prices, to the point where some observers consider that crude oil prices could fall to $US50 a barrel. This has had a dramatic and damaging effect on some of the high cost OPEC nations, on shale oil producers, and on the non-OPEC oil producers, particularly Russia.

Even before the slide in oil prices, Russia's economy had been severely hit by Western sanctions over Moscow's annexation of Crimea and continued destabilisation of eastern Ukraine, whose territorial integrity Moscow had promised to respect.

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Now the sudden collapse of oil prices has plunged the Russian economy into recession. The Moscow stock market is in free-fall, as is the exchange rate for the Russian ruble.

A further issue is Russia's support for Syria's Assad regime.

The Saudis, who are Sunni Muslims, have been bankrolling the Sunni opposition to Syria's Alawite Muslim leadership of Bashar al-Assad.

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About the Author

Peter Westmore is President of the National Civic Council and publisher of News Weekly. He is an engineer by training.

Creative Commons LicenseThis work is licensed under a Creative Commons License.

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