Declining oil prices

Reasons for going down of the oil price in the world in last few months with details in which country the oil goes down and does this affect the economy in the world

Oil prices have been falling for the last two years globally. In June 2014, oil prices were $110 per barrel, while in early 2015 the prices dropped to $60. The decline has declined to $33 today. Reduction in prices of oil has led to reduction in prices of natural gas liquids, bio fuels, crude oil, and refinery products. The decline was not observed in 2010 through to 2014 since oil demands was increasing as countries were recovering from  financial crisis and oil production was trying to adjust to the demands (Economist newspaper, 2016). Most oil fields stagnated as conflicts in oil supplying countries such as Iraq and Libya were restricting their supply. Many countries stored oil and preserved it for later minimal uses. By then oil, prices were $100 per barrel.

The high prices caused innovation in United States and led to the use of hydraulic fracturing and horizontal techniques. The method extracts oil from tight formations of rocks and tar sands and at low costs from conventional methods. Hydraulic fracturing techniques have longer life cycles and are more elastic to changes in prices (Economist Newspaper, 2016). The process unlocked large oil quantities from their shale formations in North Dakota and Texas. Since then oil, production in U.S almost doubled making supply is at equal level with demand. Moreover, countries such as Iraq and Libya produced more oils and solved their disputes, added with increased production from U.S mines, more oil was produced, and prices lowered to $70 per barrel. Saudi Arabia increased oil production to maintain its market share and increased the supply of oil in the market. As a result more supply leads to decreased prices of $30, $40 or even $ 50 per barrel (Menton, 2016).The demand has weakened while supply has increased thus lowering prices.

U.S drillers have adapted to low prices of oil, which was not expected by Saudi Arabian people. Iraq doubled its production to 4 million barrels each day after recovering from conflicts (Economist Newspaper. (2016). More oil is imported to other countries increasing supply in those countries and lowering demand and hence decreasing prices. In January, IEA expressed that oil prices could lower this year if Iran adds 600kb/d in the market by June as other members maintain their output currently. Worldwide supply of oil could exceed by 1.5mb/d, which will continue lowering prices of oil in the world.

Low oil demand

Oil prices are affected by low demand as many people are switching to using other fuels. United States has increased its domestic production of oil to almost double and declined all imports in the country (Economist Newspaper, 2016). As a result, Saudi, Algeria, and Nigeria, which used to sell oil in U.S, are now selling to Asian Countries where they are forced to drop their prices.

There are weak economic activities in China and the world, which do not use much oil supplied. China has slowed down economically while there is deflation in Japan and European countries reducing import of oil. Oil drillers are now adapted to geographical risks that may occur in the mines and have reduced them, allowing them to produce more oil.

Politically oil production has increased in US because it aims at destabilizing Russia claiming that it has been dependent on products that produce energy. Moreover, Saudi Arabia works hard to produce extra oil to destabilize countries that produce enough oil for their use such as Russia and Iran. It also aims at hurting shale industry by dropping other oil prices.

Bio fuel production

Bio fuels are today produced in greater amounts amounting to 1.4mb/d in 2014. Among the production arable land accounted to 3 percent and 1.5 percent of global consumption of oil. US are the largest producer of bio fuel from maize ethanol amounting to 44 percent of bio fuel production (Menton, 2016) . Brazil produces bio fuels from sugarcane ethanol while European Union obtains it from edible oil-based biodiesel. Bio fuel production has reduced oil consumption leaving the country with large supply and low prices.

Appreciation of U.S dollar

US dollar appreciated between 2014 and 2015 by 10 percent against other currencies, which had nominal rates. Normally appreciation of US dollar raises the cost of local currencies not joined to US dollar (Rogoff, 2016). The effect translates to stronger dollar leading to weak demand of oil in US Dollar countries and strong supply from US dollar producers. 10 percent appreciation leads to a decline of 10 percent in oil prices. U.S. dollar determines the prices of most products in the world. Lower oil prices have led to an increase of U.S dollar by 3%. U.S desires to have strong U.S dollar to lower prices of their products, which are quoted in Dollar.

OPEC

OPEC indicates that low prices of oil affect marginal output per barrel from shale wells. It warns that extra production of oil is exhausting the typical oil well in shale by 60% per year and that the losses could be replaced by digging new wells. OPEC abandoned its policy of targeting oil prices in November 2014 (Rogoff, 2016). OPEC declined its supply of oil from 1979 when prices were at their peak to maintain high prices, which resulted in slashing the supply within the following six years from 30mb/d to 16mb/d in 1985. Despite the cut in supply prices of oil continued reducing by 20 percent. OPEC dropped its policy and increased supply of oil to the world lowering oil prices to $25-35/bbl.

Global oil gut

Global oversupply of oil is filling stockpiles of oil and the production is expected to rise to 9.35 million barrels in a day. Inventories of oil rose consecutively for the last three months where crude oil inventory increased by 4.5 million barrels from last week.

Iran Nuclear adds to oversupply

The possible US nuclear deal with Tehran allows more Iran oil export, which removes sanctions against Tehran and increases global oil supply.

Effect on the world economy

Low oil prices increases growth in the world, while families will increase their purchasing power and businesses will have low input costs. Oil exporters will have declined terms of trade. Countries such as Australia, which is major trading partners with US, will experience will benefit from low prices of net energy and net oil. China among other countries, which use oil in their production, will use less energy and incur lower costs of production. Australian Economy in particular will improve from low oil prices and their terms of trade will increase as well as their purchasing power of their national income (Reserve bank of Australia, 2016).Fall in prices of automotive oil such as petrol will increase disposable income by a quarter and increase real income by a half. Dropping oil prices is beneficial since it reduces the cost of producing food lowering their prices.

 

 

References

Economist Newspaper. (2016).Why the oil price is falling. Economist. Retrieved from             http://www.economist.com/blogs/economist-explains/2014/12/economist-explains-4

Menton, J. (2016) .Why is oil prices falling. Here are four reasons crude prices continue to trend   lower. International business times. Retrieved from http://www.ibtimes.com/why-are-oil- prices-falling-here-are-four-reasons-crude-prices-continue-trend-lower-1848742

Reserved bank of Australia. (2016). Box C: The effects of the fall in Oil prices. RBA. Retrieved               from http://www.rba.gov.au/publications/smp/2015/feb/box-c.html

Rogoff, K. (2016).What is behind the drop in oil prices. Industry Agenda. Retrieved from             https://www.weforum.org/agenda/2016/03/what-s-behind-the-drop-in-oil-prices/