150219 oil prices fall
International Oil Prices
International oil price, at around $50 per barrel, has plummeted to half of what it was in June 2014. Here is a short story which explains why?
The Organization of Petroleum Exporting Countries (OPEC) has, since its inception in the 60s, acted more like a cartel than an organization. And like any cartel, its primary goal has been to maintain ‘above-market’ oil prices. And it was possible all this while for OPEC to do so because it enjoyed a large chunk, if not all, of the global oil market, making it a sort of ‘monopoly’, holding the reins to global crude prices.
But ensuring stable ‘above-market’ prices has a downside too; it attracts in a global market new entrants, who also want a piece of the cake. As an instance of this, hydraulic fracking and horizontal drilling in US reported increased outputs in 2014. Accommodating new players while maintaining high oil prices, required OPEC to cut down on its own share of the market, which it did for a while. However, realizing the move did not serve it too well, Saudi Arabia along with other oil producing gulf countries decided not to cut its oil production further, sending oil prices on a cliff. The reasoning is: Saudi Arabia figures that it can withstand low prices longer than its financially weaker competitors , who will have to slash output first as pumping becomes uneconomical at lower prices (Saudi Arabia enjoys a huge foreign reserve, which it intends to use to offset diminished revenues from low oil prices. On the other hand US producers bear higher average cost of production).
Meanwhile, the global economic slowdown only caused reduced consumption and lowered oil demands worldwide. This combined with the supply side factors further sent oil prices on a steep slide.
International oil price, at around $50 per barrel, has plummeted to half of what it was in June 2014. Here is a short story which explains why?
The Organization of Petroleum Exporting Countries (OPEC) has, since its inception in the 60s, acted more like a cartel than an organization. And like any cartel, its primary goal has been to maintain ‘above-market’ oil prices. And it was possible all this while for OPEC to do so because it enjoyed a large chunk, if not all, of the global oil market, making it a sort of ‘monopoly’, holding the reins to global crude prices.
But ensuring stable ‘above-market’ prices has a downside too; it attracts in a global market new entrants, who also want a piece of the cake. As an instance of this, hydraulic fracking and horizontal drilling in US reported increased outputs in 2014. Accommodating new players while maintaining high oil prices, required OPEC to cut down on its own share of the market, which it did for a while. However, realizing the move did not serve it too well, Saudi Arabia along with other oil producing gulf countries decided not to cut its oil production further, sending oil prices on a cliff. The reasoning is: Saudi Arabia figures that it can withstand low prices longer than its financially weaker competitors , who will have to slash output first as pumping becomes uneconomical at lower prices (Saudi Arabia enjoys a huge foreign reserve, which it intends to use to offset diminished revenues from low oil prices. On the other hand US producers bear higher average cost of production).
Meanwhile, the global economic slowdown only caused reduced consumption and lowered oil demands worldwide. This combined with the supply side factors further sent oil prices on a steep slide.