Oil Prices At Its Lowest Level Since 2009 Case Studies Examples

Business: Oil Prices at its lowest since 2009

The global crude oil price has been on a continuous downward spiral since June last year. The price of Brent crude fell from a high of $ 115 in June 2014 to $ 46 in January 2015. There are many theories floating around for the reason behind this fall. This article will analyze the causes, context and its implications on the global economy.
The steep fall in the oil prices can be broadly attributed to the gap in the demand and supply. The demand for oil has been very high during the period 2010-’14, with nations globally focusing on building huge oil reserves. The demand has been high during this period specifically from the United States and the developing economies like China. This resulted in an upward spiral during this period. In the current scenario, the supply is constant, but the demand is waning. United States has increased its production, thanks to the passion of shale drilling in states like North Dakota resulting in lower imports of crude from OPEC countries like Saudi Arabia, Nigeria and Algeria. Other big consumer economies like the European Union and China are weakening or slowing down resulting in a lower demand from them as well. Moreover, the automobile industry is pressing the efficiency pedal hard which also contributes to a lower demand for oil.
However, it should be noted that the crude cartel OPEC is not willing to cut the production and output of crude barrels. They are doing this primarily to ward off the threat from the US Shale oil gaining an upper hand in the global market. OPEC believes that the shale drillers will be forced to stop or cut down the production since the cost of production of shale is high and does not justify the low dollars per crude barrel. Also, even though the OPEC is supposed to be a cartel, there is fierce competition among its members and leading producers like Saudi Arabia and others in the Persian Gulf will not be willing to lose their market share to the US shale by cutting down the production. So it can be seen that it is also a case of cost vs. market share.
The implications of falling crude prices in the world are immense. The end consumer will get benefitted and it is estimated that an average US household will spend $750 less on fuel in 2015. The fall in crude is believed to benefit the automobile and aviation industries as well. But this scenario is bound to impact the oil producing nations negatively. Economies like Russia, Venezuela, Iran and Nigeria which are heavily dependent on energy revenues are highly impacted and face the dangers of high inflation and shrinking economies. There will be large scale subsidy cuts in these nations which will directly affect their citizens. Comparatively, the oil producing giants in the Persian Gulf region are better insulated since they have sufficient reserves and multiple income sources and can withstand this slump for a longer period of time. However, these nations are likely to invest lesser globally and may freeze aid to poorer nations.
The oil prices are not likely to recover any time soon, with the Goldman Sachs report pointing out to a U-shaped recovery. It is estimated that the prices will show reverse trends by the end of this year, when the prices are expected to touch $65 per barrel.
This report has analyzed in detail on the reasons for the fall in the crude oil prices in the global market and its impact on the world economies, from social, political and business perspectives.

Works Cited

Bowler, T. (2015, January 19). Falling oil prices: Who are the winners and losers? Retrieved from BBC News: http://www.bbc.com/news/business-29643612
Krauss, C. (2015, January 12). Oil Prices: What’s Behind the Drop? Simple Economics. Retrieved from New York Times: http://www.nytimes.com/2015/01/13/business/energy-environment/oil-prices.html
Market Watch. (2015, January 21). Crude Oil - Electronic (NYMEX) Feb 2015. Retrieved from Market Watch: http://www.marketwatch.com/investing/future/crude%20oil%20-%20electronic