Economics : Falling Oil Price

Several oil-countries have been facing economic and political turbulence as a result of the crash in oil prices, and there is disagreement among OPEC as how to handle the situation. (Krauss) While this is happening, America’s oil production continues to rise, as it inches closer to becoming an energy superpower in production and consumption; and countries that depend on their oil exports face recession.

When trading oil it pays to keep an eye on the major consuming nations, as any increase or decrease in usage is sure to have an impact on the commodities performance. Something that is also worth monitoring – with this tying into the performance of major consuming nations – is OPEC, the Organisation of the Petroleum Exporting Countries. This international organisation works to ensure both the stablisaiton of the oil markets, along with coordinate and unify petroleum policies. Current members of OPEC include mass-producing oil nations (13 in total, including Saudi Arabia, UAE, Iran, Iraq, and Qatar). Considering that OPEC has the power to decide policies related to the production and sale of petroleum oil, it certainly has the power to impact the price, flow, and distribution of oil worldwide.

This report will consist of the causes and consequences of the changing price of WTI crude oil and recent trends in the global price of oil. It will also include the effects of the ever-changing price of oil on individuals, business firms, governments and the economy.

Within the last year, oil prices in the United States have dropped significantly. As oil drilling in the United States has reached its highest level in over 30 years, consumers are reaping the benefits. Among these gains are record-low prices at the pump, and cheaper oil to heat homes. However, oil prices did not just drop on their own; multiple factors contributed to the fall. Increased domestic production, declining global demand, and competition from other oil-producing nations had led to rapidly dropping oil prices across the United States.

Member nations of OPEC wanted high oil prices to support the fortunes of the ruling wealthy classes and to provide huge public benefits for a the member nation's poverty stricken and unemployed population (Steltzer, 2000).

From 2014, the crude oil price has dropped in a sudden since the global economic downturn, oversupply of crude oil and the appearance of new energy. Global economy fatigued, and thus the demand of crude oil was not strong,

For example, the Intercontinental Exchange while oil prices have not been decided on by oil producers such as Niami refinery fires, Nigerian Pirates and global oil markets. The laws of demand and supply are also predicted by the increase and decrease in the prices of oil. Oil prices are driven by the increase in demand for oil which has limited or completely destroyed the gains for suppliers and producers. While the U.S still consumes more oil than any other country, it is evident from the increase in oil demand that developing countries such as China, India and Japan are driving oil prices higher by their continous growth in oil demand (Anderson, 1).

Leading up to the 1970’s the world was fueled by an abundance of cheap oil. Countries were able to industrialize, consumers were able to utilize all sorts of petroleum goods and low costs, and best of all there were no worries of shortages. The good times were not to last. There was emerging conflict in the Middle East that warranted United States aid to Israel in the early 1970s. The Arab countries of the Organization of the Petroleum Exporting Countries (OPEC) were not in favor of United States intervention with Israel. This caused an outrage and sparked a non-negotiable rise in posted prices of oil. Eventually, it led to an oil embargo on the United States and Netherlands. The impacts of the 1973 oil embargo led to long term impacts on Lesser Developed Countries economically, United States energy security outlook, and United States energy action.

Until the above said period, the OPEC countries were the main producers of the natural oil and they worked as the cartel and they determined the quantity to be produced based on the market demand and they kept the price at a higher rate and prevented the fall of the price by reducing the production of oil. The introduction of the shale oil made the problem. The higher demand and lower supply of

Oil is a limited commodity with an unlimited demand. Very few nations have the luxury of having their own supply to which they can fulfill their own needs, while other countries clamour for what they can get . The countries with oil realized instead of competing with one another on exports , it would be much more profitable to simply work together and cooperate in their production of oil, rather than compete. In doing this, these countries will then be able to influence the market magnitudes more.

B. The Organization of Petroleum Exporting Countries, also know as OPEC, refuses to cut production even though they are losing money in the process. a. “Russia loses about 2 billion in revenues for every dollar fall in the oil price (Bowler).” b. One of the countries in OPEC , Saudi Arabia needs the oil price to be about $85 to make money, but they continue to keep prices low to drive away the competition (Bowler). Transition: We know now why the prices are low but how are they affecting people II.

All these global policies and strategies not only include OPEC, but other countries such as the United States of America, who is the third world oil producer. This has changed many times throughout the history, as shown by Tabak & Cajueiro who stated “Due to the limited production of crude oil in the United States in 1971, the power of control of crude oil was shifted from USA to OPEC” (30). This gives us a hint about who the “players” are that were mentioned above. This is referring to USA and OPEC (led by Saudi Arabia). In this “battle”, these two countries determine who leads the oil market and control the oil prices.

Furthermore, a 1999 study reveals that OPEC countries commands reserves of 8111,526 million barrels of crude oil, representing 77.8% per cent of the world total of 1,042,536 millions barrels of crude oil” (FAQ 8). While this block of countries does not qualify as a clear-cut monopoly, it exerts tremendous influence on world supply and prices.

Among the factors that often blamed the current price increases embrace the renewed geopolitical concerns in the Middle East, declining excess capacity in oil production, the production cuts agreed by the Organization of Petroleum Exporting Countries, the devaluation of U.S. dollar against other most important currencies, increased demand from rising countries and the noteworthy expansion in provisional dealings on oil futures market.

Given than oil prices fell by 29% in 2015 and 44% in 2014, the GCC countries are facing economic crisis that could translate into economic deficits for some. Economists suggested that Bahrain and Oman are the two GCC states that are most severely affected by the drop in oil prices, while Kuwait, Saudi Arabia, the United Arab Emirates, and Qatar are in good standing. The reasoning behind it, is that Kuwait, Saudi Arabia, the United Arab Emirates, and Qatar, are considered as major oil producers. Whereas, Oman and Bahrain do not contribute as much to the production of oil and natural gas. Major oil producers among the GCC are well-equipped to deal with such economic upheavals, as they own financial wealth in the form of foreign exchange reserves, as well as in sovereign wealth funds.