Wanted: Strategic Plan for Oil Sector

Oil is first and fore­most a commodity. As a commodity, oil is the larg­est traded commodity in ton miles globally.

Besides being com­modity, oil also had been variously describe as “a weapon, a strategic asset, a course and a maker and spoiler of fortunes. Crude oil prices like prices of other commodities are controlled by the forces of demand and supply. Thus, like other commod­ity markets, the crude oil market is cyclical with prices falling and rising in response to changes in demand as well as OPEC and non OPEC supply.

Such crude oil price cycles often vary from a week to several years. Currently global oil prices have been falling steadily since June 2014. OPEC daily basket price for instance, declined by 54.4 percent from $110.30 per barrel Monday, 23 June 2014 to $50.30 per barrel Monday, 23 March 2015. This oil prices slump generally attrib­uted to market oversup­ply arising from shale oil boom in the United States and OPEC’s uncharacter­istic refusal to cut pro­duction is reversing the economic fortunes of oil exporting and importing nations.

The falling crude oil prices have turned the economic stress which high oil prices imposed on oil import dependent nations led by the United States into economic for­tune while turning the fortune of export depen­dent nations led by Russia into economic doom.

Following the oil price crash, the economies of oil import dependent nations have been ex­panding accompanied by sharp growth in job place­ment. On the contrary, the economies of oil export dependent OPEC nations have been contracting, going through a period of local currency deprecia­tion, high inflation and unemployment.

It is therefore not sur­prising that oil import dependent nations who are benefiting from the low oil prices would want the situation to contin­ue, while OPEC nations whose economies are un­dergoing severe stress, look up to a very quick price recovery.

The question being asked is: how soon will global crude oil prices rebound? Any attempt at providing an answer to this question that focuses on the immediate roles of OPEC and the U.S in this oil price slump but ig­nores a critical review of their remote causes, will not suffice.

In carrying out its man­date, the IEA formulated an emergency response strategy which focused on four supply and demand side countermeasures. On the supply side the strategy involved mem­ber nations implement­ing a strategic Petroleum Reserve capable of hold­ing equivalent of at least 90 days stocks. The other supply side measure re­quired member nations to increase domestic pro­duction of oil.

The United States which alone accounts for about 20 percent of world oil consumption went a step further than other OECD member nations who would be satisfied with just a reduction in their oil dependence, to declare and pursue a pol­icy of complete energy independence’ through which she sought to be self-sufficient in energy production and by so do­ing wean herself from imported oil. Though the American energy inde­pendence aspiration was described and derided as “ambitious”, the U.S nonetheless remained resolute and consistent in pursuing the policy to its logical conclusion. Thus as the green en­ergy revolution raged on in many OECD nations the U.S aggressively pur­sued the development of her shale oil and gas resources. The develop­ment and deployment of expensive Hydrolic frac­turing or frackning and horizontal drilling tech­nologies, both products of advanced research, are currently making it pos­sible for U.S companies to increase shale oil and gas production. Current­ly the U.S has not only achieved self-sufficiency in oil and gas production but is looking forward to exporting to other coun­tries. The U.S has thus switched side from the world’s largest oil im­porter to zero oil import­ing, oil self sufficient and may be soon to oil ex­porting nation if a law in place banning oil export is lifted.

OPEC member na­tions must wake up to above reality, that this price slump is different from others previously and that their competi­tors the OECD are now in control. Like the OECD in 1973/74 OPEC should move quickly to fashion out measures to miti­gate the impact of this deadly oil prices slump on their economies and currencies. The OECD may have called on their technological ingenuity to overcome their energy supply problem that has created the present prob­lem for OPEC. OPEC on the other hand is not tech­nologically endowed and therefore must look in­wards at their economic management systems for solution. Member na­tions must seize this op­portunity to aggressively implement the three D strategy of Diversifica­tion, Deregulation and Discipline. There is no better time than now to vigorously embrace eco­nomic diversification, oil and gas sector deregula­tion and fiscal discipline in OPEC member nations.

Dr Uchechukwu is the Deputy Director, Train­ing, PTI

drucheeke@yahoo.com