Friday, December 19, 2014

Why are oil prices decreasing?

The million dollar question indeed. Well folks there's no "one" conclusive answer, though there are many theories explaining the fall, both economic and political. Some sources have even spun a conspiracy theory around it. Next we would be hearing about aliens regulating the oil price and how CIA saves the day by fighting them(potential Oscar winning movie stuff). OK the jokes apart, lets delve deep into the mystery!

From 2010 till mid 2014, oil prices in world has been quite stable, around 115$ per barrel. But since mid 2014 the prices have been halved nearly 59$ per barrel. There are three main reasons listed below:

Fall in crude oil prices

  1. Slump in demand - The oil price is based on actual demand and expected demand. Due to weak economic activity worldwide there is low demand. In a meeting of OPEC countries in December it was decided to not reduce their daily production so as to keep their market share intact.

  1. Geopolitical - U.S became the largest producer of oil in world in 2014 surpassing Russia and Saudi Arabia, previously the top two producers of oil. Shale oil industry is the reason which catapulted U.S. to the number 1 position. Naturally the OPEC countries feel threatened by the new competition. There is another theory which says that due to Russia's annexation of Crimea and involvement in Ukraine has led to U.S. engineering the fall in oil prices to punish Russia which thrives on oil and gas exports. Of all countries the worst hit is Russia which saw ruble fall by 30% against dollar.
  2. Conflict Situations - Some of major oil producers like Nigeria, Libya and Iraq which are also part of OPEC have internal conflicts which potential oil investors see as a risk investment. For example the ISIS war in Iraq and Syria, civil war in Libya and Boko Haram insurgency in Nigeria.
For curious and avid readers, find below some useful links for further research on the topic:-
The Economist explains Why the oil price is falling  - The best one
Why are Oil prices dropping
Oil prices fall on oversupply and refinery strike concerns
Oil Prices: What’s Behind the Drop? Simple Economics
Falling oil prices: Who are the winners and losers?

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