Oil : what price can america afford before recession ?
The Falling of Oil Price
1. The Falling of Oil Price
Since the petroleum became the major energy source there has been no other
major substitute energy resource that can provide what petroleum does to the world.
Every country on earth started searching and digging up to six miles for this natural
resource because of the value it holds. Nations would start wars for the sake of
petroleum, as we know in the second Gulf War. Oil helped poor nations develop very fast
and went from nothing to become one of the most advanced countries in the world. Our
daily lives will not be the same without oil and most of the products we use in a daily
base will vanish; from our bed sheets to the roads we drive our cars on and the list keep
on beyond that. Even when all the technological advances towards eco-friendly resources
of energy, a study done by the organization of the petroleum exporting countries (OPEC)
shows that the petroleum will remain the major energy resource of the 21st century
(Yusgiantoro, 2004). Since petroleum is the most valuable commodity in our generation
any price fluctuation will affect the entire world. in this article will touch on many
aspects regarding the oil price drop; however, it will focus more on Saudi Arabia.
Like any other commodity the petroleum price always been fluctuating. It is not a
fixed price. However, the oil prices been fluctuating more than every in the two decades.
In the last two decades the oil prices is been on the rise due to the high demand from the
fast growth of some countries like India. We always can relate to the price fluctuation to
an event in one part of the world like when the oil price rose up during the invasion of
Iraq in 2003.
2. The graph on the top is from Macrotrends.com and it shows the oil price from the last ten
years. The highlighted area is the economical recession that begun in 2008. As we see
from the graph the barrel price drop in 2008 is the steepest in the last 10 years mainly due
to the decreased oil demand in the united state of America. The oil price drop in the 2014
is not as steep as the 2008 price drop; however, the barrel price went below $40 the
lowest since November 2001 where the barrel price was about $25.
According to Tim Bowler a business reporter at BBC, There are few reasons why
the oil prices drop significantly in 2014. One of the main reasons is the slow growth of
growing countries like China and India in the last couple of years, whereas China and
India are the largest two countries in term of population. Another reason for the oil drop
is the increased oil exporting in some countries like Canada and Iraq, which flood the
market with oil. The last reason I want to mention is the oil production in the united state
increased significantly in the last several years, and their demand for importing oil
deceased as the oil production increased on the other hand. New technology made
3. extracting oil from shale formation cheaper than ever. This let the oil companies in the
united state to produce oil even more and the technology they currently use is known as
fracking. All of these reasons made the oil drop possible in 2014. However, even after the
high oil price drop many oil production countries like Saudi Arabia kept the high oil
production to drop the prices down even further to a point its no longer a profitable to
extract oil from the shale formation. The low prices will have a slightly impact on some
countries in the organization of petroleum exporting countries since they can produce oil
at very low price, however, countries like Venezuela (OPEC member) is now suffering
from the low oil price. One reason people might argue about is that many countries buy
oil from ISIS or what is known as the Islamic State of Iraq and the Levant in the black
market. ISIS control oil fields in Iraq and Syria and selling oil to other countries is one of
the most effective why the use to generate money. ISIS sells oil barrels way cheaper than
any other country. However, it is hard to know the countries that purchase oil from ISIS
and no country want to admit they do.
There will always be both winners and losers for oil price increase or decease.
These fluctuations in price not only affect how countries and company operate but even
normal people in these countries. In 2014, I was studying in the united state when the oil
price drop happened. In the early 2014 I used to pay around $45-$55 to fill my car tank.
After that, the oil price dropped significantly and in 2015 I used to pay around $30
instead of $45-$50. Even though, I saved $15 every time I filled up my tank I had mix
feeling about it since I know every $1 decrease in oil price will affect my country-Saudi
Arabia- in all ways.
4. One of the biggest losers in the oil price drop is Russia, since about %70 of the
country’s export income comes from oil exportation according to “Winners and losers”
article in the Economist. Russia these days suffer hardly due to the low oil price and the
Russia foreign policy make it even worse with the Russian interference in Ukraine and
Syria. Also, as the business reporter Tim Bowler mentioned in one of his articles that
Russia lose about two billion dollar in revenue for every dollar fall. Despite the low oil
price, Russia refuses to cut production and they continue with the same high base oil
production.
