Petroleum Markets and Global Economics
Petroleum Markets and Global Economics
The global economy has undergone major events and evolutions throughout the last year. One of these key dynamics affecting the economy is the petroleum and energy market, particularly as it relates to major countries such as Russia, the United States, and members of the Organization of Petroleum Exporting Countries (OPEC). After years of declining oil prices, from over US$120 a barrel in April of 2011 to a low point of less than US$30 per barrel in January of 2016, the OPEC alongside other non-OPEC oil-producing nations worked together on the implementation of the 2016 Vienna Agreement. This agreement, in effect from January until June of 2017, reduces the petroleum output of major OPEC and non-OPEC oil suppliers, notably Russia and Saudi Arabia, in an effort to increase international prices by limiting supply.
Surprisingly, the nations partaking in the Vienna Agreement have demonstrated a level of commitment and compliance with the terms of the agreement that many were skeptical of when it was first announced. Even though it can be argued that the Vienna Agreement has yielded some positive results, oil barrel pricing is currently at approximately US$50, far below its pre-2014 levels. The policies of the new US President Trump as well as the advances in non-fossil energy sources and the ongoing discovery of new oil reserves throughout the world have all contributed to a weakening of the power that major oil and gas producers hold over the global market. In the case of the United States, the construction of new pipelines, the jumpstarting of the coal energy industry, new extractive techniques, such as fracking, and the use of shale gas have all contributed to keeping overall oil prices from skyrocketing.
Nevertheless, the slight increase in global prices within the energy industry has had an effect on the economy of the United States. Following its March (14 & 15) meeting, the Federal Open Market Committee (FOMC) of the Federal Reserve announced, through Chairwoman Janet Yellen, its decision to raise the federal funds interest rate to a target range between 0.75% and 1.0%. This interest rate increase came after months of expectation and represents the highest interest rate level that has been set since the 2008 financial crisis. There is expectation that, if the US economy continues progressing favorably, there will be another raise in the federal funds interest rate during 2017. However, the Federal Reserve’s FOMC meeting in May (2 & 3) did not bring about such a raise, while the next meeting is scheduled for June (13 & 14).
Meanwhile, world events during the coming weeks will affect the decision as to whether or not to raise the federal funds interest rate in the future. Today, Thursday, May 25, the OPEC and non-OPEC oil producers are in Vienna for the Organization’s 172nd meeting. During this crucial meeting a decision is expected as to whether the oil output reduction terms of the 2016 Vienna Agreement will be extended for another six months, which could maintain oil prices at their current levels and prevent them from diving once again. Similarly, other developments including the upcoming G7 meeting, further violence in the Middle East, and the prospect of tax reform in the United States will affect financial markets for months to come.