Some Aspects of the Problem of High Price Over Crude Oil on the World Market and Georgia 

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Despite the powerful hit of the Covid-19 pandemic crisis, in the beginning, the global economy demonstrates some signs of recovery and hope. As to International Monetary Fund data, the Global GDP in April 2021 reached 6%, including China - 8,2%, US - 6,2%, India – 12,6%, although, totally it has been fallen by 4 trillion US Dollars compared with the year of 2019 when it was 84 trillion US dollars.


As a result of governmental stimulating programmes followed by enhanced public spending, financial assistance to the private sector, more job opportunities and a certain increase of consumer expenditures, other measures, the economic life has started its partial return to prepandemic times.


But the overall situation is still a fragile one and brings mixed feelings of hopes in parallel with doubts and less predictability for future agenda... The recent upsurge of the virus cases toll in Europe, the United States, Russia and other regions deepens these concerns of the international community...


An extra reminder in this respect - that we deal with not a typical economic crisis, but with non-economic origin turbulence connected with the medical decisive contribution first...


Anywhere some positive expectations prevail and this trend is likely to be promoted and nurtured in the nearest run.


Regrettably, the new risks are floating with the old ones, including the never ended confrontation between oil-producing and oil-consuming countries over price stabilization on the world market. But 2021 year conflict on this issue is overloaded by unexpected pandemic crisis...


It has become a battlefield primarily between the most powerful economic players, as the United States and Europe from one side and Organization of Oil Producing countries OPEC plus Allies, including Russia, from the other one (currently OPEC member states control approximately 2/3 rd of the world proven oil reserves, produce 40% of oil world output and half of the world export comes to the member states).


The resolution of the mentioned problem desperately requires intensive political, diplomatic and other efforts with the major goal – to force the OPEC members countries and their allies to pump more quantities of oil barrels beyond the currently fixed quotas in order to reduce the price on globally needed energy resources. 


At the early stage of the Covid-19 the OPEC member states cut the supply of oil to the market by 10 million barrels per day due to lack of demand. Now with the increase of this demand, the current world price of Brent crude oil has doubled over the 2021 year to 81 US Dollars per barrel and, as to the estimates of the Bank of America, is likely going to be jumped up to 120 US Dollars per barrel by mid of 2022.


The reaction of the US Administration was rather sharp in this respect, which has recently announced that it 'would consider the full range of tools at our disposal to bolster resilience and public confidence' after the OPEC +coalition, which includes Saudi Arabia and Russia, disregarded calls from big oil-consuming nations including the United States to increase output by more than planned in December 'in addition, the Spokesman of the US National Security Council said: 'Our view is that the global recovery should not be imperiled by a mismatch between supply and demand' (by Charles Riley and Kevin Liptak 'White House says OPEC and Russia are putting the global recovery at risk' CNN Business, November 5, 2021).


The situation has not changed in spite of the recent intention of the OPEC member states and their allies to increase the daily pumping of oil up to 400.000 barrels.


Current five world-leading oil-consuming countries in 2021, like China - 20,5%, the United States – 12% and the European Union 10,3%, alongside with India and Japan are facing the threat of stoppage of the economic recovery mostly because of this obstacle and actively support the pressure policy on OPEC plus allies club position. China does not express its negative reaction openly, but, no doubt, it is interested in price stabilization on oil products to strengthen the positive trends in the national economic rehabilitation agenda. 


High oil prices seriously affected the pockets of a lot of ordinary consumers in many countries of the world, particularly in the United States, where the price for gasoline has been increased enormously and can also lead to political tensions inside the country, particularly in the context of the forthcoming winter season.


The United States Government intends to start the exploitation of its National Strategic Petroleum Reserve (SPR) resources (totally 714 million crude oil volume – a bit less than the capacity of OPEC Reserve Fund equal to 802 million barrels) at least partially to resolve the crisis. Now China also is considering this option to resolve the problem. Moreover, the United States Administration has just announced on November 24th, 2021: ‘It will release millions of barrels of oil from strategic reserves in coordination with China, India, South Korea, Japan, and Britain, to try to cool prices after OPEC+producers ignored calls for more crude’, (Washington, Nov.23, Reuters)
 

What can we expect in the context of future developments globally and for the Georgian local market in this regard? 

