As the fall in oil prices affects all of us, I thought I
should study more about it.The information I am giving below is culled and rewritten from an article I have read about falling oil prices.
should study more about it.The information I am giving below is culled and rewritten from an article I have read about falling oil prices.
A falling oil price is beneficial for the World consumer and beneficial for the World economy. Transport costs feed into the price of every physical product, so if oil gets cheaper, everything gets cheaper.
The present fall in oil prices has a lot do with the growth of the shale oil industry in the US.
Coupled to the shale oil boom, the fall of industrial output in China coupled with a downturn of the European economy have also pulled down the oil prices. Also the recent return to production of Algeria, Libya, Iraq and Iran has abetted the fall.
Shale Oil is produced from the Oil Shale rock which is rich in organic compounds. It is estimated by Geologists that Oil Shale all over the world has the capacity to produce 5 trillion barrels of crude oil. However, the crude that can be made from oil shale economically is estimated only at 1 trillion barrels.
Comparatively the known crude oil reserves in the world are 1.33 trillion barrels. Thus shale oil can be a severe threat to the OPEC countries which produce the bulk of the oil in the world and thereby control its price.
A large bulk of the oil shale deposits is in the USA which accounts for 67% of the total oil shale in the world. USA, Russia and Brazil together account for 86% of the shale world oil shale reserves.
If the oil price falls too far, the USA's recent shale oil boom will come to an end. The approximate average price for producing shale oil is around 80 USD per barrel, but there are a few deposits in the US that cost around USD 53 dollars a barrel.
Before the shale oil boom which made the US the largest producer of crude oil outstripping both Saudi Arabia and Russia, the OPEC countries were going in for production cuts to increase oil prices. However, the shale oil has made this unworkable. So the OPEC countries now want the shale oil industry to become uneconomical and go bankrupt while they protect their economies with their financial reserves.
Saudi Arabia has changed its policy. It increased its production in September 2014 and not only fails to support the current price but seems to be actively pricing its sales to drag the global price of oil down. The country is now selling at a price lower than the level it needs to maintain state spending. It is dipping into reserves to enable it to undercut its rivals. The OPEC alliance has split and old rivalries in the Middle East are driving the current fall in oil prices.
The oil price is currently around USD 52 per barrel. It is to be seen how far the oil prices would dip before they stabilize. But a fall below USD 50 looks unlikely considering the cost of production of the cheapest shale oil in the US.
