(Oil &Gas) Does oil keeps the economy going?

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Majority of those in the business would suggest that oil keeps the world economy going. Hence, having control over oil reserves and leverage over global oil prices translates into geopolitical clout.

As the world’s most significant energy source, oil plays a critical role in global geopolitics.  Because national economies are oil-dependent, governments are highly involved in regulating, restricting, and in some cases subsidizing or fully controlling the production and export of oil. 

Net importers of oil like China strive to achieve “energy independence” by limiting themselves to a few reliable suppliers. Countries also pursue “energy security” by trying to stabilize oil prices.

The proposed No Oil Producing and Exporting Cartels Act (NOPEC) seeks to lower the global price of oil by enabling the US government to sue the Organization of the Petroleum Exporting Countries (OPEC) under US antitrust laws. This would have enormous repercussion on the countries which depend its economy on its oil and gas business.

As the world’s most important source of energy, oil distinguishes itself from other commodities for its crucial role in global geopolitics. Global oil supply isn’t solely governed by demand and supply principles, other factors such as speculation also have their influence.

A hike in oil prices, for example, won’t immediately reduce oil demand from cars, and oil producers have only limited ability to adjust oil supply to sudden changes in demand. Demand also isn’t the only factor determining the price of oil, which is also influenced by economic forecasts and geopolitical risk assessments.

Furthermore, the notion that there is a unified, global oil market is a misconception. States have a big hand in regulating, restricting, and in some cases subsidizing or fully controlling the production and export of oil. Around 20% of global oil supply isn’t publicly traded but is, for example, used as a payment-in-kind.

Oil-rich Venezuela, for instance, uses oil shipments to China to pay down loans and debts. An example of payment-in-kind.

Therefore, it’s fair to say that oil is indispensable for keeping national economies running. Guaranteeing uninterrupted supply thus forms part of countries’ national security policy. Only countries with large reserves of their own, such as the United States and Russia, could theoretically achieve self-sufficiency.

Meanwhile, net importers of oil like China strive to achieve “energy independence” by limiting themselves to a few reliable suppliers. China, for example, is focusing on overland oil suppliers to decrease its vulnerability to marine embargoes.

“A major disruption in just a single major oil producer could send prices skyrocketing again and quickly push the world into a recession.”

Besides securing energy independence, countries also pursue “energy security” by trying to stabilize oil prices, such what OPEC strives to do for the past years. The effort of stabilizing the crude oil price at the expense of their crude oil production curtailments. It’s kind of odds really, since most organisation would set their KPIs on maximizing production,it’s certainly interesting to see one trying to curtail production.

Historically, the US government has used import quotas and tax incentives to keep prices low for domestically produced oil. The strategy, however, hurt domestic oil production in the long term as it did little to encourage or enable companies to invest in the exploration of new domestic oil reserves.

Furthermore, the United States continues to depend on foreign oil imports and thus remains vulnerable to global price fluctuations. To stabilize international oil prices, the US Congress is currently considering a bill, the No Oil Producing and Exporting Cartels Act (NOPEC), which would enable the US government to sue the Organization of the Petroleum Exporting Countries (OPEC) under US antitrust laws. As a consequence, OPEC members would likely ramp up production to secure market share.

History tells a cautionary tale about deregulating global oil markets: During the Great Depression, increased supply and reduced demand led to a plummeting of global oil prices, which rendered the US oil industry almost unsustainable.

So, it might be true, as of today economy that is, oil does keeps the economy running.


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