The OPEC heavily relies on oil revenue to grow their economies. To ensure a high flow of revenue they formed a cartel to control their output so to sell crude oil at a relatively high price. However, the strength of the cartel has declined, the prices of oil have been declining, and the countries seem to lack a solution (Bowler, 1).
Reasons for Price Decline
The United States dollar has appreciated over the last few years. Currently, it is twelve years high against major currencies like the Euro. The appreciation has put markets under pressure because as the U.S dollar gets strong the value of commodities decline (Krauss, 1).
The second reason is that the organization of the petroleum exporting countries (OPEC) cartel has been unable to agree on the ways of stabilizing oil prices. The countries representatives met in the year 2014 and did not agree to cut their output so as to control prices. In the meeting, only Venezuela, Algeria, and Iran pushed for decreasing output. However, Gulf countries and Saudi Arabia are unwilling to cut their output. Saudi Arabia is against such a move because of previous betrayals by members of the cartel who went against previous agreements of cutting output to eat into the oil market of Saudi Arabia and other major producers. OPEC influence in the oil market has also declined over the years due to increased oil production in Canada and United States of America. The increased commodity supply in the market leads to an outwards shift of the supply curve. This shift creates a new equilibrium point that offers a high quantity of oil at relatively low price (Krauss, 1).
The other factor contributing to falling oil prices is the declining demand for crude oil. Some countries in Europe and developing nations are facing some economic crisis. The crisis has led to either closure of industries or decreased production. The decline in production leads to decline in demand for crude oil. Moreover, the Chines economy is facing a deep crisis. The country was ranked as the second-largest net importer of crude oil in 2009. This position improved over time and in 2013, it was the highest net importer (Bowler, 1). However, over the last few years, the country has faced some economic crises that have forced it to devalue its currency. Moreover, China is moving towards a service is driven economy from manufacturing driven economy. The structural change in the Chinese economy and the crisis it is facing has led to a substantial decline in global decline in demand for crude oil. The decline in demand for oil due to shrinking manufacturing sector causes the demand curve to shift. The shift creates a new equilibrium that is associated with low market price (Pindyck and Daniel, 14)
The Iran nuclear deal has affected the amount of oil supply in the market. The western countries and United States of America lifted some economic sanctions on Iran. This allows it to increase oil exports. Iran wishes to use this opportunity to reclaim its lost oil market from other oil producing countries. There is a general fear in the market that Iranian oil exports will increase future oil supply. These expectations of excessive future supply of oil have negatively affected the market price of crude oil. The supply of crude oil has also increased due to increase oil production in North America (Bowler, 1).
Economic Impact of Declining Oil Prices
The net importers of oil are the biggest beneficiaries of the declining oil prices. Their cost of producing goods falls when the price of energy declines. The decline in the cost of production may be passed to consumers through declining price for manufactured goods. Besides, motorists are benefiting from the decline in gasoline prices. Thus, the increased demand for cars due to decreased gasoline prices has benefited the auto manufacturers (Investopedia, 1).
The countries that mainly depend on oil revenues are negatively affected by the decline in world oil prices. For example, the Russian economy is drastically falling due to declining oil prices coupled with economic sanctions. The country has raised its interest rates to around seventeen percent to stabilize the value of Ruble. The many OPEC members are in trouble due to declining oil prices. The smaller producers are supporting the cutting of total production to save their declining revenue. However, the large producers like Saudi Arabia can produce oil at low margins and have strong foreign reserves to support their economy (Investopedia, 1).
Conclusion
The decline in the price of crude oil is attributable to several factors. Some factors like increased production from non-OPEC countries and lifting of economic sanction on Iran have led to increased supply. Other contributing factors are the appreciation of U.S dollar, economic crisis faced in Europe and China and disagreement among OPEC members to cut production. The decline in prices has benefited auto sector and consumers of manufactured goods, but the economic performance of oil producing countries have declined.
References
Bowler, Tim. "Falling Oil Prices: Who Are the Winners and Losers? - BBC News." BBC News.
19 Jan. 2015. Web. 22 Mar. 2016.
Krauss, Clifford. "Oil Prices: What’s Behind the Drop? Simple Economics." The New York
Times. The New York Times, 08 Mar. 2016. Web. 22 Mar. 2016.
Pindyck, Robert S., and Daniel L. Rubinfeld. Microeconomics. Upper Saddle River, NJ: Pearson
Prentice Hall, 2005. Print.
Investopedia. "How Much Influence Does OPEC Have on the Global Price of Oil? |
Investopedia." Investopedia. 04 Dec. 2015. Web. 22 Mar. 2016.
