Tag: OPEC
Oil prices has been relatively stable hovering at $110 dollars/barrel for the past four years until the uneventful summer ( early July 2014) that saw the rapid 30% decline in prices. As of today, the price sits at $70 dollars per barrel which continues to weaken the already fragile world economic market. Austerity measures and supply/production cutbacks talks has been resonating among countries to counter and re-surge the oil prices. The falling import demand by United States; a major consumer and the onset of their domestic unconventional hydrocarbon production (hydraulic fracturing) and the decline of global demand (especially Asia) are the central ploy of the oil price fall therefore rendering the world market “over-saturated” with oil. Here are some of the effects of falling oil price on countries, investors and global market.
- OPEC: The 12 member “oil” cartel that includes Libya, Ecuador, Angola Nigeria, Saudi Arabia, Qatar, Iraq, Venezuela, United Arab Emirates, Algeria and Kuwait are center-stage players in the world oil market. They had a crucial meeting to discuss the current volatility of market and demand to supply ratio with its effects on individual incoming monetary deficits. They predictably agreed to continue with the current pace of production (30 million barrel/day) regardless of the oil price decline. OPEC Secretary-General Abdallah Salem el-Badri was quted saying “We will watch how the market will behave”. This action will further hurt the oil prices. It has been reported that a reduction of 2 million per day will increase the price per barrel. They are resilient because of the fear of losing oil market capitalization to competitors especially U.S. and Russia (although affected by NATO and/or European sanctions). They predict that OPEC will retain and win out the price war with non-OPEC competitors in the long run. OPEC produces a third of the world supply.
- United States : United States are one of the reasons why the oil prices are falling because of the boom of the “unconventional” shale hydrocarbon production on the past eight years. United States, a formerly top importer of oil and gas has sharply cut down due to the boom of shale oil. The production by United States will continue to grow regardless of oil prices. The self dependence will continue to dissociate U.S from the geopolitical instability for the Middle East and Europe thereby making the U.S oil market mutually exclusive. United Sates is well on its way to be the top hydrocarbon producer in the world but the decline in oil price will curb a positional forecast. It is well known that shale oil is roughly three times more expensive to produce than conventional means. The short term effect will make United States a relative winner over OPEC but a continual decline of oil prices will cut down shale production for oil companies to retain and/or increase profit margin.
- OPEC MEMBERS (Gulf states): Saudi Arabia, United Arab Emirates and Kuwait; de facto stalwarts that pushed for OPEC decision in retaining production supply thereby forcing United States to balk domestic shale production. They are all of one accord because they have strong monetary liquidity (combined more than $1 trillion in reserves) that could relatively support them if their economy runs into a deficit during the ongoing oil glut. Saudi Arabia; the top oil oil exporter promises other OPEC members to be patient and promises that in 6 months there will be rebound to $80-90 per barrel at the expense of United States’s reduction in shale production.
- OPEC MEMBERS (Nigeria, Iran, Iraq, Venezuela): These OPEC countries tried to push for cut in production to spike up the demand thereby increasing the oil price. This stance is accounted for their domestic budgets that cannot withstand the falling oil prices which could result in austerity measures to retain monetary value and meet its obligatory financial statues . In comparison to the Gulf states, this countries have a larger population that demands for a bigger domestic revenue from oil to run their economy (combined less than $200 billion in reserves). Nigeria has been forced this week to devalue its currency by 8% reducing Nigerian economy by $40 billion (oil revenue accounts for 80% of Nigerian spending power). In Angola, the monetary value fell about 3% since September reducing their economy by $15 billion. Venezuela currently undergoing strong inflation caused by government currency need a strong spike in oil prices to pay for its domestic welfare services. Iraq has recently recaptured some critical oil production areas from ISIS thereby cutting down ISIS sale of oil to the black markets from 70,000 barrel to 20,000 barrel a day with the aid of U.S airstrikes but are still on the cringe of suffering economic downturn. Iran (especially Ayotollah Ali Khamenei) have been open about their dismay of OPEC’s stance on continual optimal oil production especially Saudi Arabia.They accuse Saudi Arabia of using this glut as a template to further suppress the geopolitical-religious base of Shia (Iran have the most Shiate population in the world). They also point at United States for using the this economic price war to further to choke the nuclear negotiations in their favor because of the upcoming economic hardship at Iran’s horizon.
- Russia : Despite the imposed NATO sanctions and oil glut, Russia’s budget forecast is still relatively balanced. Russia; a major exporter of oil and gas which accounts for 70% of its revenue. Russian monetary value has hit record lows with respect to the euro and dollar (30% decline). It is reported that oil price decline is costing Russia roughly $100 billion a year and imposed sanctions accounts for $40 billion. Russia is currently discussing cutting down its production by 30, 000 barrel/day to offshoot the price and making budget cuts to sustain their economy.
- Asia: Asia’s countries could benefit from the declining decrease in oil price because of its increasing demand for oil as a function of high population. China, the incumbent top oil importer stands to benefit from falling oil prices but it will not offset their slowing economy. Japan could use the cheaper oil imports to suppress the current inflation. India benefits from falling oil prices by reducing its current deficit.
- Europe: Europe has been subjected to low inflation and weak growth and its fear of upcoming recession but cheaper oil could lessen such fears. Cheaper oil prices should boost the spending power of Europe’s consumers, who are still under high unemployment reins. However European Central Bank could sets it sights at inflation target at 2% due to falling oil prices.
