The Effects of the Falling Oil Prices

The latter quarter of 2014 certainly saw some dramatic changes in the price of oil with the price of Brent Crude falling from around $115 per barrel in June 2014 to just $57 at the turn of the year.  To understand the reasons for this and the resulting consequences we first need to understand how and why oil had reached $115.

With the rapid growth of countries such as India and China, the World saw the consumption of oil soar.  Demand for oil was far outweighing supply and this caused a spike in global prices and indeed the price of oil remained at around $100 per barrel from 2010 until mid to late 2014.  As with any other commodity, this high price encouraged countries to increase supply and meet demand.  Worldwide there was a massive increase in the exploration for oil; this in tandem with the lifting or reducing of sanctions on oil rich countries such as Libya and Iraq dramatically increased the quantity of oil in the market.

The increased supply and the tapering off of demand in Asia, Europe and the US due to their weakening economies resulted in the price of oil gradually starting to fall.  Major oil producing countries such as Saudi Arabia decided that action needed to be taken to maintain the price of oil and saw the only real option being to reduce supply.  In November 2014 these countries called upon OPEC, the major cartel that controls the oil market, to reduce production of oil worldwide.  To everyone’s surprise these calls went ignored and by late 2014 supply had exceeded demand.

The results have affected almost every country in the world with differing results.  Without doubt the falling price has been warmly greeted by consumers who are now paying significantly less for oil than they were doing just a few months previous.  This has had a knock on affect in some cases reducing other utility bills.  These reducing costs have been welcomed in countries such as the US who rely to a lesser extent on the production of oil and believe that the lower prices will provide a much needed boost to the country’s economy.

Sadly this benefit has not been felt by all nations with countries such as Russia – whose economy is heavily dependent on the sale of oil feeling the catastrophic effects.  The Russian government receives approximately 45% of their revenue from oil and the falling price has created panic.  The value of the ruble has fallen sharply (although other factors need to be considered as well) and there has been a rise in inflation to unsustainable levels.

It is not only Russia that has been affected.  Many new projects around the World have been stopped or put on hold with new exploration almost grinding to a halt as the falling price cannot support large capital investment.  This has resulted in significant jobs losses to those directly and indirectly involved in the oil industry.

The future for the oil industry in arguably solely in the hands of OPEC with little prospect of significant change in the near future unless OPEC restricts production.  2015 could be a very interesting year for all those connected.