Geopolitical Factors and Their Role in the Development of the International Oil Market: A Literature Review

Abstract

Oil export revenues still constitute a considerable part of the national budget, and influence the business cycle, in Russia as well as other oil-exporting countries. Therefore, the identification of the main factors influencing oil prices, an adequate assessment of their significance, as well as a forecast of market developments and possible actions in the international arena are necessary for competent public policy planning and realistic evidence-based budgeting. The activities of the Organization of the Petroleum Exporting Countries (OPEC) are traditionally considered among the main geopolitical factors that significantly influence oil price dynamics.Although at present it is too early to make a full-fledged impact assessment for all factors that influenced oil prices during the current crisis, the first attempts are already being made through situation analyses and academic articles in peer-reviewed journals. However, an analysis of the available studies carried out since the end of the 1960s for all cases of significant oil price fluctuations helps systematize existing findings and answer the following research question: under what circumstances do geopolitical factors play a defining role, and when is their influence extremely limited or completely absent? The goal of this analysis is to identify and generalize the main trends in the oil market and relevant academic research, as well as to clarify OPEC’s role in the current stage of the oil market’s development.Based on this analysis several conclusions are drawn. First, geopolitical factors had varying significance in oil price dynamics depending on the historic period: in the 1960s and 1970s, the influence was determinative; it then started to weaken and became less important compared to economic variables (especially on the demand side). Second, a key feature of the influence of geopolitical factors on the oil market is indirectness: expectations about future events that theoretically could lead to changes in market conditions, primarily oil supply, have a greater impact on prices than the events themselves. Third, OPEC (+) activities and the political processes taking place among its members are still the most significant geopolitical factors affecting the oil market. Moreover, OPEC’s influence as a cartel has been steadily declining since the 1980s. It has lost price-setting power, and now its major function is the adjustment of market-defined prices. Finally, OPEC’s influence has decreased due to several major factors: oil market transformation from the sale of commodities to the sale of financial products, the shale revolution, the development of production in non-OPEC countries that, in case of the United States, are also the largest consumers, and the development of alternative energy and renewable sources.