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How can oil-producing nations break free from an unstable economic framework that is heavily dependent on oil? These nations should steadily push forward with reforms to diversify their industries and contribute to the stability of the global economy.
The Organization of the Petroleum Exporting Countries and major oil-producing nations that are not OPEC members. such as Russia. have agreed to extend their coordinated crude oil production cuts until the end of next year.
The cuts started in January 2017 and were initially scheduled to last six months. The latest decision means the cuts will last much longer and reach an extraordinarily long period of two full years.
The price of oil on the crude market plummeted after hovering at about $100 per barrel until about mid-2014. In 2016. the price of oil briefly fell to between $20 and $30.
Oil money vanished from financial markets. As a result. it significantly caused stock prices to fall and investment to decline around the world.
Japan is an oil-importing nation. but it should welcome. to a degree. the coordinated production cuts that have brought price stability.
Most recently. the market price has recovered to around $60. Despite this. the decision to continue the output cuts stems from the severe deterioration in the finances of major oil-producing nations. including Saudi Arabia.
These nations are now paying the price for extending loose fiscal policies. such as making a wide range of public services free of charge. while oil prices were high.
The underlying structure of oil dependence and financial difficulty being felt by oil-producing nations is much the same. These nations must not waste the extension of the coordinated output cuts. and effectively use this period as much as possible to rebuild their finances and nurture new industries.
Japan has role to play
Next year. Saudi Arabia plans to list the shares of Saudi Arabian Oil Co. (Saudi Aramco). a prized state-owned oil company. Saudi Arabia aims to sell these shares at a high price while the production cuts underpin the market and use this precious capital to promote structural reform to wean the nation off its reliance on oil.
The dominant view is that oil prices will nosedive again when the coordinated output cuts end.
The United States temporarily cut production due to the impact of hurricanes during the summer. Political uncertainty mounted in Saudi Arabia. The recent increase in oil prices appears to have been triggered by these special circumstances.
U.S. shale oil producers. which face higher extraction costs. could increase production if oil prices rise. This would push down the market.
There is also some discontent with the prolonged coordinated production cut in Russia. which is the leading nonmember country of OPEC.
If oil-producing countries in the Middle East and elsewhere press forward with structural reform of the industry. they will gain some reserves for adjusting their oil production. This could contribute to the stability of both the crude oil market and international financial markets. such as stock markets.
There are expectations Japan will proactively support these reforms through direct investment and technical cooperation projects in Middle Eastern nations.
Foreign Minister Taro Kono will visit the Middle East this month. Japan will need to strengthen its efforts. including summit diplomacy by Prime Minister Shinzo Abe. to construct new economic ties with the Middle East.
