Sunday, February 21, 2016

Russia and Saudi Arabia agreed to control oil price

To stabilize the oil price, some dominant providers seem to have agreed on a deal.

According to the media report, Russia, Saudi Arabia, Qatar, and Venezuela made a negotiation about the control on oil production. And Russia and Saudi Arabia decided to freeze output at January level.

Reuters: Saudis and Russia agree oil output freeze, Iran still an obstacle

Oil price is continuously decreasing for a few years. In this situation, reducing production may lead to keeping the price. However, relevant nations hesitated to decide the controlling.

My past entry: Oil price falling

Because shale gas can be a strong competitor, they thought lowered price of oil would be necessary to maintain the dominance of the oil in energy resource. In addition, Iran and Saudi Arabia, two main providers of oil are conflicting with each other. They hardly believe that the opposite country will keep the agreement.

As a result, oil price continued to decrease. It is a typical situation described in micro economy theory, so-called “a chicken race.”

The fact that Russia declared to reduce production will change the situation. Iran has not supported the contract of controlled production so far. However, Russia’s political power cannot be negligible for Iran. Theoretically, Iranian oil will win in the trading battle because of its low price. But in real, few nations will choose to depend on Iran for energy source entirely.

More or less, this news will encourage the market. Although Iranian policy will be beneficial for a while, it will lose interest if the oil price remains decreasing. And it results in unstable Middle-east situation.

Furthermore, in a long term, human will have to be independent of the oil. It is said that the oil in the earth will be exhausted survive only within some decades. Until the judgment day, oil countries, as well as ourselves, have to find an alternative way to survive.

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