Falling Oil Prices

Mon, Aug 31, 2015

In Focus

In June 2014, the price of Brent Crude oil per barrel was $115. Now it has plummeted to less than $45 per barrel.  Let us look into the reasons for the same.

Some years back:

It is all a game of supply and demand. Several years ago, oil demand was more than the supply. China was booming. It led to a sharp increase in demand for oil which was not balanced by rise in oil production.  So the oil prices continued to rise.

Opportunity for energy companies:

Some energy companies saw a huge opportunity to extract oil in those places (North Dakota and Texas) from where it was difficult to extract oil. It led to a fast increase in the oil production. As a result, oil prices began to fall.

Why OPEC is not doing anything?

Earlier in 1980s, a similar situation arose. Saudi Arabia decided to cut the oil production. But the oil prices kept on falling down and Saudi Arabia lost the market share. So this time, OPEC countries are playing it safe. They are facing losses and hoping that oil prices will rise again.

Why are they hoping so?

It is difficult and costly to extract oil from the new places where the oil is found (North Dakota and Texas) while it is easier and cheaper to extract oil in OPEC countries. So, as the oil prices continue to fall, OPEC hopes that some US energy companies will start to face heavy losses and will quit from the business. As a result, the oil production will increase and the prices will rise again.

Verdict:

There is a price war prevailing. It will be interesting to keep an eye on the oil market. It is affecting the entire world. When talking about India, falling oil prices will benefit India, the fourth largest consumer of oil in the world. India will be able to cut costs on oil imports as well as increase the foreign exchange reserves. Those industries will benefit which use oil or its derivatives. These include paint, cosmetics, oil marketing companies, automobiles, etc. Globally, falling oil prices has impact on every economy in the world. Oil exporting countries are hit while oil importing countries are benefited in general.

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Utkarsh Maurya

MBA 2015-17

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