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WHY IS OIL PRICE FALLING? Well, from what I know the oil prices were rising rapidly, due to the market forces (demand and supply). The increase in demand for oil in China and India was forcing the suppliers to increase production capacity, which being not fulfilled led to the increase in Oil prices (reaching 140+ a barrel). While the risks in Iraq, Nigeria always kept in check the supply side. However recently the trend has changed a little, where the crude oil dropped to less than $100 a barrel ($95 yesterday). WHY? Has the demand changed or there is an excess in production capacity or are there any other factors? Let’s explore; Not so long ago, analysts were forecasting the oil prices to jump to $200 a barrel mainly for the following reasons; 1. Georgia Conflict might result in closure of important Bak-Ceyhan Pipeline, resulting in loss of supply. 2. Civil conflict in Nigeria. 3. Failure of the Maliki government in Iraq to agree on the legal structure through which international companies can invest in new oil developments. 4. Increase in further demand of petrol in developing countries China and India. Over the past two three years, SPARE PRODUCTION CAPACITY more or less has become the prime indicator of world oil prices and a signal to spectators. DEMAND SIDE OF OIL: IAEA the world energy watch dog recently said, that there has been record production from OPEC while at the same time the demand level have slipped back (500,000 barrels a day below the initial projections). Also demand specially for petrol in down in US and Europe has declined as economic slowdown takes hold. Besides, Japanese economy which is the second largest source of demand in the world shrank by more than 2% in the second quarter. Financial times write that “Almost all the remaining growth in oil consumption is now coming from the emerging markets – especially China and India. Even there the rate of increase in demand has slowed in the past six months. In a market that is sensitive to every change, even the Chinese constraints on car use in advance of the Olympics have had an impactâ€. SUPPLY SIDE OF OIL: On the supply side it is worthy to note that the soaring prices have encouraged producers to expand output and a series of new development projects around the world, such as the delayed Khursaniyah project in Saudi Arabia and new offshore fields in Nigeria and Angola, are due to come on stream over the next six months. The net result of these changes is that the level of spare capacity has increased appreciably. If spare capacity levels continue to improve the stage is set for a further reduction of prices. Prices could break through the symbolic $100 a barrel level – only this time they will be heading downwards just as we saw yesterday. Financial times further writes on this issue that “Those brave enough to predict oil prices are usually wrong, but the perception that the fundamentals have changed has begun to affect the trading market and behaviour of speculators. That is why the Russian invasion of Georgia had so little impact. Speculators in particular are pulling out of oil – with a few beginning to bet on a further substantial fall. In the words of one London trader: when prices have risen by more than 100 per cent in 12 months the chances are that the next move will be downwardsâ€. WHATS THE FUTURE: The resources are finite, and in-order to maintain the price levels it is important to discover new oil-fields, which companies are still unable to unearth. New sources of energy or alternative means are to be worked upon. For the time being consumers might take a sigh of relief but it’s not a long term solution, it might just be a breathing space but without sound policies and transition towards other sources of energy it could become a major problem in the near future. Source: Financial Times, IAEA, OPEC Related Articles |
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The problem with Pakistan is that the current fuel prices in domestic market were attributed to high oil prices in international market when they touched $145 per barrel. Now that the international market prices have came down to $93, our domestic prices are still at the same rate even though we have Saudi Oil facility. We have also imposed additional duty on export of the diesel and kerosene oil, which was not the case previously. Moreover, we have also increased the price of electricity where our 60% of diesel oil was consumed. Despite all these steps, which must have added billions to the government coffers, we are still living with higher domestic fuel costs.
Someone rightly said that prices can only go up in Pakistan
If you just take care that money gets used for what it should what you describe is not so bad, the oil prices are not greatly dependend of supply, for that you need to exhaust the buffers first (they are not very high at least not like 6 months ago). Irak and saudi arabia maintain an artificaially low price with a significant percentage of the output. It’s questionable if this development subsidy by this nations reaches to all UN nations equally. Also the stockmarkets are dropping, there is a general sense of economic crisis in the financial west,
The price of oil will rise, but depending either big or slow factors. Economical development of even china only contributes a small percentage to such a price a year. A negative investment climate in many western nations also has a moderating influence on the price, no oil needs to be bought yet for investments (un)done.
Basically i think the price of oil and btw a couple of other resources is artificial, it runs through politics and networks not rarely of an autocrat kind,
a really free market would mean china and india could buy most of the excellent quality iraki and saudi oil at that low price, i hope it goes like that because that way at least the development has a rudimentairy right priority, plus i have none the least respect for either china or india’s governments intentions with their populaces, their people.;)
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