Posts Tagged ‘oil price’

oil rigs     The global oil price has fallen 40% since June from $115 to below $60. 40% of the oil in the world is produced by the (OPEC) Organization of Petroleum Exporting countries which consist of Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, UAE and Venezuela. They have failed to come on a consensus on curbing the production limits even though the demand is low. The oil prices is determined using the demand and supply and also partly by the expectation and the demand is closely associated with the economic activity in the world. There are basically three major reasons for the slump in oil prices firstly due to low economic activity in the world, increased efficiency and switching to other fuels, secondly the countries which are in turmoil like Libya and Iraq which produce about 4m barrels a year combined has not reduced its production and thirdly the major reason is America has become the largest oil producer in the world which in turn imports very less oil so there is a lot of surplus oil in the market. The Saudis and other powerful oil producing gulf countries have decided not to sacrifice their market share to restore the prices. They can reduce the production sharply but which will benefit the countries which largely depend on oil for their economy like Iran and Russia. Saudi Arabia can tolerate lower oil prices quite easily. It has $900 billion in reserves. Its own oil costs very little to get out of the ground.  This mainly affects the most vulnerable bits of the oil industry which include American oil companies which borrowed heavily on the expectation of continuing high prices and also on high-cost projects involving drilling in arctic and other expensive oil fields like North Sea. But the greatest loss is for the countries which depend on high oil price to pay for the foreign adventures and for social programs like Russia which is hit by the western sanctions like travel ban for its officials, freezing of its assets in US and other EU countries, also transaction ban of its energy firms and its two banks and Iran which is paying Assad govt to keep its government steady.