The global oil market is abuzz: the production of crude oil is increasing without there being greater demand and, according to the IEA (International Energy Agency), the price of oil will continue to fall in 2015. The agency states, “It is increasingly clear that we have begun a new chapter in the history of the oil markets.”
Over the past few weeks, the price of Brent crude oil, one of the major benchmarks for the market, has fallen to its lowest level in the last four years: to below 78 dollars per barrel at the time of writing this article. The members of OPEC will meet on 27th November to discuss the pricing policies to adopt according to the current supply and demand. However, according to analysts, the price drop cannot be exclusively attributed to this dynamic, but also to geopolitical reasons. (See Dancing Numbers and Musical Chairs on the World Crude Oil Stage and Shale Gas and the Neo-Strategy of the United States previously published on this blog.)
In this type of scenario, logic dictates that the main oil producing countries, such as Saudi Arabia, should reduce production to force prices to rise in order to maintain their revenues; however, that is not what is happening. On the other hand, countries such as the United States, which are achieving greater energy independence and becoming exporters due to the “fracking” technique, may be seriously affected if prices continue to fall, as this extraction method is so costly that it would cease to be profitable. With this in mind, some experts are of the opinion that the Saudi Arabian strategy of maintaining its extraction volume (even though the decision means financial losses) could be due to their intention to mine some economies, such as that of Russia, and to impede the production of the “new” crude oil in the United States.
Whatever the reasons for the turbulence in the oil market, the fact is that the most energy-dependent countries are the ones which are benefitting most from the situation. Europe, for example, is experiencing a reduction in its energy demand, which, when added to the trend of falling oil prices, could contribute to stimulating its economy, although it must be remembered that it is at the mercy of the decisions made by Saudi Arabia. It begs the questions of how the situation will affect the oil companies, how far the low trading price of oil will mean savings for industries and companies which consume large amounts of fuel, and when consumers will see the drop reflected in the price they pay for petrol, diesel or plane tickets. Or perhaps we should wonder how far individuals and companies will benefit from the fall in prices given that, although the cost of crude oil is in free fall, the costs of refinement and transformation into fuel do not vary, nor do the taxes applied to a litre of petrol. Moreover, oil companies are seeing sales fall, making it difficult for them to renounce their profit margins, and the depreciation of the euro is not a favourable sign either as oil companies buy crude oil in dollars but sell fuel in euros.
We shall have to wait and see what happens at the OPEC meeting.