As at mid January 2015, oil has dipped below the $50 mark and the slide continues unabated. After the economic meltdown of 2009, oil prices have been nearly stable around the $110 per barrel. But, 2014, particularly the last quarter has been an entirely different story for all major oil exporters around the globe.
Oil importing countries are celebrating
If high oil prices had dealt a body blow to many developing countries in the preceding couple of years, it is the oil exporting countries including the OPEC that is bearing the brunt now. Undoubtedly, the importing countries on the other hand are celebrating because for many of them it is an unexpected bonanza. The huge drop in prices can significantly impact the economy of many nations including India. The bigger question however is how long the party would last?
What caused the downtrend?
The current downward trend in oil prices is attributed to a lower global demand arising from more fuel efficient vehicles and use of alternative energy in some parts of the world. But, the major contributor to this state of affairs is the US becoming nearly self sufficient in oil. America is now on the verge of becoming a net oil exporter which is a paradigm shift from being one of the major oil importers. Yet another cause is the weak global economy, particularly in Europe that is pulling down consumption further.
More money to boost consumption
Reduced oil prices have a multiplier effect for most oil importing nations. In the first place, it puts more money in the hands of the common man and that in turn can pep up consumption. Petroleum products are used by a wide range of industries and lower crude prices can translate to lower raw material costs for these products. In turn, the end customers are expected to benefit significantly. However, the Indian business always fights shy when it comes to reducing prices and price increases come a day earlier than is essential.
Big thrust to the economy
The biggest winner from the current trend in oil prices is the Government, particularly in large nations like India. Significant reduction in import bills will have a salutary effect on the balance of payment and foreign exchange numbers.
Read More- Lower oil prices to alleviate India’s high inflation and spur economic growth: Moody’s
Are there dark clouds hovering in the horizon?
This is perhaps a million dollar question that many are asking today. Saudi Arabia sitting on $900 billion reserves can afford to fight this price war to the end. The US has made significant investments in oil production through fracking and horizontal drilling. At a point where imported oil gets cheaper than the domestic product, it can start hurting the American oil industry. For the OPEC lead by Saudi Arabia, the cost of producing oil is very low because they have recovered all their capital costs and therefore only need to bother about maintenance and operational costs. Put together, their comfort zone pegs around $10 to a barrel of oil.
Make hay while the sun shines
For the importing countries, it is the proverbial situation of making hay while the sun shines. One thing for certain however, is that there is far more to the current oil prices than a mere demand/supply imbalance and one can only hope to enjoy cheaper oil as long as the party lasts!
Let us know if you enjoyed reading the article!