Lower Oil Prices Carry Geopolitical Consequences

Editor's Note: The recent drop in global oil prices is affecting economies around the world. This series examines the reasons behind the falling prices and their effects on major energy consumers and producers. Part One discusses the structural changes in the oil market, particularly the growth in supply and the decline in demand. Part Two will examine the countries likely to be most troubled by price drops, while Part Three will look at the countries likely to gain the most.

 
Since mid-June, the price of Brent crude oil has fallen by nearly 25 percent -- going from a high of $115 to about $87 a barrel -- and structural factors are causing concern among global oil producers that oil prices will remain near current levels through at least the end of 2015. This concern has caused several investment banks to slash their oil price outlooks for the immediate future. Stratfor believes that oil supplies will stay high as energy production in North America increases and OPEC countries remain hesitant or unable to cut production significantly. Moreover, in the short term, the Chinese economic slowdown and stagnant European economy will limit the potential for growth in oil demand. These factors could make it harder for global oil prices to rebound to their previous levels.

Oil is the most geopolitically important commodity, and any structural change in oil markets will reverberate throughout the world, creating clear-cut winners and losers. Countries that consume large amounts of energy have been coping with oil prices above $100 per barrel since the beginning of 2011 as most of the developed world has been trying to emerge from financial and debt crises. A sustained period of lower oil prices could provide some relief to these countries. Major oil producers, on the other hand, have grown accustomed to high oil prices, often using them to underpin their national budgets. Sustained low oil prices will cause these oil producers to rethink their spending.

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