OIL: The talk of the hour

Oil: A weapon, a resource and a bait, just the context alters to its different definitions. Oil is such a resource, that has the capacity to make or break the whole economic ecosystem. It is the defining bedrock for international relations, geopolitical developments, financial progress and industrial prosperity. Lately oil has rode a roller coaster ride offering a transitory respite from its highs of $86/Barrel. It has been an epicenter for all big international treaties and agreements, deviating it furthermore from the basic principle of price discovery of economics. It slid as much as 25% over 4 weeks, and regained strength but in a very sedate manner. But amidst all the hustle bustle around this commodity, US has very smartly emerged the largest oil producer contributing around 13% of the global daily supply of oil. This makes the US absolutely insensitive to the price fluctuations, and strategically well positioned to overpower its terms over other countries. In fact the recent Iranian and Turkish economic slaughter were some instances that prove its supremacy in the oil markets.

Though we all saw the prices descending 25%, but none really pondered upon was it consumer ended or supplier oriented. Or was it a surprise for everybody, because when it peaked at $86/barrel analyst were foreseeing it touch $100 levels, soon after which it slid. I believe the primary reason was a dual effect of both the sluggish demand and unproportionate supply. The Us, OPEC, Russia and Middle East, all the major oil pumping mills were operating at their full capacity, but demand could not keep pace. With the growing acceptance of renewable energy sources, oil is losing its charm as a environment friendly fuel, also with the upsurge of electric vehicles and machinery it is a bane for the oil extractors. But there is an interesting vicious cycle, that high oil prices thwart economic and industrial growth, which in turn reduces the demand for oil thereby justifying the price slash.

Additionally the OPEC members are facing the prisoner’s dilemma, that even if they are able to sell oil profitably they are restricted by the cartel norms. Such developments have led to the fragmentation of the cartel, which has given space to individual countries to unilaterally lock deals with their allies, recent one being the Russia- Saudi Arabia accord to cut global supplies. This febrile status of the organisation offers other emerging markets to cut cheap deals.