1. The article "Oil Supply-Demand Imbalance Will Dissipate Painfully Slowly" was produced by Gaurav Sharma and published in the Forbes Magazine in August, 2015. The article seeks to explain the current supply-demand disequilibrium in the oil market analyze the causes of such significant imbalances.
The first key point discussed in this article is the tremendous oil price downturn which took place in the past year. The author suggests that despite the general and global turmoil in the commodities sphere and considerable price fluctuation in the majority of other markets, particularly in the industrial metals and precious metals markets, disequilibrium in the oil market remains one of the dominant topics of discussion and one of the most noticeable matters of concern.
Another fundamental point discussed in the article is the ever-increasing rates of oil production despite the crude demand contraction and the growing concern of oil makers. In accordance with statistical information provided by the Oil and Gas UK, "provisional data for the first six months of 2015 shows liquid production to be up around 3% and net gas production to be up around 2.5% this year, compared to the first six months of last year" (Sharma, 2015). What is more, oil production in the Great Britain in the second quarter of 2015, "looks particularly encouraging and early figures suggest that May saw the most oil and gas produced on the UK Continental Shelf since March 2012" (Sharma, 2015).
The third major point that the author makes is that the oil supply glut is not going to decrease in the nearest future. Although some analysts predict an upswing of demand in the oil market, the author makes an interesting point, "Those who thought the glut is going to dissipate in double quick time ought to think again" (Sharma, 2015).
The final fundamental point discussed in this article is the effect of external factors on the slipping of demand. "What has triggered the decline is short sellers taking their cue from the strength of the dollar and a general fear of demand slipping further following a weakening in China’s economic activity in the face of supplies holding firm" (Sharma, 2015). In other words, the current supply-demand disequilibrium in the oil market has been caused by a wide variety of internal and external factors.
2. Taking everything mentioned above into consideration, one should conclude that "the oil industry, with its history of booms and busts, is in its deepest downturn since the 1990s, if not earlier" (Krauss, 2016). A more recent article published in the New York Times magazine reveals that "earnings are down for companies that made record profits in recent years, leading them to decommission more than two-thirds of their rigs and sharply cut investment in exploration and production".
In other words, the supply-demand disequilibrium in the oil industry, discussed in the Forbes article, has a direct and negative effect on the profits of all the oil producing companies as well as on the investment attractiveness of this industry. As a result, scores of many oil producers have turned bankrupt or ceased payments. Obviously, when a company goes bankrupt, it has no recourses to pay salaries to its workers or to compensate for losses. Bankruptcy of oil companies resulted in an estimated 250,000 jobs lost in the oil industry. Therefore, the concept of Demand, Supply, and Market Equilibrium in any market has a direct impact on the unemployment rates.
3. Speaking from the perspective of the U.S. economy, it should be noted that supply-demand disequilibrium in the oil market and associated unemployment rates in the oil industry affect detrimentally the overall performance of the U.S. economy. It should come to no secret that "America's once-booming oil industry is suddenly in deep financial trouble" (Egan, 2016). Consequently, current problems in the U.S. oil industry, particularly, the immense crash in oil prices, "have wiped out tens of thousands of jobs, caused dozens of bankruptcies and spooked global financial markets" (Egan, 2016).
The supply-demand disequilibrium in the oil market has affected not only the economies of petroleum-rich states, including Texas, Oklahoma and North Dakota, " where home foreclosure rates are spiking and economic growth is slowing", but the country's economy taken as a whole (Egan, 2016).
As of today, ”in the United States, there are now virtually no wells that are profitable to drill" (Krauss, 2016). Considering that the U.S. economy is strongly affected by the supply-demand imbalance in the oil industry, the government should take effective and appropriate measures to bail out the U.S. oil industry in order to prevent the growing rates of unemployment and the overall worsening of the economy.
4. I strongly agree with the majority of points presented in the article "Oil Supply-Demand Imbalance Will Dissipate Painfully Slowly". Although it was written in August 2015, the ideas outlined in it are consistent with the reality of the oil market as of 2016. The supply-demand imbalance has not dissipated yet as the oil supply glut has not diminished. Consequently, prices have not recovered and are not likely to recover in the nearest future. Therefore, there is no exaggeration to say that the oil industry and oil producers are still in deep financial trouble.
The only point I disagree with is the statement that the actions "short sellers" may be considered as the primary reason for the current oil supply-demand imbalance. In my opinion, their effect is insignificant as compared to major macro-economic factors in the oil industry.
References
Egan, M. (2016, January 14). Is it time to bail out the U.S. oil industry? Retrieved February 26, 2016, from http://money.cnn.com/2016/01/14/investing/oil-bailout-us-washington/
Krauss, C. (2016, February 16). Oil Prices: What’s Behind the Drop? Simple Economics. Retrieved February 26, 2016, from http://www.nytimes.com/interactive/2016/business/energy-environment/oil-prices.html?_r=0
Sharma, G. (2015, August 12). Oil Supply-Demand Imbalance Will Dissipate Painfully Slowly. Retrieved February 26, 2016, from http://www.forbes.com/sites/gauravsharma/2015/08/12/oil-supply-demand-imbalance-will-dissipate-painfully-slowly/#6015d04e1d95
The Forbes Magazine
