Article Summary
The world has seen unprecedented fall in the price of crude oil in the last two years. The fall in the price has been triggered from both demand and supply sides. On the demand side, the move towards more energy efficient vehicles or towards electric cars which are less polluting, have played a big role in reducing the demand for gasoline. The increased investment in research and development for oil exploration has resulted in the discovery of more oil reserves. The US Shale production and discovery of oil reserves in Canada has increased present and potential supply of crude in the world market . The combined effect of lower demand and higher supply has resulted in the plunge in the oil prices in recent times.
Surprisingly, the OPEC has not taken steps to rein in this falling trend in the price. It has in fact decided that the member nations keep the oil supply at the same level. This decision has been seen as Saudi Arabia’s intention to deliberately keep the oil prices low and falling. Saudi Arabia has prominent position in the OPEC. It has utilized this position to bring down the oil prices to make some oil producing countries buckle under pressure. Its primary target has been Iran which has a high production cost. But it also has an eye on shale production. Saudi Arabia expects price of oil to fall to such a level so that Shale is forced to move out of market. It is believed that a price lower than $70 a barrel will make Shale unable to carry on its oil explorations . Another potential competitor that Saudi Arabia intends to keep at Bay is Canada which is believed to have the world’s third largest oil reserves. Even if Saudi Arabia is unable to shut down shale it will be able to curb the potential supplies from Calgary, Canada which has a higher production cost than Shale.
In the figure below we represent the situation in the market for crude in the world. The increase in supply has been shown by a rightward shift in the supply curve from S0 to S1. The leftward shifts in the demand curve from D0 to D1shows the decline in demand. As a result the price falls from P0 to P1 .
S1
P0
P1 D0
D1
Q
Works Cited
Denning, Liam. "Saudi Arabia Versus Shale and Sand." The Wall Street Journal 19 October 2014. English.
Varian, Hal R. Intermediate Microeconomics A Modern Approach. 8th. New York: W. W. Norton & Company, 2010.
