Oil prices have been trending downwards for some time now as new deposits have opened up new supplies to the world. One of the biggest is the North American shale oil boom, which has given America some energy independence for the first time in many decades.
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However, as prices continue to drop, countries heavily dependent on oil will need to increase their production and supply so as not to let their income drop. In fact, several countries face dire consequences if the price of oil drops too far. This situation could cause a global price war, with greater consequences than we have ever seen before.
The reason for the declining oil prices is both a supply and a demand issue. The economic slowdown in China and anemic global growth have led to lagging demand. Booming extraction in North America and expanding production in Libya, Iraq and other traditional oil suppliers have created record amounts of petroleum production. Putting these two factors together has sent the price of Brent crude prices spiraling to $90, down 20 percent from its $115 highs.
Another factor is the tightening of US monetary policy by the Federal Reserve, which has contributed to a stronger US dollar and as a consequence, a lower oil price.
The primary reason for the decrease in oil prices has been increased production by the United States. US oil production is at its highest since 1986 because of fracking. Petroleum imports from Asia and Africa have been replaced with the increasing production from Canada. Despite the delays of the US construction of the Keystone XL pipeline, there are several new alternatives connecting Canada and the Midwest with Gulf coast oil refineries.
Next month’s Opec meeting will see the major schism in the oil-producing bloc: some petroleum exporters are either not interested in or unaffected by the current fall in prices in the short-to-medium-term, while several other Opec member states see the abundance of oil supply as a threat to their economic stability, the New Zealand Herald reports. A faction led by Iran has called for immediate action to cut production in order to keep the price at about $100 a barrel, as the nation is experiencing budget shortfalls at the current or lower price level. Iran may be supported by Iraq in a bid to decrease the Opec overall production quota of 30 million bpd by 500.000 bpd, the New Zealand Herald suggests.
The Saudi-led faction of the Gulf Arab monarchies is as troubled by the decreasing oil price as they have accumulated large foreign-account reserves during the previous years and are able to withstand a two to three years long crisis in oil demand without any serious damage to their economies, TradeArabia says. At the same time the Saudis may be interested in oil price drop in order to retain their share of the US market.
However, oil depreciation is risky for most petroleum producing nations. Saudi Arabia could face budget deficit at oil price of $82 per barrel, while only five years ago this baseline was $62 according to an analysis by Foreign Policy. Iraq also has many spending commitments and Baghdad wanted there to be prices of $93 a barrel at the end of 2013, but now with the threat posed by IS, the number may be higher by the estimates of Akira Yanagisawa of the Institute of Energy Economics. Russia, though not an OPEC member, relies heavily on oil exports as a source of foreign currency. While the federal budget is based on an oil price of $100 a barrel, Russia’s central bank has already prepared a plan for a drop to as low as $60, as reported by Reuters.
In America, the drop in oil prices has caused a boost to the economy and consumer demand. However, it could have an adverse effect of undercutting prices of alternative energy. In the end, even fracking may become uneconomical at oil prices lower than $54 a barrel.
No matter the case, falling oil prices, while they are a blessing for the average person paying heating and gas bills, are a dreaded fear for many foreign countries who lives are dependent on the black gold for funding and paying for their bloated inefficient governments.
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