Tuesday, April 14, 2015

Reasons behind Recent sudden decrease in Oil Prices

The oil manufacturing industry was among the most progressing industries seeing heights and booms. But recently the oil rates are seen to decline. The oil rates once used to be over 55 percent of the current prices sums up to almost $110. It was fairly stable from 2010 till mid of last year, but from June, it costs around $40 for a barrel, which is the lowest price after the recession period of 2009. Some analysts guessed that oil prices will reduce further to as low as $30 while some optimists still have hope that the prices won’t drop than lower than $70. The reason for this drop in oil rates is a bit complicated but coming to the point it is simple economics. The balance between demand and supply is disturbed.

  • Previously the oil demands were really high by countries like China and the supplies didn’t meet it fairly that is why the prices spiked up.
  • There was a sufficient shift in dynamics because United States due to increase demands starting producing more of crude oil which almost doubled in the past 6 years. United States suddenly started competing for Asian markets. Thus the demands for oil by Europe, United States, Asia and other developing countries began declining due to weakening economies and new measures for maintaining efficiency such as energy efficient vehicles.
  • In the end as a result by late 2014, the supply was high but the demand was not enough which piled up unused stock of oil for later. That is why by September the prices starting falling.

Who is benefited by dropping Oil Prices?
Normal motorists benefit from this lowering of oil prices the most! They can easily tell you the drop in rates and the new rates which are a dollar less, every passing month. Similarly heating oil, gas and diesel prices reduced sharply which overall cut tax saving almost $1000 for average families living over the next year.

Who is at loss due to drop in Oil Prices?
Oil producing countries and states are at a loss. States like Iran, Russia, Venezuela and others will suffer economically and even politically. The Gulf States will withdraw hands, invest less and might cut aid to Egypt. Some oil producing companies already in debt will suffer a lot, going out of business.

Organization of the Petroleum Exporting Countries who pump 40% of the world’s oil decided to cut down the production in order to raise the prices back to normal which is quite justified. Iran, Algeria and Venezuela followed it and lowered the production as they wanted prices to get high for managing their budget. On the other hand Saudi Arabia (world’s second highest oil producer), U.A.E. and the other gulf countries refused to do so whereas Iraq increased its supplies.  Saudi Arabia explained the reason that they didn’t want to compromise on their market shares and benefit the competitors like U.S. thus they don’t mind oil prices getting lower for a short time.

There are a number of views in this regard where it is said that Saudi Arabia and United States, the two top most oil producing countries are lowering the prices intentionally to harm Russia and Iran because it helped to bring down the Soviet Union in 1980s also.  It is predicted that the prices will drop down to $40 per barrel very soon. The prices might recover due to the drop in production in the 2nd half of this year.  Lower oil prices are excellent news for the oil consuming countries like US or Japan, where gasoline is now cheapest in history. The case is entirely different for those relying completely on oil sales. Russia’s economy is facing crises whereas Venezuela is facing unrest and drowning in debt. Countries like Saudi Arabia also can face heavy pressure if the oil prices are low for some more time.

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