The Double-Edged Sword: Falling Oil Prices and Regional Impacts

 

Falling oil prices

The price of crude oil slightly increased as the weekend approached, something that has been attributed to the rising tension in the Middle East between Israel and Hezbollah, the Shite military group in Lebanon.

As of 18:00 GMT, the prices of WTI and Brent were at $81.58 and $86.46 respectively. The price of LNG, liquified natural gas, meanwhile, was at $2,60.

US Crude stocks in June

The US crude stocks, against all odds, rose again during the last week, deviating from the draw that was reported a week ago. It raises the prospect of feeble demand that has been the case for months; this is rather unexpected in the US, the world's top consuming nation of the fossil fuels, despite the onset of the summer driving season.

The fact that the price of oil slightly went up despite the rising US crude stocks has been attributed to the rising tension between Israel and Hezbollah; the northern border between Israel and Lebanon has been a hotbed for hostilities involving both sides since Israel launched a full-scale war in the Gaza Strip against Hamas.

Not a day gone by without a military confrontation of some form along the border in question since October, 2023.  As Israel beefed up its military units in the region, the spectre of a direct, deadly confrontation appears to be much more real than ever before . 

Although the West fears that it would get out of control and evolve into a broader regional conflict involving Iran, the latter in the recent past proved, time and again, that it was not interested in a major war with the Jewish state, especially due to its own economic reasons; Iran has so many domestic issues to be addressed.

Military uncertainties in the Middle Eastern theatre are nothing new; they just come and go. Despite the hullaballoo from both sides, the military confrontations in the region - and in the 21st century -  are usually short-lived, as the major global powers and regional allies use their influence to mitigate the severity  and bring about some sort of resolution in the event of a war breaking out. 

In short, the particular factor that has recently arisen in the Middle East is certainly has not got the psychological ingredients to lift the oil prices up for a sustainable period of time; it is highly unlikely that the price of oil will go through the roof even if a war breaks out - and when the initial excitement wears  off.  

That means the price of both WTI and Brent would be in $70s in the foreseeable future.

Of course, it is not a range that the oil producers want prices to be in. The circumstances, however, do not favour an alternative, other than a prolonged stagnation -  exactly what we just see at present.

If the price of oil falls down further, it could trigger off a chain reaction, impacting the Middle Eastern economies that heavily rely on oil for enriching their coffers, the men and women from South and East Asia, employed in the region, and of course, exporters that supply the very countries with goods of all sorts; the diminishing spending power of the countries will affect the West too in the long run.

in short, the impact will be felt far beyond the borders of the region.

Oil price crash: 2014/16

Oil producers, for the right reasons, feel a sense of déjà vu in the current circumstances: Between 2014 and 2016, this is exactly what happened, much to their horror; the oil price crashed by more that 50% and stayed that way for a painfully long period of time that resulted in massive job losses, economies seeing red and dwindling investment in infrastructure. 

Since oil sales are the lifeblood of many Middle Eastern countries, falling prices translate to a significant drop in government revenue. This disrupts budgets, hindering investments in public services, infrastructure development, and social programs.

In addition, reduced government spending weakens economic activity. Projects are stalled, and businesses face tighter budgets. This translates to slower economic growth, impacting overall prosperity

The impact may be felt in other areas too: oil revenue, for instance,  stabilizes regional currencies. When oil prices fall, these currencies can weaken, making imports more expensive and potentially leading to inflation.

If the fall in oil price is inevitable, there is a silver line in the dark cloud:  for instance, this could be a wake-up call for the Middle Eastern countries to diversify their economies while reducing the dependency on the commodity to fill up the coffers. 

Saudi Arabia's ambition to turn the kingdom to a major tourist destination is a case in point. The UAE has already turned itself into a major economic and tourist hub - the envy of the region.

If the prices of the commodities from the region continue to stagnate, the other regional players will jump on the band wagon too in order to avert a major socio-economic blow.




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