          
A number of observations and comments

 

•    Since the pandemic crisis is not over, the supply/demand ratio on global market is likely to be a matter of fluctations caused by primarily non economic reasons. It affects the regulation of price on oil under standard global market functioning conditions, even when the well-known measures, as the usage of the national reserve funds fill the gap.
 

•     There might be some moves towards lessening the price level, but the confrontation between oil-producing and oil-consuming countries will remain a permanent headache for key economic players on the world market.
 

•    Global tensions between the United States and Europe from one side and China and Russia from the other one definitely are not a good basis for full-fledged economic cooperation. The appearance in 2021 of a number of US and EU new initiatives on global economic development in addition to Chinese 'Belt and Road Initiative', will likely create a new reality in the architecture of global relations. At the same time, in our opinion, this is a favorable momentum for the United States and China, as well as for the EU, Japan, and India to consolidate the efforts over a common problem since they present the 'group of big oil-consuming countries'. 'The United States has asked China to release the oil reserves to help stabilize soaring international crude oil prices as part of ongoing discussions on economic cooperation between the two countries' (by Catharine Wong and Frank Tang, 'US asks China to release oil reserves as a part of discussions on economic cooperation' (South China Morning Post, November 17th, 2021). This topic has been recently raised in the November virtual meeting between US President Joe Biden and President of China Xi Jing Pin. 
 

•    As it has been mentioned, the United States and China have started the partial usage of their oil strategic reserve resources to stabilize the price, but some experts think, this measure will not change the picture in general and only slightly diminish the price, like the Goldman Sachs analysts, who mentioned, that ‘a release of 60 million barrels would only be of modest and temporary help. It would reduce brent prices at the end of this year by only $3 per barrel and could discourage US shale producers from increasing their output, leading to higher prices in 2022' ( by Charles Riley and Kevin Liptak 'White House says OPEC and Russia are putting the global recovery at risk' CNN Business, November 5, 2021).

 

•   The composition of the OPEC plus Alliance countries is rather diversive and sometimes it is not easy to determine which factor dominates in the decision-making policy of the organization - political or commercial one. This aspect substantially affects a consensus on many important issues, including the adjustment of the quotas on oil.
 

•    Another trend is steadily increasing the price on natural gas on the world market now, which also has a negative impact on the price status on crude oil. In this regard, the impact of Russia, as one of the allies of OPEC, alongside with other factors, is a matter of special attention.
 

•    In the long term run the development of alternate energy resources incorporated into the concept of 'Green Global Economy' should decrease the consumption of natural energy on the world market. This circumstance, in our view, can be considered as one of the explanations why the oil-producing countries nowadays are not demonstrating their readiness to pump more oil from their deposits.
 

•    Finally, we think, that despite the mentioned obstacles, the need to foster globally demanded post-pandemic recovery will force the oil-producing and oil-consuming countries to come to a consensus-based decision. That will be an extremely important step towards cementing the international community over the Agenda of Global Stability and post Pandemic crisis Rehabilitation Program.
 

And what about Georgia in this story?
 

•    Georgia is a small market and certainly does not belong to a group of big players with influence opportunities. But the country is a part of the global market and consequently faces the negative impact of high prices on oil (particularly gasoline), first of all on the standard of living of the population, which has to pay more and more money for this commodity at gas stations.
 

•    In addition to a high level of inflation and pandemic crisis challenges, it can also be impactful in terms of the country's dynamics of GDP growth sustainability. 
 

•   Despite the Covid-19 epidemic crisis, tourism is recovering in Georgia. But the flows of revenues from the tourism industry can be under threat due to the high cost of tickets for aviation flights (where the share of the cost for aviation fuel is rather high), ground travelers and other business exchanges in combination with pandemic crisis impact.
 

•   Georgia, as a transit bridge country, binding the Western and the Eastern marketplaces, and reliable long-standing business partner for oil-producing and oil-consuming countries naturally is interested much in the resolution of this global problem. The importance of Georgia should be more exposed in the post-pandemic phase when cross transportation of goods and passengers are to be expanded, nevertheless, in case of a crisis on energy resources, this goal is likely to be less realistic.
 

 

Ambassador, Professor, David Aptsiauri
November 29, 2021

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