- My forecast: OPEC will win the price war with the American shale producers because their production costs($50-70 per barrel) are too high compared to OPEC($10-20 per barrel) and OPEC will regain and restore their dominance in market shares.But the question is when? To the everyday consumer, cheaper oil means cheaper fuel prices and more savings. Stronger multinational oil companies(ExxonMobil, Shell, BP, Chevron and Total) will lose marginal market share due to falling prices in comparison to smaller American shale dependent producers (Continental resources,Anardarko, Devon energy, Newfield, Chesapeake) who are very susceptible to fall in investment, profit windfall, corporate buyout due to losses, or face dire company bankruptcy.
People have often wondered what is goes in the price at the gas pump….The image above is a simplistic economic model of gas prices…..
Crude Oil (80% of the gas price)…..The raw material that is extracted from the earth. The processes involved in this extraction accounts for the costs of the stipulated 80% share of the gas price. The price is set by the supply and demand of the global market not oil companies (their jobs deals with the technical and engineering methods in oil extraction/production).
Refining (-12% of the gas price)…..The number -12% is a rough average that goes into gas prices. The negative number is confusing because it seems that refineries are operating at a loss. That is partly true. Refineries operate on the terms of the global market….The profit made by refineries is directly proportional to the demand of petroleum and its subsidiary products. So it is very possible that cost of refining crude oil is higher than actually the profit made by refining it. The higher the stipulated above percentage, the more money the refineries make and the higher the gas prices.
Distribution and marketing (10% of the gas price)….After refining, there has to be distribution channels to reach consumers. The distribution channels include trucks and pipelines. The retailers then set the price at the gas pump accounting for the distribution costs, taxes and labor. It is important to note the gas stations are not mostly owned by ExxonMobil, Shell, Conocophilips but owned by retailers who pay some dividend to the above companies by using its name not profits.
Taxes(12% of the gas price)….. State and Federal Taxes……
It is important to note that this percentages and gas prices are subject to change due to political conflicts especially with oil producing countries, natural disasters, refineries with inadequate maintenance and finding new highly producible oil fields,
In recent weeks, the republicans nominees have pointed fingers at Obama on the increasing gas prices. Even the common man in the U.S feels that Obama literally controls the gas prices. It is comical to idealize the belief of a “a oil price switch” that is located in the white house at the disposal of use by the President. The ever fluctuating gas prices is not controlled by the President. If it is not the government, the oil companies and Wall street are pointed at; these are absolutely false accusations. The gas prices is the reflection of various factors that govern the global economy. The recent spike in the gas prices are controlled by countless factors but the prominent factors are follows:
In the U.S, there a ration of refineries that are closing down in the nationwide. The refineries are closing down because the demand of gas is at 15 year low and the supply is at a considerable equilibrium over the 15 years span. The refineries cannot over produce gas for the under-consuming public. Some refineries started to close down because the profit margin is low and sometimes make losses. The demand of fuel hgas to increase the offset the production of fuel costs. The recent dwindling demand of oil for consumption could be attributed of the financial downtown, investments on the low, decreasing consumer confidence in the market and spending.
The cost of oil distribution plays a vital role in the gas prices spikes. The cost of distribution has increased overtly beacuse of the distance factor between the refineries in the U.S. and gas pumps. The distribution have to account for the fact that refineries are closing down so they increase their prices of distributions which is constituents of the gas prices. Taxes, Distribution costs, refining costs and crude oil cost are all constituents of the actual gas price. Therefore people buying gas at the pump are paying for the costs from the above costs. The increment of the refining costs and refining costs directly affects the spike. Simply, the farther the distance from a refinery, the more expensive gas costs.
The socioeconomic state of oil producing counties play a hand in gas prices increment. There is direct relationship of a country’s political climate with the economy. A chaotic country creates an obstruction with the supply of oil to other countries causing an imbalance the supply chain. In order to accommodate this perturbed atmosphere, the rise of prices is implemented. The recent economic strain from Europe’s financial crisis(Recovering but still affects the oil markets), the bewildering Iran(major supplier) nuclear program( “If Iran is successful in its nuclear ambitions, the world and oil markets and the global economy and the stability in the region would be in jeopardy”- Secretary of Treasury, Tim Geithner), the Nigeria(major supplier) religious conflicts between Christians and Muslims( Calmed down but cause a spike during the November-PRESENT gas prices spike). These are some of the political/socioeconomic examples of the influence of the global oil supply.
OPEC indirect influence in the gas prices has played a factor in the gas prices spike. OPEC( Organisation of Petroleum Exporting Countries) is conglomerate of top producing oil supplier countries that dictates and stabilizes the world’s oil prices. It is 12 member council consisting of Nigeria, Iran, Qatar, Saudi Arabia, Venezuela Kuwait , Iran and so on and surprisingly excludes United States. They accounted for about 70% of world reserves and 40% of oil production. They makes adequate measures to stabilize the world oil markets and supply/demand fluctuations. They put the price tag on petroleum based on many political/ socioeconomic climate of the world oil suppliers, worldwide financial downturn and worldwide inflation. In general, OPEC takes ambivalent measures to reduce harmful disruptions of the world oil markets. They have been accused of playing politics and sometimes setting upsetting unfair prices to favor the member countries rather than setting a plain economic field for other countries. One notable example is the infamous “Yom Kippur War” in the early 1970’s.
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