What are the reasons for the recent drop of the oil prices? (via Behold Israel) BY WATCHING PETROL PRICES PLUMMETING AT GAS STATIONS ARE WE WATCHING AN INVISIBLE WAR GOING ON? First, demand is low because of weak economic activity, increased efficiency, and a growing switch away from oil to other fuels. Second, turmoil in Iraq and Libya—two big oil producers with nearly 4m barrels a day combined—has not affected their output. The market is more sanguine about geopolitical risk. Thirdly, America has become the world’s largest oil producer. Though it does not export crude oil, it now imports much less, creating a lot of spare supply. Finally, the Saudis and their Gulf allies have decided not to sacrifice their own market share to restore the price. They could curb production sharply, but the main benefits would go to countries they detest such as Iran and Russia. Saudi Arabia can tolerate lower oil prices quite easily. It has $900 billion in reserves. Its own oil costs very little (around $5-6 per barrel) to get out of the ground. We don’t have to look too far back in history to see Saudi Arabia, the world’s largest oil exporter and producer, using the oil price to achieve its foreign policy objectives. In 1973, Egyptian President Anwar Sadat convinced Saudi King Faisal to cut production and raise prices, then to go as far as embargoing oil exports, all with the goal of punishing the United States for supporting Israel against the Arab states. It worked. The “oil price shock” quadrupled prices. It happened again in 1986, when Saudi Arabia-led OPEC allowed prices to drop precipitously, and then in 1990, when the Saudis sent prices plummeting as a way of taking out Russia, which was seen as a threat to their oil supremacy. In 1998, they succeeded. When the oil price was halved from $25 to $12, Russia defaulted on its debt. The Saudis and other OPEC members have, of course, used the oil price for the obverse effect, that is, suppressing production to keep prices artificially high and member states swimming in “petrodollars”. In 2008, oil peaked at $147 a barrel. As has been noted, Saudi Arabia’s manipulation of the oil price has twice targeted Russia. This time, the effects of a low price have hit Moscow especially hard due to sanctions already in place combined with the low ruble. Last week, in an effort to defend its currency, the Bank of Russia raised interest rates to 17%. The measure failed, with the ruble dropping another 20% leading to speculation the country could impose capital controls. Meanwhile, Putin took the opportunity in his annual televised address to announce that while the economy is likely to suffer for the next two years and that Russians should brace for a recession, “Our economy will get diversified and oil prices will go back up.” Russia’s situation is getting the most attention these days. The country is hugely dependent on oil and gas production — with oil revenues making up 45% of the government budget — and the sharp fall on prices has been ruinous. Economists now estimate that Russia’s GDP will shrink at least 4.5% in 2015 if oil stayed at $60 per barrel. The plunging price of oil has also caused the ruble’s value to collapse — which is leading to panic inside Russia and a rise in inflation, as imports become drastically more expensive. Many Russians, worried that their savings may vanish, are rushing out to buy cars and washing machines — anything that has more lasting value than currency. So far, Russia’s central bank has been struggling to deal with this crisis. On December 15, the country suddenly hiked interest rates from 10.5% to 17% in an attempt to stop people from selling off rubles. But the ruble kept declining anyway and the rate hikes are likely to slow the country’s economy down even further. Iran: Iran’s economy had recently started to rebound after years of recession. The International Monetary Fund had been projecting that the country was on track to grow 2.3% next year. But that was all before oil prices started to plunge — a potentially precarious situation for the country. One big problem for Iran is that it also needs oil prices well north of $100 per barrel to balance its budget, especially since Western sanctions have made it much harder to export crude. If oil prices keep falling, the Iranian government may need to make up revenues elsewhere — say, by paring back domestic fuel subsidies (always an unpopular move, at least in the short term).
Posted on: Wed, 31 Dec 2014 10:03:08 +0000
Trending Topics
Recently Viewed Topics
© 2015