The effects of falling oil prices

The Brookings Institution reports that the recent drop in global oil prices could not have come at a worse time for the US oil producers, who have been advocating for the US to lift the long time ban on oil exports, which has been in place since 1975.

According to the Brookings Energy Security Initiative’s research on the issue, if the ban were to be lifted immediately, the US could be exporting 1.7 million – 2.5 million bpd by 2015. With the market in such a weak position and demand falling, adding as much as 2.5 million bpd to the world market would significantly drive down both crude oil and petroleum product prices.

While beneficial to consumers in the near term, the effect on crude prices will only add to the current market turmoil and a further downward spiral in crude prices. Furthermore, with many unconventional oil wells also producing natural gas, to the extent that oil prices fall below US$ 60/bbl, some natural gas production could also be affected.

However, Brookings accentuates that the further crude oil prices fall in the near term, the faster they may rebound, as low prices become the engine that leads to a resumption of demand and world economic growth. The fall in oil prices will have various effects on different countries, but the magnitude is often overstated.

That having been said, countries that produce at a high cost with large populations, subsidised consumer prices and various political constraints, such as Iran (sanctions), Indonesia (falling energy exports), Iraq (political turmoil), Nigeria (political instability and falling exports) and Venezuela (a collapsed economy in need of high export prices) will be thrown into turmoil.

Fearful of low prices, Venezuela recently tried and failed to call an emergency meeting of OPEC to discuss the situation. Charles K. Ebinger of Brookings suggests that the prospect of series social upheaval cannot be rule out given the already fragile nature of these regimes. However, large oil importing countries such as China, India, Brazil, Japan, and South Korea stand to benefit from falling oil prices.

OPEC is to meet in November; efforts to reverse the oil price slide will be top of the agenda. But while the Saudis may be willing to cut production if all other OPEC members also agree to substantial cuts, the prospects for an agreement are slim to none, given their individual internal political realities and revenue needs.

Ebinger concludes: ‘As a long term observer of the oil market, I have seen this game played out in various manifestations over the last 40 years. We are clearly in for a wild ride; buckle your seatbelts’.

Adapted from a report by Emma McAleavey.

Read the article online at: https://www.hydrocarbonengineering.com/gas-processing/20102014/world-oil-demand-1452/