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Why the oil price is falling???

The Economist explains
Why the oil price is falling???
THE oil price has fallen by more than 40% since June,
when it was $115 a barrel. It is now below $70. This
comes after nearly five years of stability. At a meeting
in Vienna on November 27th the Organisation of
Petroleum Exporting Countries, which controls nearly
40% of the world market, failed to reach agreement on
production curbs, sending the price tumbling. Also
hard hit are oil-exporting countries such as Russia
(where the rouble has hit record lows), Nigeria, Iran
and Venezuela. Why is the price of oil falling?
The oil price is partly determined by actual supply and
demand, and partly by expectation. Demand for energy
is closely related to economic activity. It also spikes in
the winter in the northern hemisphere, and during
summers in countries which use air conditioning.
Supply can be affected by weather (which prevents
tankers loading) and by geopolitical upsets. If
producers think the price is staying high, they invest,
which after a lag boosts supply. Similarly, low prices
lead to an investment drought. OPEC’s decisions shape
expectations: if it curbs supply sharply, it can send
prices spiking. Saudi Arabia produces nearly 10m
barrels a day—a third of the OPEC total.
Four things are now affecting the picture. Demand is
low because of weak economic activity, increased
efficiency, and a growing switch away from oil to other
fuels. Second, turmoil in Iraq and Libya—two big oil
producers with nearly 4m barrels a day combined—has
not affected their output. The market is more sanguine
about geopolitical risk. Thirdly, America has become
the world’s largest oil producer. Though it does not
export crude oil, it now imports much less, creating a
lot of spare supply. Finally, the Saudis and their Gulf
allies have decided not to sacrifice their own market
share to restore the price. They could curb production
sharply, but the main benefits would go to countries
they detest such as Iran and Russia. Saudi Arabia can
tolerate lower oil prices quite easily. It has $900 billion
in reserves. Its own oil costs very little (around $5-6
per barrel) to get out of the ground.
The main effect of this is on the riskiest and most
vulnerable bits of the oil industry. These include
American trackers who have borrowed heavily on the
expectation of continuing high prices. They also
include Western oil companies with high-cost projects
involving drilling in deep water or in the Arctic, or
dealing with maturing and increasingly expensive
fields such as the North Sea. But the greatest pain is in
countries where the regimes are dependent on a high
oil price to pay for costly foreign adventures and
expensive social programmes. These include Russia
(which is already hit by Western sanctions following its
meddling in Ukraine) and Iran (which is paying to keep
the Assad regime afloat in Syria). Optimists think
economic pain may make these countries more
amenable to international pressure. Pessimists fear
that when cornered, they may lash out in desperation.
Dig deeper:
The economics of oil have changed .

thanks Rohit Dhandapat --facebook
Why the oil price is falling??? Reviewed by sambasivan srinivasan on 4:35:00 PM Rating: 5

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