Fracking in the US:
Over the last 5 years there has been a ramp up in the production of oil by shale oil companies (though a method called Hydraulic fracturing or fracking) in the United States. This provided access to large volumes of oil and natural gas that were previously uneconomic to produce. The shale oil companies were so many that US became the largest producer of oil surpassing Saudi Arabia and Russia. Fracking also takes credit for American oil and natural gas reserves being at their highest levels since 1972.
Oil prices per barrel in USD:
Reason for the price decline in 2014:
Oil prices go down when supply goes up, and that’s exactly happened in 2014. There are two main drivers of this increased supply:
- Hydraulic fracturing (fracking) in the USA
- OPEC production
Stubborn reaction of OPEC:
OPEC (particularly Saudi Arabia) has also vowed to keep production levels constant, rather than reduce them to inflate the price of oil as they believed that America’s new shale producers would be forced to quit the oil business as it won’t be viable to operate oil businesses at such low prices (as they aren’t as big as their counter parts in the OPEC countries). So, Saudi Arabia and fellow OPEC members kept the taps open, instead of throttling back production.
Bankruptcies in the US Shale oil industry:
As per the prediction of OPEC, there were around 63 Shale oil companies by the end of April 2016 and around 90 shale oil gas companies by October 2016 that had gone bankrupt since January 2015 in North America and Canada. This reduction in the number of oil companies drastically reduced the supply of oil in the international market and thus contributed to an upturn in the prices in the oil market.
The OPEC and non-OPEC oil producing countries meet:
In order to restore stability to the oil markets the
‘The OPEC High-level Committee’ met with ‘nonOPEC oil producing countries’ on 29 October 2016, at OPEC headquarters in Vienna to discuss the possibility of a cut in the oil production which would lessen the supply and increase the demand thus in turn increasing the oil prices.
Saudi Arabia and Other OPEC countries to Cap output:
Saudi Arabia and its Gulf OPEC producer allies had signalled that they would be ready to cut their near record crude oil production by 4% where as Russia would not cut, but rather agreed to freeze its crude oil output at its current level.
Iran, Libya, and Nigeria given exemptions:
All the OPEC countries are left with no other options rather than cutting the oil production whereas only conflict-torn Libya and Nigeria, as well as post-sanctions Iran, which have variously lost output because of violence in their countries or sanctions would not be as tightly bound by any deal to cap output.
With the bankruptcy of the US and Canadian shale oil companies and the agreement between OPEC and non-OPEC countries to reduce the production output the forecast for oil prices is positive in the near future.
Implications of low oil Prices:
- Countries that depend heavily on oil have would witness a decline in the government tax revenues, increase in the trade deficit, and an increase in unemployment levels due to job cuts in the oil industry
- Countries that import oil would witness an increase in the trade surplus, decrease in inflation levels which helps the central banks ease the policy rates which in turn would favor corporates as the borrowing rates would be reduced. Low interest rates would also encourage FDI Low oil prices also give a positive outlook for the automobile industry
What does the future hold?
The World Bank is raising its 2017 forecast for crude oil prices to $55 per barrel from $53 per barrel as members of the Organization of the Petroleum Exporting Countries (OPEC) prepare to limit production after a long period of unrestrained output.
http://dailycaller.com/2016/08/10/90-north-american-oil-companies-went-bust-in-just-20-months/ http://asia.nikkei.com/Business/Trends/Bankruptcies-continue-in-US-shale-oil-industry http://www.macrotrends.net/1369/crude-oil-price-history-chart
http://www.bloomberg.com/news/articles/2016-09-02/putin-pushes-for-oil-freeze-deal-with-opec-exemption-for-iran http://www.wsj.com/articles/shale-oil-producers-ready-to-raise-production-1431556302 http://oilprice.com/Energy/Crude-Oil/Saudis-Gulf-OPEC-Members-Offer-To-Cut-4-Of-Oil-Output.html https://www.ft.com/content/e781ddcc-8565-11e6-8897-2359a58ac7a5