Example Of Essay On Oil Price Reduction: The Causes And Effects

Type of paper: Essay

Topic: Oil, Russia, Middle East, Economics, Energy, United States, America, Countries

Pages: 5

Words: 1375

Published: 2020/10/17

Just as any other energy resources play a pivotal role as means of economic development, negotiations, and political pressure, so too does oil; still, when the price for Golden Gold plummets for a number of economic and political reasons, its versatile role becomes marginal. Some countries stand to lose following the decrease while others are in line for a windfall. Venezuela and Russia, countries with extraction economies, known for the paradox of plenty or resource curse, suffer the most, as do transit countries receiving profits for having oil transferred through their territory. Extraction economies are dependent on oil revenues, with economy subsisting on petrodollars.
On the other hand, cash-starved consumer countries forced into buying crude oil at exorbitant prices are on the winning side, as is the case with Ukraine looking for energy diversification and employing gas reverse tactics now that Russia has proved an aggressor country and unreliable energy provider. Russian economy stands mediocre chances of emerging unscathed in the wake of oil price fall damaging the national currency beyond repair. Whether it be for the purpose of weakening Russian economy in addition to sectoral sanctions with the help of Saudi Arabian sheikhs, due to the dumping policy of emerging players on the energy market characterized by a cutthroat competition used to gain large segments, the market reemergence of Libya, the ISIS paralyzing the Levant oil production region, or a natural cyclic trend, the effects are universally felt. Overall, the global reduction in oil prices has its underlying causes and effects now felt by all economic actors worldwide.
Arnsdorf (n.p.) states that violence in the Middle East threatening to undermine supplies, obscure demand from China and Europe, and the increase in the US production capacities in the June of 2014 are generally cited as the chief reasons for the downward price vector. The macroeconomic data changed in summer demonstrating a slack demand in Asia and Europe. As per the International Energy Agency, in the coming years, global oil consumption is expected to be at its lowest since 2009. According to Why the Oil Price Is Falling (n.p.), increased efficiency, slack economic activity, and a shift from conventional energy sources to their alternatives have reduced the demand and subsequently oil prices. According to Arnsdorf (n.p.), when the turning point came was on October 1, 2014, the time that Saudi Arabia cut prices short for the biggest consumers.
Rather than engage in price pegging, the world’s largest energy exporter indicated its willingness to retain its market share by allowing the drop in the region of 29%. Saudi Arabia cut its prices on crude exports to Asia on October 1, 2014, when the cost reached its 5-year low. In its comments, Commerzbank referred to the situation as a price war. According to the IEA, the Saudis are said to be testing the rate, at which the American energy production retains its profitability. In what could be a revelation of OPEC’s intentions, Abdallah el-Badri claimed that at least 50% of shale oil at the current price is economically unprofitable. It appears that a third of the American shale-made production forfeits money at 80 dollars per barrel (Arnsdorf n.p.). Thus, unable to find a steady ground on the market, the American shale oil industry is suffering from tumbling prices.
Still, this is not all there is to the rationales of price dumping. In all honesty, there is an undeniable political component to how Saudi Arabia is acting on the market. Besides wishing to keep the Americans out of the oil market, the former donor of the ISIS, the kingdom of Saudi Arabia, is willing to destroy Russia, the longstanding ally of Syria and Iran. Syria and Russia being down-and-out, the Saudis will have less market rivals left. According to Why the Oil Price Is Falling (n.p.), Saudi Arabia along with its allies in the Persian Gulf do benefit by damaging much-detested Russia and Iran. With 900 billion dollars in reserves, the country can tolerate even lower thresholds. For now, the fall in prices affected large oil-exporters, such as Venezuela, Iran, Nigeria, and Russia, wherein rouble started hitting all-time lows. The outcomes make themselves felt particularly painfully in states whose oil-dependent political regimes are used to spending high oil revenues on costly social programs and expensive foreign adventures.
Iran paying a high price for keeping Bashar Assad’s regime in power is another example. Russia is a good case in point being the country suffering from low prices, apart from hard-hitting Western sanctions imposed in response to its aggression against Ukraine (Why the Oil Price Is Falling n.p.). Russia annexed Ukrainian Crimea and attacked the Eastern part, first conducting what many analysts call a hybrid war, in defiance of the Budapest Memorandum, to which it is a signatory. Both military adventures and the need to fund separate puppet states, Euro politicians and journalistic yes-men require colossal funds that, coupled with hard-hitting sectoral sanctions, ruin the economy especially in the light of massive corruption in Russia, aka mafia state. Catastrophically low oil revenues put the final nail in the coffin of the Russian Federation. It is only a matter of time before low oil prices destroying the economies cause revolts in adventuresome oil countries like Russia. In the case of Russia, it is a matter of months or a year at best.
