This is a question that many people are asking, especially in the wake of the recent OPEC+ meeting, where the major oil-producing countries agreed to increase their output gradually over the next few months.
The decision was seen as a compromise between the competing interests of Saudi Arabia, which wanted to maintain tight supply and high prices, and Russia, which wanted to boost production and market share.
But what are the underlying factors that are driving the oil price dynamics, and how does the world order play a role in them?
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One way to approach this question is to look at the supply and demand sides of the oil market. On the supply side, there are several factors that affect the availability and cost of oil, such as:
The level of production by OPEC and its allies, which account for about 40% of global output. OPEC has a history of using its market power to influence prices by adjusting its output quotas, either to increase or decrease supply.
However, OPEC’s influence has been challenged by the rise of US shale oil, which has increased its production significantly in the past decade and become a major competitor in the global market.
The level of production by non-OPEC countries, such as the US, Canada, Brazil, Norway, and others, which account for about 60% of global output. These countries have different production costs and capacities, and their output decisions are influenced by market forces, technological innovations, environmental regulations, and geopolitical factors.
The level of spare capacity, which is the amount of oil that can be brought online quickly in case of a supply disruption or a surge in demand. Spare capacity acts as a buffer that can stabilize prices and prevent volatility.
However, spare capacity has been declining in recent years, as many producers have been operating at or near their maximum capacity, leaving little room for flexibility.
The level of inventories, which is the amount of oil that is stored in tanks, pipelines, ships, and other facilities. Inventories act as another buffer that can smooth out fluctuations in supply and demand.
However, inventories have also been declining in recent years, as demand has recovered from the pandemic-induced slump and supply has been constrained by OPEC+ cuts and other factors.
On the demand side, there are several factors that affect the consumption and price sensitivity of oil, such as:
The level of economic activity and growth, which determines the overall energy demand and oil consumption. Oil is still the dominant source of energy in the world, accounting for about 33% of total energy consumption.
Therefore, oil demand is closely linked to economic performance and outlook. The global economy has been recovering from the pandemic-induced recession, but at an uneven pace across regions and sectors.
The recovery has been boosted by fiscal and monetary stimulus measures, but also hampered by new waves of infections and variants, vaccine inequality, trade tensions, and social unrest.
The level of consumer preferences and behavior, which determines the demand for specific oil products and services. Oil is used for various purposes, such as transportation, heating, electricity generation, industrial processes, petrochemicals, etc. Different oil products have different demand elasticities, meaning how responsive they are to changes in price. For example, gasoline demand tends to be more elastic than jet fuel demand, meaning that consumers are more likely to reduce their gasoline consumption when prices rise than their jet fuel consumption.
The level of technological innovation and efficiency, which determines the energy intensity and oil intensity of economic activity. Energy intensity is the amount of energy needed to produce one unit of GDP, and oil intensity is the amount of oil needed to produce one unit of GDP. Technological innovation and efficiency can reduce both energy intensity and oil intensity,meaning that less energy and oil are needed to produce the same amount of output. This can lower the demand for oil and put downward pressure on prices.
The level of environmental awareness and regulation, which determines the demand for alternative energy sources and low-carbon solutions. Environmental awareness and regulation can affect both the supply and demand sides of the oil market,but they have a more direct impact on the demand side, as they can shift consumer preferences and behavior away from oil-based products and services towards cleaner options, such as renewable energy, electric vehicles, hydrogen, biofuels, etc.
This can also lower the demand for oil and put downward pressure on prices. These factors interact with each other in complex ways, creating a dynamic and uncertain oil market environment.
However, they do not operate in a vacuum, but rather within a broader context of global politics, economics, and security, which shapes the world order.
The world order can be defined as the set of rules, norms, institutions, and power relations that govern international interactions and cooperation.
The world order can affect the oil market in various ways, such as:
– The level of stability and predictability
of the international system, which affects the risk perception and confidence of oil producers and consumers. A stable and predictable world order can foster a cooperative and constructive oil market environment, where supply and demand are balanced and prices are stable and reasonable.
However, an unstable and unpredictable world order can create a competitive and conflictual oil market environment, where supply and demand are imbalanced and prices are volatile and extreme.
The level of integration and interdependence of the global economy, which affects the trade flows and investment patterns of oil producers and consumers.
An integrated and interdependent world order can facilitate a free and fair oil market environment, where oil is traded and invested across borders without barriers or distortions.
However, a fragmented and protectionist world order can hamper a free and fair oil market environment, where oil is traded and invested across borders with barriers or distortions.
The level of cooperation and coordination of the international community, which affects the policy responses and collective actions of oil producers and consumers. A cooperative and coordinated world order can enable an effective and efficient oil market environment, where oil policies and actions are aligned and harmonized to address common challenges and opportunities. However, an uncooperative and uncoordinated world order can disable an effective and efficient oil market environment, where oil policies and actions are divergent and contradictory to address common challenges and opportunities.
Therefore, the world order is not only a backdrop, but also a driver of the oil market dynamics.
The world order can influence the oil price trends by affecting the supply and demand factors, as well as the market sentiment and expectations.
However, the relationship between the world order and the oil market is not one-way, but rather two-way. The oil market can also influence the world order by affecting the economic performance, political stability, and strategic interests of oil producers and consumers.
For example, high oil prices can benefit oil-exporting countries by increasing their revenues, fiscal space, and geopolitical leverage, but they can also harm oil-importing countries by increasing their costs, inflation, and trade deficits.
Conversely, low oil prices can benefit oil-importing countries by decreasing their costs, inflation, and trade deficits, but they can also harm oil-exporting countries by decreasing their revenues, fiscal space, and geopolitical leverage.
These effects can have implications for the world order by altering the balance of power, the distribution of wealth, the patterns of cooperation or conflict, and the prospects of development or instability among countless countries.
The world order is a cause and a consequence of the decline in oil price globally. The world order affects the oil market by shaping the supply and demand factors, as well as the market sentiment and expectations.
The oil market affects the world order by shaping the economic performance, political stability, and strategic interests of countries. The interaction between the world order and the oil market creates a feedback loop that can amplify or dampen the oil price movements.
Therefore, understanding the world order is essential for understanding the oil market, and vice versa.