Since June, Oil prices has
dropped from about $115 for a barrel to $80 or so, a reduction of more than a quarter and its being forecasted the prices will likely to
fall further as there is no anticipated huge increase in demand
for the next few quarters.
If prices settle at
today’s level, the bill for oil consumers will be about $1 trillion a year
lower. That would be a shot in the arm for a stagnating world economy. It would
also have big political consequences. For
some governments it would be a rare opportunity & for others a threat. Countries like India, Indonesia and few others find the low prices reason enough to fast-forward oil sector
reforms and decontrol retail prices specially Diesel, by far the most used
petroleum product.
If speculators truly are
the major cause of the price decline, then it increases the chance of a faster
recovery in oil prices. The other
reasons could be the result of unexpected and maybe short-lived developments.
War torn Libya somehow pumping 40% more oil. Saudi Arab’s decision to boost output to
protect its market share and hurt American shale producers and see off new
developments in the Arctic.
The prices may rebound once U.S. shale
producers start decreasing production. Its believed that 33% of U.S. oil
production becomes uneconomical at $80 a barrel. In fact, according to analyst
at $80 a barrel, oil production would rise only 5%, and at $ 70 production
growth will halt entirely. Almost similar is the case for Canada’s sand oil.
Saudi Arabia, which derives 80% of its
government revenue from oil and dominates the cartel's actions, needs $95-per barrel
oil to remain solvent. Venezuela @ $120, Iran @$140 though the production
cost of oil which could be much lower say $5 - $30 or so. These
countries aggressive foreign policy, investment decisions, extravagant spending
schemes etc are based on such
numbers. So they will try to somehow
push the prices up for their own survival. So cheaper oil is welcome, but it is
not trouble-free.