Oil market impact of rising oil prices – In this section and the next few articles, we will talk about The Petrodollar and the Geopolitics of Oil which is part of Tesla’s Revolution as the leader of the electric car company today. To understand more, we recommend reading the following article – and the series;
Oil Market Impact of Rising Oil Prices
The high oil prices in 2005–2014 provided some of the largest transfers of wealth between oil-consuming and oil-producing countries in the history of industrialized countries. Within just this time span of 10 years, a total of $8.5 trillion, equivalent to about 1.2% of global economic output, was transferred via oil sales to the 14 OPEC oil-producing countries in the Middle East, Africa, and South America. High oil prices provide a large economic stimulus to oil-exporting economies.
At the same time, oil-importing countries suffered, as they had to pay the price of this transfer of wealth, mainly in smaller economies whose oil imports at the price levels from 2008 to 2014 resulted in a large burden on the import-export balance. The ‘PIIGS’ countries of Portugal, Ireland, Italy, Greece, and Spain, saw their oil import budgets balloon from 2005 to 2008 by 75% to a joint $120 billion, which only reversed with the 2014/15 oil price drop.
A key effect of the growth of petrodollar exchanges between countries has been the expansion of the number of dollars used in international trade. Because of the petrodollar system, the United States has benefitted substantially as the price of the dollar remained stable despite the country’s domestic financial problems and trade deficit. As explained earlier, no other country has the financial luxury of running imbalances at such high levels without heavily impacting the purchasing power of its citizens.
Beyond changes in oil wealth distribution, high oil prices also provide an impetus to invest and develop alternative energy sources. A considerable number of alternatives to oil are close to or at commercial market levels at oil prices above $100 dollars. Since 2005, largely due to the impact of oil prices, research budgets in energy have quadrupled across the world.
The extraction of large amounts of additional unconventional oil in general, including shale oil, tar sands, extra-heavy, and deep-water, requires an oil price above $60 per barrel. Beyond analyst calculations, we can see this from the only success story for shale oil outside of the US so far, in Argentina, where production started in 2013 and has reached 20,000 barrels per day due to a strategic effort from the government, which includes a minimum $67 guaranteed oil price level.
The other main countries where shale oil production could unfold in the near-term future are Mexico and Russia. The first successfully producing shale oil well was drilled in Russia in 2016 in the Bazhenov formation in Siberia, which potentially holds as many recoverable shale oil resources as the entire United States. In Mexico, shale oil blocks will be auctioned off to foreign oil and gas companies in 2017 for the first time since its oil industry nationalization, which, given promising geology, ill kick-start shale extraction. China also has large shale resources but these are extremely difficult and thus too costly to extract.