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Oil Price Decline: A Positive Shock?

By Alwan Amin Eddine for Beirut Center for Middle East Studies –

According to OPEC, oil prices is expected to continue its declination until the mid of 2015. This decline in prices is a result of over production and weak demand.

Although Saudi Arabia the largest oil producer faces its first budget deficit since 2009 (145 billion Dollars) and in spite the fact that oil revenues represent 80% of Saudi GDP, the Saudi oil minister announced a few weeks ago that his country will not reduce oil production even the barrel price would reach twenty dollars.

On the other side, the Iranian Oil Minister said that Iran has got accustomed to oil price declination in the past even when the profit reached two Dollars.

The new “Oil War” affects United States “rivals” in particular. This tactic was previously used in the mid eighties, against former CCCP, and Iraq after the First Gulf War with Iran (1980 – 1988) and was a major factor that led to the Second Gulf War (1990-1991).

Presently, it is a kind of “Political Sanctions” in parallel with the European and American sanctions to specifically encounter the Russian influence on both Ukrainian and Syrian issues.

Also, it adds more pressure on Iran to make compromises on the Nuclear negations and sign the final agreement, especially that a new round of Geneva talks is taking place on January 18th.

Meanwhile, in the U.S. “backyard”, this kind of “Punishment” tragically affects the Venezuelan regime where oil production represents 75% of GDP and 96% of exports.

This critical situation urged the Venezuelan President Nicolas Madorou visiting the Middle East region and primarily the Kingdom of Saudi Arabia, Qatar and Untied Arab of Emirates hoping to reach an agreement regarding oil production levels and taking effective actions to regain a fair oil price (Saudi Arabia produce 30 million barrels alone out of 30 million barrels).

New oil prices have negative impact on the economy of United States “rivals” and allies (oil producing countries). For example, Kuwait officials said that the deficit in budget will be cover through the independent reserve funds. Also, the Kingdom of Bahrain lost about 252 millions in 45 days, while UAE officials announced that “prices declination will not last too long.”

On the other side, new oil prices will reflect positively on oil consuming countries’ economy. India is one of these countries where an official said that his country will save around 12 Billion dollars as a result of oil price declination. Undoubtedly this situation will reflect positively on Indian’s developing economy.

Also in Europe, some business men claimed that the products of European industries are more competitive than before and the exports will increase especially that Europe is suffering from a deep recession.

The same effect can be applicable on China. The large industries need more sources of power to increase their productivity and the products will be more competitive.

On the other hand, Russia won the largest stake of weapons sales last year (10 Billion Dollars last November), but this is not enough. However, a large economy such Russia cannot depend either on oil production or weapons sales.

Russian politicians should be fully aware of the negative impacts of oil price declination on their economy, otherwise it would be a “big dilemma”.

Despite of the above, Russia still has many cards to play, like selling oil using its local currency the “Ruble”, and China might participate in such action in order to help its ally. Also, it can decrease the “Governmental Spending” by disengaging it with the changing of oil prices, and this what Mr. Dmitry Medvedev said days ago. In addition, this issue will “refresh” the internal market by focusing on the “domestic commerce”.

Russia, Venezuela and Iran have to shift their dependence on oil sector into other productive sectors like industries and agricultural.

They have to turn out oil price declination from a “Disaster” into a “Positive Shock”.

*Researcher at Beirut Center for Middle East Studies, Specialized in International Relations

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