Oil Prices

Oil price recently has come down to $34/ barrel. After trading above $100 per barrel the Brent Oil prices have decreased by 25% since early July 2014. Oil prices are mainly influenced by demand and supply all over the world. Financial crisis, 2008 lead to the dropdown in oil demand with the increasing supply, causing the oil prices to fall substantially. But after the recovery in global oil demand the prices rose above $100/per barrel in the year 2010. From 2010-2014 the oil prices were relatively stable, indicating a stable oil market all around the world. Demand kept increasing gradually over the crisis and supply also started growing with the strong gains of The North American Shale Oil Production. Political instability in Libya also caused a drop down of oil production to almost zero. The Ukraine-Russia conflict also led to geopolitical uncertainties, which maintained the oil prices above $100 per barrel.

Oil Prices

The main reasons for recent decline are:

  1. The reinstitution of Libyan oil exports served as one of the major reasons for the dive in prices of oil. In the year 2015 Libyan largest oil producer Sharara restarted its production, which added to the growing supply after lifting a yearlong blockade on its export terminals.
  2. US domestic production has nearly doubled in the year 2013-14, with the US shale boom. The output has risen from 5milion Barrels per day (2008) to 8.5 million Barrels Per day, 160,000 bpd in 2011, 850,000 bpd in 2012, 950,000 bpd in 2013 and 1.2 million bpd in 2014, according to the U.S. Energy Information Administration. With the advent of technology Shale drillers have become more efficient at finding wells and drilling them faster. U.S. consumption of motor gasoline, diesel, jet fuel and other refined products have reduced by more than 2 million barrels per day, almost 12 percent (2005-2013) although there is a population increase.
  3. Saudi, Nigerian and Algerian oil, which were exported mainly to the US, longer have any demand in the US so slowly they are shifting their focus to Asian markets where there is the next potential market. Canadian and Iraq oil production and exports are increasing every year continuously.
  4. As the vehicles have become more energy efficient with the advent of electric cars and solar batteries the demands from many European and developing countries have reduced.
  5. The speculation created by Saudi Arabia by production cuts to keep the prices high in an artificial way has only caused the OPEC’s market share to reduce and indirectly boosting up Shale’s share.
  6. Many rigs of the Shale Petroleum have been idled and layoffs also have been done.

Thus, the price stability in Oil prices mainly depends as to how much can Shale cut drilling and production and improves efficiency with sustained production of oil in an environment with a prevailing low price.

Who benefits?

  • Mainly the motorists
  • Households who use heating oil.

Who suffers loss?

  • The oil producing countries like Venezuela, Nigeria, Ecuador, Brazil and Russia.
  • Saudi Arabia, Venezuela and Qatar, along with Russia have planned to stop output at a certain level to stabilize prices.

In the near future, there will be no possibility to bring down the oil prices because Saudi Arabia and the US rarely coordinate. Their competitive production has only led to further imbalances in oil prices in the economy.

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Yamini Natarajan
Yamini Natarajan is a writer by choice for Paisa Matters a Financial Advisory. Having completed her MBA in finance, her keen interest is all finance and the capital market and their working in the real world. She is a financial analyst and an advisor. Travel is a passion for her. Dancing is her energy quotient. She aim’s to be one of the best bloggers.