Falling oil prices may lead to regime change in Saudi, Russia

‘As matters stand, Russia and Saudi Arabia, two of the world's biggest oil producers, are set for a hard landing as they didn't diversify their economies as much as they should have when oil prices were booming.’

The world is undergoing a major political churning over an economic issue: tumbling international oil prices.

Saudi Arabia and Russia are the most severely affected by the free fall in oil prices which have plummeted to less than $30 per barrel, and experts forecast the price crashing to below $25 per barrel in near future.

Such is the level of alarm in Riyadh and Moscow that the ruling regimes led by King Salman and President Vladimir Putin respectively are facing a stiff challenge to their leaderships. One should not be surprised if these two countries witness a regime change in the coming months if the present scenario continues.

Iran and Iraq are on the rebound, particularly after the era of suffocating sanctions on Iran has finally come to an end. This will inevitably mean a much stronger Iran, both economically and politically, in coming years. Powers like Israel and Saudi Arabia are scared of a resurgent Iran for different reasons.

Israel feels that a more powerful Iran, now enjoying much better relations with the US-led international community, may pump in more money, fighters and weapons to Hamas and Hezbollah, two prime bugbears for Israel.

Saudi Arabia is confronted with the immediate scenario of a severe loss of face as the Sunni power is rattled with the stark possibility of the Shia Iran stealing its thunder in the Islamic world.

This raises the spectre of a sharp uptick in covert wars aimed at pruning the increasing influence of Iran, thus adding fuel to the fire in the already volatile region. One cannot rule out a hawkish Israel resorting to some drastic unilateral military actions in its neighbourhood to further its national interests.

To understand the economic reasons for the falling oil prices and its political impact, Rajeev Sharma spoke to Himendra Kumar, a New Delhi-based global oil analyst. What Kumar had to say is quite an eye-opener.

Here are Himendra Kumar’s views touching upon four core areas.

1. Won’t lifting of sanctions on Iran lead to a further oil glut and a further fall in prices?

"Global oil prices are likely to fall below $25 a barrel as the markets are currently sloshed with excess oil. The lifting of the Western sanctions against Iran would increase the supply glut. As against a global oil demand of 94 million barrels per day, the markets are receiving, on average, in excess of 96 million bpd. Iran will add another 400,000 barrels per day output over the next three months and Iraq and Libya, too, are set to increase their production which would further exert downward pressure on oil prices which have dropped more than 70 per cent over the last 18 months."

2. What will be the likely political impact of falling oil prices on the world, particularly Russia and Saudi Arabia?

"As matters stand, Russia and Saudi Arabia, two of the world's biggest oil producers, are set for a hard landing as they didn't diversify their economies as much as they should have when the oil prices were booming above $100 a barrel. In fact, Saudi Arabia may see a regime change as King Salman looks increasingly shaky with a strong cabal of passed-over princes and clergy rallying against him, in private. Already, Saudi Arabia is seeing spending cuts and there's a 15 per cent budgetary deficit. In Russia, President Putin will need to pull a cat out of his bag in order to survive as the Russian economy is crumbling fast because of the fall in oil prices. Both Saudi Arabia and Russia need oil prices above $90 a barrel to balance their respective budgets."

3. The role of the United States and China.

"The demand growth from the US and China, two of the world's largest crude oil importers, isn't strong enough to absorb the excess global production. With the US developing its own shale oil resources, it's turned into a net oil exporter from being the world's biggest buyer. So, there's been a paradigm shift. With China, the problem is that its economy is slowing and there's a strong likelihood of it posting a lower gross domestic product growth rate this year than India's. But natural, a slowing economy has led to a lower demand for oil products."

4. Is there a possibility of oil prices rising once again and, if so, by when and by how much?

"Oil will probably end the year trading close to $45 a barrel and may start rising again in the third quarter. It could be led by faltering shale output in the US and strong winter demand for heating oil in Europe and the US and from countries like India, trying to fill up their strategic oil reserves. Also, the current low prices mean no one is currently developing new oil fields and when producing fields deplete, there will be no new oil replacing them. This may help balance the oil market and prices may find a floor close to $40 a barrel."

Rajeev Sharma is a New Delhi-based independent journalist and strategic analyst who tweets @Kishkindha.

Photograph: Danish Siddiqui/Reuters.