Wednesday, 20 January 2016

Oil Prices – the fall!

The oil prices are touching new lows – the latest prices are lower than prices of 2003 and there are talks that soon the oil would be costing less than beer in the US.

So what is/ are the possible reasons for the drastic fall in the prices of oil which at one time crossed $100 per barrel?

The plausible explanations are many. Some of the factors that have impacted prices can be explained by simple economics theory of supply outpacing the demand due to a combination of following reasons:

1.       Chinese economy's (world’s second biggest) poor health and reduced demand is being considered as one of the major reasons

2.       The Iran’s nuclear deal has lifted partial sanctions on it and has brought its oil in the market. While there are reserves already with the Country, the government has also ordered ramp up in production.

3.       OPEC inaction is also seen as one of the reasons for the decline in prices. While, the role of OPEC was to keep the production in check to control prices; it has decided not to take action this time to control the falling prices.

4.       The rise of the US as a shale oil producer means it now imports less oil, adding to the glut on world markets

5.       The economies of Europe and some of the other developing countries are weak and vehicles are becoming more energy-efficient. So demand for fuel is lagging a bit.

Other Theories

While the above is being considered, according to experts there are other theories doing rounds.

1.       OPEC deliberately keeping prices down to combat the Islamic State. There is no question that the best funded terrorist organization ever relies heavily on seized energy assets to support a burgeoning population and intensifying war effort. Why wouldn’t the OPEC nations at IS’s doorstep do everything in their power to slow its flow of revenue and stop its murderous rampage?

2.       OPEC itself posits that the declines are due largely to speculation in the market and that demand isn’t as low as many may think. Others contend that increased competition—in the form of increased U.S. shale oil production—provides incentives for OPEC to keep prices down.

3.       Some argue that Saudi Arabia, the world’s largest producer, is defending its market share by cutting prices rather than production.

4.       Others would go so far as to say that Saudi Arabia is pushing prices down to hit its regional rival, Iran, where it hurts most; the economy. Some estimate that Iran needs oil at $136 a barrel to finance its growing spending plans.

Whatever be the reasons, there is a widespread talk that the prices might fall further and touch $20 – however, where would this free fall in prices end is yet to be seen. The reduction in the prices is deeply impacting the oil producing economies and the oil producing companies which are resorting to mass cuts in costs and investments in response to the falling margins.

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