[Economics]
As everyone knows, oil is considered to be a raw material. Though there are some unknown oil stocks, oil as well as other minerals is an exhaustive type of resource. Moreover, no matter what scientists say, or give any predictions, in the nearest future we will run out of this mineral. That is one of the reasons why we can observe the price gradually raising now. But to be honest, by 2020 this factor will not influence significantly the price of oil. The explanation to this is because the vast majority of world’s oil stocks have already been pumped out and oil containers around the world are full of oil.
What is the reason why the price of oil harshly lowered over last two years? There are different sorts of oil, depending of the composition of the “black gold” such as, containing the sulfur compounds, impurities, groups of alkanes, the place of oil deposits etc. Standard quality for the price of oil is considered to be Brent that is extracted mainly by oil companies in The Russian Federation. However, The Russian Federation is far not the only supplier of the oil. The main oil export-oriented countries are Saudi Arabia, The Russian Federation, Iran, Kuwait, The United Arab Emirates (UAE), The United States and others (Zaycman, “YouTube: Oil, petrol and your pocket”).
The price of oil is determined by the futures market – the hydrocarbon supply contracts at a fixed price on a fixed date. The sale of these papers on the market exceeds ten times the actual sale of oil in real life. This means that there is a huge money supply, which can be directed properly either to increase or decrease the value of futures. And this is a benchmark for all other market participants – growing price of futures will result in an increase in oil price; if the price reduced - it is necessary to prepare for the fall and build your “shopping-sales strategy” accordingly.
Oil supply exaggerates its demand. From year to year this resource is being drawn out from deposits more and more which simply means that oil companies produce far more oil than consumers actually need. As a result, extremely high supply and low level of demand for oil makes the price go down. That exactly reflects the “Law of demand and Law of supply” (O'Sullivan 3).
Disability to reach an agreement or conspiracy (geopolitical factor). There is such an international organization OPEC - Organization of the Petroleum Exporting Countries which global influences the prices of oil. It consists of 13 oil-exporting nations which produce approximately 40 percent of global oil and account for 73 percent world's "proven" oil reserves. In order to control the amount of oil on the market, they set up a limit of oil extracting which currently equals 30 million barrels / per day (so called “quantity ceiling”). To be honest, this level is far above the limit. Actually OPEC could easily unanimously decrease this limit, but they did not. Some analysts think that this is a conspiracy against the Russian Federation. Others claim because of disability to reach the consensus between oil cartels. In other words, it is easy to say: “Let’s lower oil’s price”. However, where is a guarantee that if I decrease the amount of oil excavation now, you will decrease it as well?
Combined reasons from 2nd and 3rd case. It is believed that the collapse of oil prices may be modeled by The United States, because 85% of foreign trade operations with oil and gas are conducted in those countries which are directly or intermediately under control of The United States. It is assumed that The United States wanted to hit 3 disobedient countries – Iran, The Russian Federation and Venezuela. In this game, Saudi Arabia started playing against The United States. In order to struggle against America, Saudi Arabia came to the policy of “low oil price” in order to bring down a blossom of shale oil starting from 2014 and put pressure on The United States economy as well. In this tricky game, the Saudis have played simultaneously against all, including The Russian Federation.
Now let’s take a look at graph and analyze how the oil price changed over last two years. By an example, we will take Brent as a high-quality sort of oil (see graph 1)
Graph 1
Dynamics of the price of Brent 2014 – 2016
Source: ProFinanceService. Oil prices in graphs over last 2 years. 26 Mar. 2016.
As far as we can see from the graph, over the last two years starting from July 2014, the price of oil rapidly decreased because of the aforementioned factors. In June 2014, the approximate price of oil was variability in the level $112,5/bbl. By January 2016 the price roughly lowered and approached to the historical minimum – $27,59/bbl. The current price of oil on the 26th of March 2016 is $40,44.
However, over the last two months the price slightly went up. It is believed that 40 % rise in prices in the comparison with the beginning of the year is caused not by changes in supply or demand, but due to market speculations. Moreover, the government of Saudi Arabia is planning to get rid of oil dependency on this mineral and concentrate mainly on renewable sources of energy (Smith and Parkin).
It is very interesting to predict the future, because the predictions are comparatively pessimistic. In 2016 The United States will increase the extraction of oil up to 31 million barrels / per day or maybe even more. However, OPEC is not going to reduce oil extraction and The Russian Federation will not do this as well. As a forecast, I can assume that eventually the oil price will keep cutting down.
Conclusion.
In my opinion, the economy will benefit from falling oil price. As I have mentioned in the very beginning, oil is a raw material which is used to produce some kind of products such as gasoline, jet fuel, diesel, motor oil etc. I think it is a winning situation for both sides, producers and consumers. The lower price of oil, the less costs for the company to manufacture goods. Anyway companies will remain profitable regardless of low oil price (Orjiako, “Bloomberg: The impact from collapsing oil prices”). By reducing the cost of oil, consumers also receive advantages. Humans will pay less for petrol and all other products, where oil was included in the process of production; transportation and energy costs will be decreased as well. Even such directly related to oil production industry sphere as Petrochemistry will gain preferences.
As a consequence, both sides could either spend their money on paying their debts or bills, making investments or saving cash for the family. However, you should not expect a positive effect of falling oil prices immediately. But it will definitely manifest itself in the future.
Work cited
Zaycman, Rami. “Oil, petrol and your pocket”. Online video clip. YouTube. YouTube, 8 Dec 2015. Web. 26 Mar. 2016
O'Sullivan, Arthur “Microeconomics: Supply and Demand”. Web, n.d. 26 March 2016.
ProFinanceService. Oil prices in graphs. Web, 26 Mar. 2016.
Smith, Grant and Brian Parkin “Saudi Arabia's Oil Chief Prepares for a World After Fossil Fuels”. Bloomberg Business: no page. Web, 17 Mar. 2016.
Orjiako, A.B.C. “The impact from collapsing oil prices A.B.C.” Online video clip. Bloomberg. Bloomberg, 21 Mar. 2016. Web. 21 Mar. 2016.
