Political Manipulations with the Price of Oil
Mikhail AGHAJANYAN | 23.10.2014 | OPINION

Political Manipulations with the Price of Oil

The drop in oil prices that began at the same time as Islamic State (IS) attacks in Iraq and Syria is impossible to explain with economic factors. The world has long been used to the fact that the market has reacted to every war in the Middle East, where 47 per cent of the world’s ‘black gold’ reserves are concentrated, with a sharp jump in oil prices. That is what happened during the two wars in the Persian Gulf, and that is also what happened when the Americans began their ‘mission to restore democracy’ in Afghanistan. And speculation about a possible military conflict between the US and Iran was accompanied by the expectation of a jump in oil prices of up to $200 a barrel and higher. At present, everything has turned upside down, but for how long? 

When the IS invaded Iraq in June, stock exchange quotations for oil initially began to rise, increasing from $109 to $115 a barrel between 10 and 19 June, but then the invisible hand of the market suddenly seemed to lose its strength. The Islamic State’s military successes in Syrian and Iraqi theatres of war have been marked by a fall in oil prices to their lowest level since November 2010. Further reductions in the price of a barrel of oil have been recorded with each new wave of military activity in the Middle East. Increased airstrikes on Syrian and Iraqi targets by America’s hastily thrown-together coalition and the influx of information on IS plans to invade Lebanon and Jordan have all led to a drop in the price of ‘black gold’. And at the time of the most intensive US air strikes on IS positions in the Syrian town of Kobani (more than 50 airstrikes were carried out over the course of 48 hours between 15-16 October), the price of a barrel even dropped below the $85 level. 

The theory of a new ‘oil conspiracy’ between the US and Saudi Arabia against Russia (and possibly Iran) has a strong hold on the minds of many analysts. For the time being, this predominantly involves guesswork. But then the whole point with conspiracies is that they are difficult to uncover, if the conspiracy is in fact true. On the whole, the anti-Russian focus of possible American-Saudi Arabian speculation on falling oil quotations is noticeable. It must also be remembered, however, that right now, Nobel Peace Prize laureate Barack Obama’s team is not only knocking together a new military coalition and supplying the American military-industrial complex with orders, it is also preparing for midterm elections to Congress to be held on 4 November, the results of which could clarify the possibility of a ‘changing of the guard’ in the White House in the autumn of 2016. Theories of a US-Saudi conspiracy also contain the idea that oil prices slumped during recent election campaigns in the US, for which there are once again no economic reasons. 

It seems that history is repeating itself. Obama and his Republican opponents are trying to win over voters’ sympathy. For Americans, low petrol prices are much more important than their government’s foreign policy endeavours. The affordability of oil products needs to not only seduce American households, but also stir up business activity. The stakes for the democrats and for Obama personally in the midterm elections are relatively high. If the Republicans take control of both houses, the White House’s current occupant is doomed to become a lame duck for two years until the next presidential elections. The alarm bell for the democrats sounded four years ago during the previous midterm elections to Congress, when members of Obama’s party, who up until that point confidently controlled the upper and lower houses of Congress, lost their advantage in the House of Representatives after losing 63 seats there, and 6 seats in the US Senate. It was the biggest loss of votes for a ruling party in midterm elections since 1938. 

An understanding between the US and Saudi Arabia with regard to the regulation of oil prices using non-economic levers is highly probable. However, Washington knows it should not take it too far. And not just for economic reasons, when the shale oil being extracted from North American oil fields is ruining the companies involved because of the high cost of its production. For the US, it is more important that China is one of the main beneficiaries of the downward trend in the oil market. Do Americans really want to speed up the moment that China becomes the leading global economy, with all the geopolitical consequences that that implies, with their own hands? Or have they become so obsessed with the idea of punishing Russia that its policy of restraining China has lost all urgency? It is neither one nor the other. It seems that after the Congressional elections, Obama’s administration will lose much of its motivation to play around with pushing down prices on the oil market. All the more so since with the approach of the winter season, bear speculation would be excessively costly. 

In the long term, political manipulations with oil prices would also cause major problems for the second alleged conspirator. Saudi Arabia has shouldered most of the expense in the fight against the Islamic State. They are financing the training of the so-called moderate Syrian opposition in the hope that, over time, it will manage to overthrow Bashar Assad’s regime by force. Riyadh is also providing financial support for major arms deals in the region (the contract with France and Lebanon for $3 billion). The largest monarchy of the Persian Gulf also has the burden of its own domestic problems associated with the need to control the growth of radicalism among Saudi Arabians through the use of multi-billion dollar social programmes. All this requires money. But there is no guarantee that the oil monarchy will receive as much as it needs at the prices that have recently been established in the oil market.

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