Another loser in the oil price drop is Venezuela. Venezuela was in debt and
trouble even before the oil price collapse. According to an article in The Economist,
Venezuela fiscal deficit in 2013 was %17 of the country GDP and the country faced a
great inflation over %60 in the same year (winners and losers, 2014). It always strokes
me to see one of the top oil exporters in this kind of situation when the barrel price was
above $100. One of the reasons I found is the corrupted government. Corruption most be
deep in Venezuela and they need to get rid of corruption in order to develop and have a
better life standards. Iran also in the same page as the other oil exporting countries, they
are facing a great problem due to the oil price drop. In order, for Iran to be in the safe
side, they need to sell the oil barrel at price higher than $130 to cover all its financial
spending (winners and losers, 2014).
The graph below shows how much the oil price should be to balance the
government spending in 2014 and as we see all the countries listed are the top oil
5. producer’s countries. Most of the countries that I have mentioned in this article new to
sell the oil barrel at least at $100 to balance their budgets.
Going back to Saudi Arabia topic, Saudi Arabia and gulf countries are keeping the
high oil production for few reasons. First, since they produce the oil barrel at a very low
price, they want to the drop the price to a low point where it is unprofitable to some oil
producing countries like the United State. Many oil producing companies in the united
state are in bad situation these days due to the low oil prices and they having a negative
profit margin. However, since the oilrig is been dug already they cannot stop the
production. Second, to make Russia suffers even more economically, so they might cut
their interference with other countries like Ukraine and Syria. Also, by doing that Saudi
Arabia hope that Russia will stop supporting the Syrian regime. Another reason make
Saudi Arabia able to do this beside the low oil barrel cost is that they have about $700
billion in fund reserve from the past few years so they can handle the low cost for a
while. Therefore, Saudi Arabia still hopes that in the long run the oil price goes up to
about $100 a barrel.
6. Saudi Arabia also will not reliant on oil by 2030 as the deputy crown prince
Mohammed bin Salman mentioned during an interview with Bloomberg by setting a
mega-fund of two trillion dollar. The plan will be to transfer Saudi Arabia economy
within the next 13 years. This fund is enough to buy the top four companies in the world
and Saudi would still have excess money left. Also, the deputy crown prince Mohammed
bin Salman on April 25, 2016 had a long interview with Alarabiya TV and talked about
the vision of Saudi Arabia in 2030. One of the things the prince mentioned is how Saudi
Arabia will reduce the role of oil in Saudi Arabia economy and GDP. Saudi Arabia will
increase the share of nonoil exports in nonoil GDP from %17 to %50 by 2030. The As a
Saudi Arabian citizen myself I am looking forward to the future of Saudi Arabia and I am
hoping the I will be a change maker to achieve this dream that all the Saudi Arabia
citizens been dreaming of for a while. I hope this article help many people understand the
oil industry more, where Saudi Arabia currently stands and what is the potential future
for Saudi Arabia.
7. Citation work:
Micklethwait, John, Glen Carey, Alaa Shahine, and Matthew Martin. "Saudi Arabia Plans $2
Trillion Megafund for Post-Oil Era: Deputy Crown Prince." Bloomberg.com. Bloomberg, 01
Apr. 2016. Web. 27 Apr. 2016.
Bowler, Tim. "Falling Oil Prices: Who Are the Winners and Losers?" BBC News. BBC News,
19 Jan. 2015. Web. 27 Apr. 2016.
"Winners and Losers." The Economist. The Economist Newspaper, 25 Oct. 2014. Web. 27
Apr. 2016.
Yusgiantoro, Purnomo. "Petroleum Will Still Be the Major Energy Resource in the 21st
Century." OPEC :. N.p., 20 Oct. 2004. Web. 27 Apr. 2016.
"Crude Oil Prices - 70 Year Historical Chart." MacroTrends. N.p., 27 Apr. 2016. Web. 27
Apr. 2016.