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Asian Tribune is published by World Institute For Asian Studies|Powered by WIAS Vol. 12 No. 2643

Unsolved Mystery behind Plummeting Oil Price

Hemantha Abeywardena writes from London…

Oil prices, consistently indicated both by Brent, the global benchmark and the U.S. benchmark, have been falling for more than six successive weeks, yet no one knows what exactly is causing the mysterious phenomenon that defies the conventional wisdom.

As of Friday, Brent crude was trading at $83.39, a slight increase from the average price of the week; US crude, meanwhile settled at $78.65 on the same day. The rise, despite a significant fall during this week, was promptly attributed to the anticipation of colder weather, both in the US and Europe.

The falling petrol prices at the pumps have delighted the drivers, both in Europe and the US – at the expense of the oil produces and oil companies, of course. In the UK, meanwhile, the oil companies have come under direct government pressure, urging them to pass on the drop in price to consumers.

The oil companies, however, seem to be dragging their feet over the issue, while propagating the impression that their respective profit margins are wafer-thin and the taxes imposed by the government are to blame for the slow progress made on the price front.

Most analysts believe that the fall in price of a barrel of oil below $80 will trigger off a disastrous chain of events among major oil producers.

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Programmed by Hemantha Abeywardena

Although, the economic impact on the oil producers seems to be fairly universal, the social and political impact are going to fluctuate disturbingly between public unrest to anarchy, depending on the political system of the country in question, if the trend continues unabated.

Oil producers in Europe, such as the UK and Norway, for instance, will be able to manage the damage, as the sector is being managed through proper administrative bodies and robust mechanisms are in place to fall back on, when things get tougher.

For a major oil producing nation like Nigeria, however, finding a solution in the presence of falling oil revenue may not be that easy, as the exiting government has to deal with multitude of problems, ranging from Islamic extremism to rampant corruption. The situation could only get worse, when the gap between the rich and the poor continues to get wider, despite the substantial national oil wealth.

The impact on Libya and Iraq, meanwhile, is going to be disastrous, as what is left of the economies of both countries entirely depends on the oil revenue, with a massive chunk being spent on boosting security. On Friday, Lukman Faily, Iraqi ambassador to the US voiced his alarm over the falling revenue, while saying that country’s budget for 2014 was based on $90.00, a barrel!

The situation in Venezuela, the Latin American country in its own political turmoil at present, is going to get worse as well, if the falling oil revenue start biting.

The impact on Russia and Iran will also be significant, as both nations are feeling the pinch of western sanctions. On Thursday, President Putin of Russia blamed the plummeting oil price on slow economic growth and politics while refraining from spelling the latter out.

Political analysts believe that Mr Putin took a swipe at Saudi Arabia, the world’s top oil producing nation, for ruling out the reduction of the daily output, in order to manipulate the equation of supply and demand – to appease the Americans.

The stance taken by Saudi Arabia, a leading member of OPEC cartel, in its reluctance to curtail the daily output has been puzzling many in the industry – and beyond – despite a significant loss of oil revenue due to falling prices.
Some believe that the Gulf nation forces the US shale-gas sector to scale back its operations in the US, which could potentially make the former irrelevant in a few years in terms of dependence as a major supplier.

It is obvious that the plummeting oil price makes mockery of the claim that the global economy has recovered from the longest recession in recent years. If over-supply is not the cause behind the fall in price, then it is the lack of demand, which can easily be interpreted as the slowing down of global economy despite the endless stimuli in order to reverse the trend.

Although, we are delighted at pumps while filling out tanks in the short run, it may well be short-lived, if the price drop has stemmed from the lack of economic growth rather than the over-supply of oil in the markets. In this context, the sharp drop in oil price may be elevated as a newly-crowned index as a reliable indicator of the health of global economy – when every other known index fails to do so, of course.

- Asian Tribune -

Unsolved Mystery behind Plummeting Oil Price
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