Fallacy of Peak Oil

Since the peak of June 2014, the price of oil has plummetted by about 70%. At the time when the price was in the vicinity of $140 per barrel, no one really believed it could ever come down. So-called oil experts talked about “peak oil” theory and how the petroleum reserves were dwindling and so the price of oil would never fall below $100 per barrel. Think-tanks that put out regular updates scared people by saying a barrel of Brent crude could cost about $200. This was a scary scenario for consumers, but music to those economies that live off commodities. Economies like Russia, Venezuela, Angola and Nigeria, whose development spend was premised on the price of oil being $100, were devastated. Their balance sheets were brutally savaged and so were their economies. Venezuela saw such political turmoil after the economy began to flounder due to falling oil prices that it saw an extraordinary defeat of the ruling socialist party, whose support structures were premised by the late Hugo Chavez’s pro-people policies. Other commodity-based economies were also badly hurt. Some of them pleaded with Saudi Arabia, the leading producer of oil, to reduce production and lower prices. The Saudis obviously have their own ideas. They used oil as a weapon in 1973 during the Yom Kippur war and they are pursuing their own regional and economic interests. Expectedly, Saudi Arabia does not want to push the Oil Producing and Exporting Countries (OPEC) to make a move towards raising oil prices. Riyadh’s reason for keeping oil prices low even if it eats into its profit is prompted by a desire to haemorrhage its enemy, Iran, which has been accommodated in the global order after the signing of its nuclear deal with P5+1. The Saudis want the oil prices lower so that the Iranians do not reclaim all their pre-sanction customers. Also, Iran’s recovery from years of UN and Western sanctions would have been quicker if oil prices were in excess of $100 per barrel. The other factor that the Saudis want to nip in the bud is the influence new shale oil and gas technologies are exercising on oil supplies.

One of the major reasons oil prices are coming down is that the US has become self-reliant in oil. Worse, it has also become an oil exporter. By hammering down the price of oil below $140, shale-based oil production becomes unviable. This is the major cause for many shale and oil gas companies going bust. About 20% of oil rigs are lying idle and if the oil prices fall further then more will be affected.

The Saudis, by keeping oil prices soft, are also hurting Russia as an economic power. In this, their interests may converge with those of the US, which has wanted Moscow to stop supporting Syria and back off in Ukraine. In both these theatres, the US and Europe have a major interest. Russian President Vladimir Putin has displayed interesting tactics. He has shown that if a country is a serious military power, it can also preserve its economic interests.

By parking themselves in Syria, where a number of oil and gas-driven countries have major stakes as it is the intersection point for proposed gas pipelines to Europe, the Russians have ensured that they will be a major factor when the Middle East is being reordered. The Russians, in order to get a grip on oil prices, have also attacked the Islamic State’s oil smuggling enterprise by bombing tankers on their way from Syrian oil wells. The Russians believe that filling the market with cheap smuggled oil was not just helping the Islamic State with finances, but also impacting fuel prices. By plugging such leakages, the Russians are also trying to control the price of oil. Though, at the moment, the impact has been minimal, the Russians are of the belief that slowly they will be able to get the Saudis and other oil producers to come around to their worldview. The Iranians, for example, are backing the Russians in their military enterprise and hoping their alliance with them will help in protecting their oil and strategic interests.

The oil and gas world represents a murky reality where old colonial powers like Britain and France who carved up the Ottoman Empire based on the areas that had hydrocarbon reserves are still playing their own games. To attain their nebulous objectives, they have introduced a murderous sectarian dimension that is not just destroying these ancient societies, but also making it difficult for bombed-out countries like Libya and Syria to arise again.

The dip in oil prices has not just questioned the fallacy of peak oil – the world is floating in hydrocarbon-based fuel – but also the fact that low prices spur economic growth amongst consumer countries.