Oil prices and its consequences
In June 2014 the
price of Brent crude was up around $115 and in January 2015 it has fallen to
$52. During decade oil prices were bouncing around $100 per barrel since 2010
because of soaring oil consumption in countries like China and conflicts in
Iraq. Companies started production of oil from difficult to drill places. To take advantage of high prices many companies
started using state of art technology like fracking and horizontal drilling to
extract oil from shale formations in North Dakota and Texas. Even Alberta’s
(Canada) gooey oil sands were heated to extract usable crude. It added 4
million new barrels of oil per day since 2008. (75 million barrels of oil per
day is the global oil production)
Up till now the
new production of crude oil by US does not have effect on the supply. Not to
forget other conflicts like civil war in Libya, Iraq conflict and sanctions on
Iran. More than 3 million barrels per day production was affected because of these
conflicts.
But by mid 2014
below events happens and suddenly production increased:
On the contrary
demand of oil decreased because of below reasons:
Oil demand decreased in China
and Germany
USA, the world biggest oil
consumer saw big cutbacks in industrial oil use after recession and increase in
use of fuel efficient cars
On the other
hand demand of oil decreased due in USA, Europe and Asia because of economic
slowdown and switch over sustainable energy. In late 2014 the supply of oil was
greater than demand and in September prices started to fall.
OPEC control
prices by either cutting production or increasing production. At the crucial
meeting in Vienna on November 27 countries like Venezuela and Iran wanted to
control prices by reducing production in order to breakeven on their budgets.
But Saudi Arabia
wanted to keep price to fall as it did not want to repeat history. In 1980, in
order to control price it reduced production but Saudi Arabia lost the market
share. Saudis have now decided to go for low price option as this is short term
phenomenon. The government has massive foreign exchange which would helpful to
finance deficits.
OPEC (world’s
largest cartel) did not take any steps to reduce production. Higher oil prices
were desperate for big OPEC economies like Saudi Arabia and Iran to control the
budget. Saudi Arabia did not took any stringent steps to control falling crude
price as it thought that it would give undue advantage to US oil boom.
Effects of
falling prices on economies:
a) Russia which
is highly dependent on oil and gas production with oil revenues making 45
percent of government budget will ruin the economic system in country. Many economists
believe that Russia’s economy will shrink by 4.5 in 2015 if oil stayed at $60
barrel. In an attempt to stop people from selling off rubbles Russia’s central
bank have increased interest rates
from 10.5% to 17.5%.
b) Iran’s
economy just began to recover after many years of recession. In order to
balance budget Iran needs price of crude above $100 since it is much harder
after western sanctions.
c) Venezuela which
is highly reliant on crude sales may face potential meltdown. It is 10th
largest oil producer and accounts for 95% of its export earnings. As inflation
increased up to 60% mass anti-government
protest were flared up. Scarcity of basic products is increasing including
medical supplies. One of the analysts at Nomura suggested that it needed crude
prices up to $200 per barrel to balance its budget
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