High Oil Prices Dampen Economies

Trang Le '17 Contributing Writer

Worldwide industries and economies are currently witnessing a 25% fall in oil prices since their peak in June. This drop, which economists speculate will continue, is heavily affecting countries that depend on oil to generate a large portion of their GDP. This economic reliance, coupled with domestic political turbulence, has greatly harmed oil-rich countries, including Venezuela, Iran and Russia.

Just like the dilemma John D. Rockefeller faced in his effort to form an oil cartel back in 1870, a similar obstacle appears again today as oil companies have failed to respond to the current situation and reduce output accordingly.

As T. Boon Pickens, American business financier, noted in his interview with the Wall Street Journal, it is within the characteristics of the oil industry to be “a bunch of guys that think independently of each other.” No one wants to stop drilling first, despite the falling prices of oil, and as Pickens put it, “They all keep drilling.”

Due to an increase in supply and decrease in demand for oil (which stems from the dwindled manufacture growth in China and a decreasing U.S. dependence on foreign reserves), prices have greatly affected countries largely dependent on oil. In Venezuela, for every dollar that oil prices drop, the state loses roughly $450 to 500 million off export earnings. These countries are vulnerable to even the slightest fluctuation in market prices. According to Business Insider, prices have fallen from $115 a barrel in July to under $85 in October.

The problem, however, also lies largely in Venezuela’s economic policies, which do not embrace a pro-market stance. Venezuela’s socialist economy imposes even more hardship on its citizens. Most citizens are too besieged by daily struggle to care about politics, but that does not mean that the government should not worry about civic unrest as the country faces heavy debt. Polls show that 80% of citizens now believe the country is heading the wrong way, signaling a political outburst if the President, Nicolás Maduro, makes a wrong move on the economic chess board.

The situation is also heating up in Russia, whose currency has been weakened by 20% since the start of the year. As a country that also depends heavily on oil to generate GDP, the reduced prices and Western sanctions, are putting great pressure on the ruble. Experiencing capital outflow of $100 billion, the government has to manage this and simultaneously fulfill “key obligations,” as stated by Russian Finance Minister, Anton Siluanov.

Right now, one of the two main questions put forward is whether Organization of the Petroleum Exporting Countries, can manage oil production. Saudi Arabia has affirmed that the country would rather keep their share in oil production as history shows price fluctuations are inevitable.

The other question lies in the decisions of leaders, especially those made by the Venezuelan government, whose corrupt economic choices are heavily affecting local citizens. Whether the countries drown in this oil challenge or find a way to resolve it through political and economic negotiations will be determined. And the world will be watching.