Political Economy of Global Oil Prices: Who Moves the Prices?

Now that the beginning of the year has arrived, let's take a closer look at the trends in oil prices. Below is a chart of the past 5 years of global crude oil prices (CL=F).

<Crude Oil(CL=F) Price trend for the past 5 years>

(Source: Yahoo Finance)

Global oil prices experienced a sudden drop in 2020 due to the unexpected COVID-19 pandemic, followed by a gradual recovery. However, in February 2022, prices skyrocketed due to Russia's invasion of Ukraine, followed by a decline. In the fall of 2023, a sudden announcement of production cuts by OPEC+ led by Saudi Arabia caused a brief rebound, followed by a gradual stabilization.

The global oil prices, which were significantly shaken by exceptional variables such as the pandemic and war, are now heavily influenced by the ongoing geopolitical and economic hegemony struggle between the United States and Saudi Arabia.

As the U.S. approaches its November 2024 presidential election, President Biden, seeking reelection, faces the urgent task of bringing down oil prices to stabilize inflation. Simultaneously, he must lower interest rates, which were raised to historic levels to curb inflation, to ease the burden on U.S. citizens and businesses.

On the other hand, Saudi Crown Prince Mohammed bin Salman (MBS), engaged in efforts to diversify the economy and move away from oil dependency under the "Saudi Vision 2030" initiative, requires favorable oil prices for the construction of the world's largest smart city, Neom.

MBS attempted to boost oil prices with OPEC+'s production cut announcement in September 2023, but the U.S. responded by actively increasing shale oil production and releasing strategic petroleum reserves, resulting in oil prices reversing according to the U.S.'s intentions.

The graph of U.S. oil production shows a sharp increase in the fall of 2023, reaching a peak of 13.3 million barrels per day.

(Source: The Daily Shot)

The graph below illustrates the levels of the U.S. Strategic Petroleum Reserve (SPR), rapidly decreasing since the Russia-Ukraine war in 2022. The U.S. has actively released SPR to counteract rising oil prices.

(Source: The Daily Shot)

Thus, the situation is unfavorable for Saudi Arabia. While Russia, in opposition to the U.S., was an active partner in production cuts, its stance is ambivalent. Maintaining an adequate oil price is essential for covering the costs of the Ukraine war, but it is challenging for Russia to actively participate in cuts as it needs to sell oil to fund the war.

Saudi Arabia, facing resistance from OPEC+ members like Nigeria, sought to achieve another production-cut agreement at the end of last year but faced opposition. Saudi Arabia's leadership within OPEC+ is diminishing.

In contrast, the U.S. is making various efforts to stabilize oil prices. After Yemen's Houthi rebels, backed by Iran, attacked civilian ships in the Red Sea, the U.S. promptly deployed an aircraft carrier to stabilize maritime routes in the region. Despite the heightened crisis in the Middle East since the Israel-Palestine conflict, it has not significantly affected oil prices.

The Red Sea, through which about 12% of global trade passes, is a crucial trade route. If the region's crisis forces ships carrying oil or goods to detour around the Cape of Good Hope, increased transportation costs could become a direct hit to price stability. To address inflation, lower interest rates, and maintain a suitable growth rate while achieving economic soft landing, President Biden, hoping for reelection, cannot afford to act slowly.

The future focal points are whether Saudi MBS will continue to face challenges or find a way to counterpunch. While the U.S. appears to be managing the situation well, the challenge lies in China and North Korea. If China openly attempts military unification with Taiwan or North Korea intensifies nuclear threats, the U.S. may struggle to manage three simultaneous crises. In such a weakened situation, a crisis could erupt, causing oil prices to dance once again.

The political-economic contradictions among various countries surrounding oil are expected to become increasingly apparent in 2024.