Brodzinsky (n.p.) suggests that oil price constitutes as much as 95% of the hard-currency income of Venezuela. What are the most disturbing outcome for citizens are food shortages that lead people to queue up at the entrance to supermarkets in efforts to purchase subsidized merchandise like diapers, soap, and milk. Police has reduced shopping time to two days a week at supermarkets run by the government. Venezuela is now a recession-ridden country, in which there is a stable crisis (Brodzinsky n.p.). What is under way in the country leaves an overwhelming sense of déjà vu since there was a similar situation in the USSR in its late days. Super long lineups for food and marked arms indicating entrance order were also characteristic of the commercial system of the country during its closing years. Oil price fall also contributed to its eventual collapse at a time when the empire of evil was on its last legs. Recently added fingerprint registration to control the number of food bought is only a sign of worse things to come.
Arnsdorf (n.p.) stated that, following what many believed the stable buildup of supply and a slackening demand, the beginning of the price war declared by OPEC has reduced the likelihood of investment in new oil resources; still, it has done a lot to keeping inflation checked as well as lending a helping hand to the global economy (Arnsdorf n.p.). The participants of a Vienna Meeting on November 27 did not manage to come to terms on production curbs, which sent prices into further fall (Why the Oil Price Is Falling n.p.). The failed meeting turns out to be another cause of the falling price that could otherwise have been normalized to a certain extent. It may be that the Organization of the Petroleum Exporting Countries, including Middle Eastern, African, and South American oil producers, may be trying to drive the budding American shale oil producer out of the market by dumping the price.
Beyond that, the production of oil in Libya increased threefold to an estimated 900.000 barrels per day, which is 40% down from two years ago. Though riven by the war, Iraq never stopped its oil extraction pumping an impressing 3.1 million barrels on a daily basis. The production of oil by the Organization of Petroleum Exporting Countries reached a high of 30.9 million barrels per day owing to extra stimulation (Arnsdorf, n.p.). Why the Oil Price Is Falling (n.p.) states that, despite chaos in Libya and Iraq, the combined production capacity of about 4 million barrels per day has not suffered as a result of internal turmoil. Arnsdorf (n.p.) noted that London-headquartered Barclays reduced its oil price financial forecast in October a number of times believing global oil surplus to be the major cause for a fall in prices. OPEC does face a mounting competition offered by the USA capitalizing on scientific innovations, such as horizontal drilling and hydraulic fracturing, which allowed satisfying the internal demand and replacing imported oil with its domestic analogues. The total output reached a historical mark of 14% in the preceding year that is equivalent to 8.97 barrels per day, which is the highest the rate has ever been since estimates made by the US Energy Information Administration first began in 1982 (Arnsdorf, n.p.). Why the Oil Price Is Falling (n.p.) suggests that the USA does not export crude oil, but for all that it creates the above-mentioned surplus that send oil price tumbling down.
Who bear the major brunt of price reduction are the most vulnerable and the riskiest elements of the oil industry. These are the US frackers who made critical borrowings in hopes of taking advantage of rising prices. Beyond these, Western oil companies working on high-cost projects on drilling in the deep waters of the Arctic or increasingly high-priced and maturing fields like the North Sea (Why the Oil Price Is Falling n.p.). Lobosco (n.p) notes that cheap oil has already deprived 9.000 workers of their jobs at Schlumberger, which is a company providing services and instruments for gas and oil companies. The termination of labor contracts affects 7% of the company workforce in 85 world countries. CVEO, the provider of housing for oil employees was planning the termination of 1.000 workers in the December of 2014.
Conversely, clients are relishing the drop since gas is now available at gas stations for 2 dollars per gallon. Prices have reduced by about 1.21 dollars a gallon, as against the previous year (Lobosco n.p.). Since 2007, non-shale American states have lost 424.000 jobs while their shale counterparts have gained a total of 1.36 million jobs (Tverberg n.p.). It the price continues falling or remains low, it may no longer be profitable for producers to pump it from the wells. Tverberg (n.p.) opines that the fall in oil price will leave it in the ground. Overall, these is a plethora of negative outcomes associated with the fall, such as the loss of letters of credit required for exports, bank failures, deflation-induced debt defaults, and the already mentioned oil exporter collapse along with workforce cuts (Tverberg n.p.).
The intensification of oil extraction by Iraq despite military conflicts and remerging Libya are contributing to the reduction. If the price continues its freefall, oil may remain in the ground, without being extracted, which will leave plenty of skilled oil workers unemployed. Oil companies with high-income projects and US frackers feel the adverse economic impact of the drop. In general, negative outcomes include the loss of letters of credit required for exports, bank failures, deflation-induced debt defaults, and the already mentioned oil exporter collapse along with workforce cuts. Still, consumers seems to enjoy the newly reduced gas prices. Overall, the drop of oil prices induced by intensified extraction, fierce competition, and other factors have largely affected the interests of multiple economic actors, although benefitting gas consumers worldwide.

Works Cited

Arnsdorf, Isaac. “Why Oil Prices Went down so Far so Fast.” Bloomberg Business. 30 October 2014. n.p. Web. 28 Jan. 2015.
Brodzinsky, Sibylla. “Street Protests Loom as Shortages, Inflation, and Oil Slump Hit Venezuela.” The Guardian. 16 January 2015. n.p. Web. 28 Jan. 2015.
Lobosco, Katie. Victims of Cheap Oil: Schlumberger Cuts 9.000 Jobs. CNN Money. 15 January 2015. n.p. Web. 28 Jan. 2015.
Tverberg, Gail. “Ten Reasons why a Sustained Drop in Oil Prices Could Be Catastrophic.” Oil Price. 8 December 2014. n.p. Web. 28 Jan. 2015.
“Why the Oil Price Is Falling.” The Economist. 8 December 2014. n.p. Web. 28 Jan. 2015.

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