Oil prices are manipulated by the US and Saudi Arabia. They are not determined by volatility on demand and supply. This has been the case since US President Franklin Roosevelt and Saudi King Abdul Aziz (ibn) Saud agreed on April 14, 1945, to collaborate on both controlling global pricing and production of oil and to sell and buy oil globally using the dollar. So, just like how the price of oil was forced to collapse in 1985 by President Reagan to bring down the Soviet economy – and it triggered political and social chaos and the eventual collapse of the Soviet Union and the end of the Cold War – this same oil price downward manipulation is being used to bring down the Russian economy which is dependent on oil exports as its main revenue stream; it is a way to punish it for invading Ukraine.
The good news is that the so-called shale oil which contributes 2 million barrels per day to the global output of 82 million will be priced out of the market, should the price of oil go below $80 per barrel. Also should 2million barrels be removed from the global oil supply, it would trigger slight supply shortage. Unless the US and Saudi are ready to take care of the difference, which obviously they might have thought through in this manipulation game to punish Russia, it is possible the price might not go below $80.
Also, China is against the oil price collapse that is devaluing the dollar and making China’s $3.9trillion foreign reserves increasingly worthless, besides Chinese exports being hit by reduced imports from OPEC importers.
For the reason not to see Chinese factories shut down and millions laid off, Beijing is doing everything to not allow the continued plunging of oil prices. Also aware that winter hits the world, oil price will begin to go up once again. China is already in frenzy buying. This is another reason why oil price hasn’t witnessed the kind of fall Washington and Riyadh wanted to see in their use of oil card to punish Moscow and Beijing. That is why benchmarking oil price at $78 for the 2015 budget is okay. While oil price will not go below $78 per barrel, it is obvious that Excess Crude Account inflows will decrease.
– By Odilim Enwegbara (development economist)