The Oil spill in the world market

From the beginning of 2010 till the mid 2014 the prices of the oil barrel remained fairly stable at around $110 per barrel. However since June, 2014 the global markets have experienced a dip in the global oil prices which now at a staggering lowest since May, 2009 at less than $50 per barrel. The worlds’ top oil producers seemed to have pushed the red panic button, yet no major action has been taken to stop the dip.

Who are affected?

Russia is one of the largest oil producers in the world and is hugely dependent on its oil exports. It exported 4.72 million barrels per day in 2013 and current price fall is affecting the Russian economy adversely. The interest rates are already at a high 17% and the rouble has been falling since the mid of last year. Despite the crisis the Russian Energy Minister has refused to cut the oil prices. "If we cut, the importer countries will increase their production and this will mean a loss of our niche market," said Energy Minister Alexander Novak.

Hugo Chavez’s Venezuela certainly misses its great leader as his replacement Nicholas Maduro has evidently failed live up to his predecessor’s reputation. Even before the fall of global oil prices the country was facing difficulty due to economic mismanagement according to the BBC. The crisis seemed to be a hit on the face for Venezuela, as it too is one of the largest global oil suppliers. It is also interesting that the country accounts for the lowest domestic fuel prices by government implemented subsidies.  The government still hasn’t considered cutting subsidies despite the crisis.

Saudi Arabia is the world’s largest oil producer and holds a strong economy with reserves as high as $700 bn, which gives it the ability to withstand for a bit more. It is the most influential player in the Organization of Oil Exporting Countries (OPEC) and has not shown any signs of cutting down its supplies to balance out the excess supply.

The oil production has seen a rapid increase in the recent years. The US energy companies have been a major cause in the current dip of the prices. The hydraulic fracking of the Shale has been the main reason befind the price fall. This increase of production at relatively less costs than the conventional oil producer have created the crisis, and the US seemed to be affected less than its counter parts.

The Asian giants are facing mixed results. China is exploring massive economic gain as it is set to become the world’s largest oil importer. Japan depends on the imports for all its oil supplies but yet the price drops result in drop in inflation thus obstructing Prime Minister Abe’s economic agenda, thus giving mixed outcomes for the Japanese. India will find its economy strengthening if the oil prices continue at this rate or dip even further considering its oil imports and is expected reduce its expenses on subsidy.  

Why is the oil price dropping?

The economist highlights four key reasons affecting the low prices. Initially the fall of demand in the global market has resulted in the drop of the prices. In simple economic terms of “Demand and Supply”, because the demand falls with constant supply as no exporter has limited its supply, the prices are dropping. Secondly, the political crisis in the Arab world hasn’t had the expected effect on its oil output. Libya and Iraq mainly going through a rough patch in its politically divested backyards still manage to continue its vast supplies of oil into the global market.

Thirdly, the increasing growth of the Oil production in the US. The oil companies in North Dakota and Texas have set about in extracting oil from Shale formations and have completed drilling around 20,000 wells since 2010, which is nearly as ten times more than that of Saudi Arabia. As mentioned above the increase of oil production in the US has affected the global market with the increase of supply as well as the decrease of the demand. The imports of oil to US have dropped with its increase in production. Finally, no major oil producer is willing to let go. Saudi Arabia, UAE and Kuwait seen as the most stable oil exporting nations have refused to sacrifice their market shares to restore the market prices. Saudi Arabia holds a strong reserve of $700 billion and an oil barrel costs are very little. Yet, it still hasnot make any decision to restore the oil prices.

The OPEC holds monopoly over 40% of the oil production of the world but has not been able to tackle the crisis. Saudi Arabia holds major influence in the cartel and has not made any movement. The OPEC worries of losing the market share as an whole to the non OPEC exporters as they cut the supply.  

The world is waiting eagerly to see what the major exporters will do with regard to the oil price dip. Will there be anyone ready to sacrifice itself? Or Will the crisis go on pass the point of no return?