Oil and Gas: a sector where politics drives prices

The decisions of politicians impact many sectors of the economy. The banking sector, for instance, has long since dealt with government regulation and intervention. Therefore, the oil and gas sector cannot say it is victimised or claim to be a unique economic ecosystem. However, the impact of politics on the fluctuations in the price of oil and gas is a factor that can offer opportunity, but it can also offer risk.

The importance of political decision making on the oil and gas prices make it a worthy topic for discussion and exploration. Here we explore the overarching issues worth considering.

Supply, demand and reserves

Like most sectors, the oil and gas prices are dictated by supply and demand. The scarcity of supply can drive up prices, and if supply is suddenly increased or demand falls away, then the price falls. This is basic market economics, with oil and gas managed as a global commodity.

However, oil and gas prices can be artificially managed by reserves. If political forces decide to hold back the number of barrels of oil coming to market, for instance, then they can artificially drive up the price. Equally, if one area of the world floods the market, then the price will drop. This means the OPEC countries, the US and, to a lesser degree, Russia, can influence commodity prices with decisions that often relate to internal policies or global relations.

Middle East Turmoil

With centuries-old religious and cultural differences, it is too simple to suggest that oil plays a significant role in conflicts in the Middle East. However, the oil fields in the area make land strategically valuable and could be a reason why the area attracts such a level of global, as opposed to regional, concern.

Middle East turmoil also plays a part in the price of oil. Wars are a significant barrier to successful exploration, drilling and supply of oil. The conflict in Yemen, for instance, creates challenges for the supply chain, with the major port in Yemen offering a critical entry point to the region.

However, the turmoil also results in tariffs and trade bans. Iran’s oil supply has been adversely impacted by the US decision to pull out of an international agreement. This has the possibility of increasing prices, except this is also the first time in US history that it has become an exporter, not importer, of oil.

The pressure of the ballot box

Fuel prices and petrol costs are issues that can quickly impact on the pocket of the average consumer. High oil and gas prices reduce the spending power and sense of prosperity of the electorate. For a politician, this is a significant threat to survival in the post of world or regional leader. So, when prices rose in America to a record high, Trump put considerable pressure on the OPEC countries to increase supply and so decrease the cost of petrol at the pump.

This is where the oil and gas sector is unique to a degree. The political pressure is both macro and micro. There is a global chess game played with oil and gas prices. However, it is also a micropolitical pressure. If an old person dies because they cannot afford to turn on the central heating, then this becomes the direct concern of a local politician hoping to drive change.

Only a brief introduction

Oil and gas price and political influence is the topic of political science PhD dissertations. Therefore, this is just a short and simple introduction to the relationship between industry economics and the world order. However, what it illustrates is the complex environment in which we work – and which makes it so interesting.

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