Why are oil prices falling?

 Event Report

Oil prices tumbled to a six-year low Monday, driven by renewed fears of oversupply and a surging U.S. dollar. Crude prices were also weighed down amid U.S. negotiations toward a possible nuclear deal with Tehran, which would allow more Iranian oil exports into an already oversupplied global oil market.

oil price going down

Here are some reasons crude prices continue to trend lower especially in the last few months :

  1. Iran Nuclear Deal Could Add to Oversupply

U.S. crude was also weighed down Monday as negotiations toward a possible U.S. nuclear deal with Tehran advanced, which could allow more Iranian oil exports. The deal would remove Western sanctions against Tehran and investors fear it could affect a global oil market already facing oversupply.

 

  1. Simple Economics of Supply and Demand

United States domestic production has nearly doubled over the last six years, pushing out oil imports that need to find another home. Saudi, Nigerian and Algerian oil that once was sold in the United States is suddenly competing for Asian markets, and the producers are forced to drop prices. Canadian and Iraqi oil production and exports are rising year after year. Even the Russians, with all their economic problems, manage to keep pumping.

 

On the demand side, the economies of Europe and developing countries are weakening and vehicles are becoming more energy-efficient. So demand for fuel is lagging a bit. China’s recent devaluation of its currency suggests the economy of the world’s biggest oil importer may be worse off than expected.

 

  1. OPEC’s Reaction

A central factor in the sharp price drops, analysts say, is the continuing unwillingness of OPEC, a cartel of oil producers, to intervene to stabilize markets that are widely viewed as oversupplied. Prices of OPEC’s benchmark crude oil have fallen about 50 percent since the organization declined to cut production at a 2014 meeting in Vienna.

 

Iran, Venezuela and Algeria have been pressing the cartel to cut production to firm up prices, but Saudi Arabia, the United Arab Emirates and other gulf allies are refusing to do so. At the same time, Iraq is actually pumping more.

 

oil production cost

 

  1. United States : Fracking Boom

“The growth of oil production in North America, particularly in the US, has been staggering,” says Columbia University’s Jason Bordoff. Speaking to BBC World Service’s World Business Report, he said that US oil production levels were at their highest in almost 30 years.

 

It has been this growth in US energy production, where gas and oil is extracted from shale formations using hydraulic fracturing or fracking, that has been one of the main drivers of lower oil prices. “Shale has essentially severed the linkage between geopolitical turmoil in the Middle East, and oil price and equities,” says Seth Kleinman, head of energy strategy at Citi.

 

oil production cost

Even though many US shale oil producers have far higher costs than conventional rivals, many need to carry on pumping to generate at least some revenue stream to pay off debts and other costs.

 

  1. Europe and Asia : Mixed Blessings

With Europe’s flagging economies characterised by low inflation and weak growth, any benefits of lower prices would be welcomed by beleaguered governments.

 

A 10% fall in oil prices should lead to a 0.1% increase in economic output, say some. In general consumers benefit through lower energy prices, but eventually low oil prices do erode the conditions that brought them about.

 

China, which is set to become the largest net importer of oil, should gain from falling prices. However, lower oil prices won’t fully offset the far wider effects of a slowing economy. India imports 75% of its oil, and analysts say falling oil prices will ease its current account deficit. At the same time, the cost of India’s fuel subsidies could fall by $2.5bn this year – but only if oil prices stay low.

 

We can’t deny that this situation can lead to a bad domino effect on energy industries. But we’ve been there before, and it is the fact that we’ve passed it well. The only thing we can do

 

Written by

-Muhamman Ghazali Putra-

Geological Engineering ITB

Related Posts

Leave a Reply