The oil price has been on a downtrend and it is still on a downtrend this far. The largest producers are all grouped under the Organisation of the Oil Exporting Countries (OPEC). Thus, this group is quite powerful when it comes to dictating oil prices. For example, when the demand goes up or when there’s a war in some countries in the Middle East or even just because of speculation, the OPEC can decide to vary their production thus impacting the market and balancing the prices. While its not as straight forward all the time but when oil prices are really swinging crazily, OPEC can be a stabiliser. Recently, oil prices has been going down and it has gone down so much that it is bordering on the cost of producing the oil! Yes, the cost of oil production for some American oil producers are estimated at US$80 per barrel.
The usual cost of production is just US$30 per barrel for the Middle Eastern exporters including Saudi Arabia, Iran and Iraq. The reason is because the oil drilling in US is much more complex versus the usual pumping from conventional reserves of the Middle Eastern exporters. The current oil price? Well, it’s already at US$72.58 per barrel. In other words, if we consider that the orders for oil was 6 months in advance, it meant that the producers with a higher cost than the selling price would have to stop producing soon or lose money every time they produce and sell. Stopping totally may not be possible as fixed costs are still there. Thus, it is going to be a fine balance of survival vs bust.
What happens when many of these producers in America starts shutting down? Well, the news of supply shrinking will likely help to bolster oil price for a while. However, if we look at the demand, it is not likely to exceed the supply for many years to come. Unless of course, the supply is cut temporarily due to unforeseen circumstances. Many years ago, as soon as there are news of impending war in the Middle East, oil prices starts to rise. Today, it is still extremely unstable in Iraq with the IS but oil prices continue its downtrend. Perhaps the world has begun to understand that oil prices did not rise because of just the demand and supply but some speculators are playing their usual game of pushing it up and down to earn their profits. Let’s hope this trend may persist for a few more years. Most of the oil producers are not losing money anyway, just lower profits, that’s all. Happy driving and consuming more petrol.
written on 30 Nov 2014
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