| Kyiv Post | - |
Russia's President Vladimir Putin (2nd L) visits a refinery of Russian oil giant Rosneft in the Black Sea port of Tuapse in southern Russia, on Oct. 11, 2013, with Rosneft CEO Igor Sechin (L) attending.
Why are oil prices falling? 5 reasons you might not expect
Oil prices have collapsed over the last several months, and some analysts say they could go even lower. What's behind the plunge in oil prices?
A variety of factors have coalesced into a perfect storm driving oil prices lower and lower: US prices have fallen 25 percent to around $80 a barrel in the past five months – a large drop, given that prices had been floating around $115 dollars a barrel from 2011 onward.
In late October, Goldman Sachs revised its 2015 forecast to predict that oil prices would continue a downward slide. Goldman predicts soft demand and a glut of supply will drive West Texas Intermediate – the North American benchmark – to $70 a barrel in the second quarter of 2015. Global benchmark Brent could dip to $80 that same quarter, according to the report, when oversupply is at its peak.
But the global oil market is unpredictable, and dependent on a variety of factors.
“[O]il is an imperfect market in every way,” says Deborah Gordon, director of the energy and climate program at the Carnegie Endowment for International Peace, a Washington-based think tank. The market is racked with government intervention, cartel manipulation, and high barriers to entry, Ms. Gordon says. “It would be hard to imagine a more imperfect market.”
For now, that imperfect market is a boon to US motorists, who are enjoying thelowest gas prices in years. And those savings could translate into increased consumer spending in other sectors. Low gas prices have a downside, though, encouraging increased gasoline consumption and the purchase of larger, more inefficient vehicles.
Falling crude prices also threaten oil producers in Texas and North Dakota, where the cost of extracting hard-to-reach oil from shale is high. Oil producers in those regions are already cutting rig counts – worried that if crude prices dip too low, wells won’t turn a profit.
Abroad, Venezuela, Russia and other petro states are wringing their hands as well, watching nervously as prices plunge. Those oil-dependent governments rely on high-priced crude to round out their budgets, and falling oil revenues mean they’ll have to curb their government spending.
Relief for those countries may not come anytime soon. Here are the five main reasons oil prices have been falling:
1. US oil production is booming
Exploding US oil production has transformed one of the world’s leading oil consumers into one of its leading producers as well – in fact, North Dakota alone produces a million barrels of oil per day. US production now rivals oil giants Saudi Arabia and Russia, largely thanks to innovative drilling that has unlocked oil and natural gas deposits trapped in shale rock.
US production has cushioned oil markets from geopolitical strife in theMiddle East and Ukraine, and are pushing down gas prices. Analysts expect gasoline could slide below $3.00 a gallon before the end of the year.
Why are oil prices falling? 5 reasons you might not expect
Here are the five main reasons why oil prices have hit their lowest levels in years.
2. Saudi Arabia isn't budging
As a leading producer, pumping nearly 10 million barrels of oil a day,Saudi Arabia has outsize influence in the oil markets. And so far, the crude powerhouse has indicated it’s willing to ride out lower prices so as to avoid losing customers to US producers or other competitors. It’s a strategy of maintaining market share until the price of oil rises again.
Other less stable members of the Organization of Petroleum Exporting Countries (OPEC) reject Saudi Arabia’s strategy. Venezuela, for example, would rather cut production than take a reduced price for its oil.
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Why are oil prices falling? 5 reasons you might not expect
Here are the five main reasons why oil prices have hit their lowest levels in years.
3. Asian demand has dropped off
The US is producing record amounts of oil, and there’s plenty of supply out of OPEC and Russia. But there’s not enough demand from developing economies – think China and India – to consume all the oil that’s being supplied. A global recession has left Asian demand weaker than expected, and governments are slashing fuel subsidies across Asia. That drives up the cost of gasoline, diesel, and other everyday fuels, further dampening demand in a region that will largely determine the future of global oil markets.
It’s not just Asia, though. Austerity measures and decreased consumption across Europe are curbing oil demand throughout that continent, too.
Why are oil prices falling? 5 reasons you might not expect
Here are the five main reasons why oil prices have hit their lowest levels in years.
4. The US dollar is strong
Oil is bought and sold in US dollars across the globe. When the dollargets stronger (as it has over recent months), it makes oil more expensive to buy in countries outside the US. That, in turn, weakens worldwide demand and further puts downward pressure on oil prices.
“While the barrel of oil is cheaper here in the US – for the US consumer – it's going to be more expensive for people overseas,” Phil Flynn, senior market analyst at the Chicago-based PRICE Futures Group, tells NPR. “And that's really adding to some of the economic woes that they're having right now.”
Even though global oil prices are falling, they’re falling less for countries with currencies that are weaker than the US dollar.
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Why are oil prices falling? 5 reasons you might not expect
Here are the five main reasons why oil prices have hit their lowest levels in years.
5. Libya and Iraq are back
On top of burgeoning US output, oil production from typically volatile regions has been surprisingly stable. Libya, Iraq, South Sudan, and Nigeria have all maintained production despite the threat of instability, flooding the market with oil at a time when demand is low.
The threat of disruptions in oil production hasn’t caused tremors in the market like it used to, either. Even when the US began airstrikes against Islamic State militants in Iraq, oil markets shrugged, suggesting oil markets are increasingly cushioned by production growth in the US and elsewhere.
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| Kyiv Post | - |
Russia's President Vladimir Putin (2nd L) visits a refinery of Russian oil giant Rosneft in the Black Sea port of Tuapse in southern Russia, on Oct. 11, 2013, with Rosneft CEO Igor Sechin (L) attending.
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