Global Oil Market

Abdur Chowdhury

Department of Economics

Marquette University

April 21, 2015

Brief history of oil price

• The oil price in the global market has fallen by more than 40% since June 2014, when it was $115 a barrel. It is now below $65.

• For much of the past decade, oil prices have been high – more than $100 per barrel. This was due to:

• Soaring oil consumption in China, India, etc. and

• Conflicts in key oil producing nations like Iraq.

• There simply wasn’t enough oil production to keep up

• So oil prices spiked and hovered around $100 per barrel between 2010 and 2014

Brief History of Oil price (Contd…)

• As oil prices increased, many U.S. companies began using fracking and horizontal drilling to extract oil from shale formation in North Dakota and Texas

• Companies in Canada were heating Alberta’s oil sands with steam to extract usable crude

• In 2008, U.S. added 4 million extra barrels of crude oil per day to the global market (global production is about 75 m/b/day)

• But conflicts in Libya, Iraq and other oil producing countries took 3 million barrels per day off the market. So U. S. production had little effect on global prices.

Brief History of Oil Price (Contd…)

• By mid-2014, conflicts were no longer affecting oil production

• Production in U.S. and Canada were still rising fast – and world’s supply of oil kept growing.

• Even more significantly, oil demand in Asia and Europe suddenly began weakening – due to economic slowdowns in China, India and Germany.

• Combination of steadily rising supply and weaker than expected demand caused oil prices to start dropping from their June 2014 peak of $115.

Saudi Factor

• In November 2014, the OPEC decided not to cut production to increase price. This decision was driven by Saudi Arabia, despite opposition from Iran and Venezuela

• Saudi Arabia can tolerate lower oil prices quite easily. It has $900 billion in foreign exchange reserves. Its own oil costs very little (around $5-6 per barrel) to get out of the ground.

OPEC is now engaged in a price war with the United States

• It is relatively cheap to pump oil out of places like Saudi Arabia and Kuwait

• But it is more expensive to extract oil from shale formations in places like Texas and North Dakota

• As the price of oil keeps falling, some U.S. oil producers may start losing money and go out of business

• U.S. shale producers are especially vulnerable when oil dips below $60 per barrel.

Affected Countries

• But the greatest pain is in countries where the regimes are dependent on a high oil price to pay for costly foreign adventures and expensive social programs.

• These include Russia (which is already hit by Western sanctions following its meddling in Ukraine), Venezuela (which is paying to keep the unpopular regime in power), Iran and Nigeria.

Effect of low oil price on the U.S. economy

• A fall in crude oil price will have both positive and negative effects:

• Cheaper oil means lower gasoline prices – U.S. drivers will spend about $550 less on gasoline in 2015 than they did in 2014, assuming prices stay low. That will give consumers more money to spend on other items.

• Oil-producing states like Texas and North Dakota are likely to see a drop in revenues and economic activity. Alaska’s state budget derives 90% of its revenue from oil.

Lower Oil prices will Boost Economic Activity in 42 states

Oil Price in 2015

• While growth in the U.S. is going from strength to strength, the eurozone is still weak and industrial and manufacturing growth in China is slowing, and that looks set to persist throughout 2015. This would lower demand for crude oil

• Adding further pressure, the supply situation shows no signs of near-term tightening. OPEC members have been very vocal in defending their decisions to leave output unchanged

• The focus among OPEC members to maintain market share could see persistently weaker prices in 2015, as a combination of increasing supply and lackluster demand prevent any significant rally from gaining traction

• So crude oil prices in 2015 will remain around the current level.

How will the drop in oil price affect the green vehicle industry?

• Drop in oil prices will have some impact in the production of liquid biofuels, investment in liquid biofuels and investment in electric mobility and hybrid mobility

• Consequently, it will affect electric cars and biofuels more than other parts of the green power industry

• That is because they compete directly with rivals such as petrol-fuelled cars that are becoming cheaper to run as oil prices fall.