The plunge in oil prices has been doing the rounds ever since I was waiting for my Semester 1 results. We have heard that oil prices sky rocketed from 2011-14 to approximately $110 per barrel but now it’s somewhere around $50 per barrel. That’s a steep decline and invokes the basics of Economics: Oversupply coupled with deficient demand.
Certain reasons for this oversupply are US shale oil production and the ego of OPEC countries! US was a significant importer of oil but since the discovery of fracking of shale oil, it has its own production. Although, it doesn’t export but it aggravates the deficient demand side. The US businesses that recently ventured into oil production through high borrowings, expecting consistent high oil prices, are likely to go bust because it will be increasingly difficult to sustain their prices at/above marginal cost. OPEC countries met at the Vienna’14 but refused to cut the production ceiling to arrest the slide in oil prices. This marked a shift in their objective from controlling prices to maintaining market share. With steel over production and decline in investment slowing down the Chinese economy, the demand for oil is also threatened. In general, the weakening of the European economies and shift to energy efficient technologies adds to the woes. Despite the civil war in Libya and the troubles in Middle East due to ISIS, they have sustained their oil production, which was unexpected for many analysts. The inverse relation between USD and oil prices shows that the 10% appreciation in USD in 2014 is further responsible for crashing oil prices.
I have attached a ‘MECE’ approach World Bank report which explains how to interpret the changes in oil prices! A very interesting topic is: What are the macroeconomic and financial implications?
*This was originally posted on FISCUL, Lady Shri Ram college facebook page. These posts use a different format by supplementing them with links which have been used for the research and are hence kept short and crisp.