Home / This Week / Cover Stories / Economic impact of oil price fluctuations

Economic impact of oil price fluctuations

Vast fluctuations in oil prices have played a significant role in putting economies into recession. Since 2008, oil prices have seen highs and low prices, with no prospects of a balanced path in the near future. The high values of oil prices during 2010–13 and the following prolonged downturn during 2014–16 shows that the world economy is still not stable.

The direct influence of the Organization of Petroleum Exporting Countries (OPEC) on oil prices has changed due to rising competition from US shale oil producers. Instead of defending price levels, OPEC has changed its strategy to defend market share rather than price, by producing more at low prices.

The past 15 years have witnessed interplay of all various factors, resulting in extreme oil price fluctuations. Oil prices surged during 2003-08 due to an unexpected global economic boom, especially in emerging Asian economies such as China and India, while oil producers failed to keep up with the rising demand.

Rising inventories in anticipation of increasing demand added to the existing demand pressures. Within a year, oil prices nearly doubled, reaching $113 dollars in May 2008.

The political uprising and civil wars in a few Middle Eastern countries resulted in intermittent oil supply disruptions. Oil prices reached $100 per barrel in 2010 and remained steady at $90-120 per barrel during 2011-14.

All this changed, however, when oil prices dropped over 70 percent between June 2014 and January 2016, as supply outstripped demand. New oil fields and advancing technologies in the United States enabled US oil producers to increase production.

The biggest contributor has been Saudi Arabia’s (the biggest oil producer within OPEC) unwillingness to not counter the increasing supply but instead maintain the production at historically high levels despite the perceived glut.

Its intention might have been to preserve market share at the expense of Iran and the United States, even if that meant lower prices.

Meanwhile, global growth slowed because of the economic slowdown in China; modest growth in most of the advanced economies, including the United States; and increasing uncertainty in the Eurozone leading to a steady fall in oil consumption growth by these big oil importers.

Slowing demand growth amid rising supply resulted in a sharp increase in inventories during 2014-15. By the end of January 2016, oil prices slid to $26 per barrel — the lowest level since 2003.

The magnitude and the duration of the fall in oil prices gradually started impacting revenues and investments made by the US energy companies that had borrowed heavily.

According to Deloitte MarketPoint, production will likely see a production fall of 2 million barrels per day from 2018 to 2020. Consequently, prices might increase further in the medium term.

The pace of the oil price rise will likely depend on the revival of global demand. Given the modest outlook for the US economy, rising post-Brexit uncertainty in the eurozone and the rest of the world, and considerable downside risks to China’s economy, the demand for oil may grow only moderately between 2018 and 2020.

Oil prices are expected to rebound to $58 per barrel in the next couple of years; they are unlikely to reach the previous high of $100 per barrel anytime soon.

The oil prices are vital macroeconomic variable: higher oil prices might still lead to significant damage on the economies of oil importing nations and on the world economy.

Many nations face higher inflation rates due to the rising oil prices in the world. As a consequence, the higher inflation rates have devastating impact on both production and consumers that leads to big difference between oil importing and oil exporting nations.

The fuel has become a scarce resource that forces many countries to develop alternative energies to maintain their economic activities without having any problem.

Development of millions of people living standards depend on our existing energy infrastructure. To maintain economic progress on the whole world, economic experts should reinvent the ways in which they create, distribute and utilize energy.

To overcome this technological difficulty, experts should invest in invention in energy generation. While people struggle to go for solar, wind, geothermal and related energy sources, they should reinvent their traditional sources to utilize these sources more efficiently.

Alternative energies might contribute the economies to decrease their dependency on fuel as the key energy source. Especially, oil importing countries extremely need to use other means of energy that might contribute them to deal with big economic crisis.

Oil futures rose for a fourth straight session trading at nearly 18-month highs on expectations the Organization of the Petroleum Exporting Countries (OPEC) and other major producing nations will make good on promises to cut output in this year 2017.

On the New York Mercantile Exchange, light, sweet crude futures for delivery in February CLG7, +0.32% gained 16 cents a barrel, or 0.3%, to finish at $54.06 — their highest close since July 2, 2015.

February Brent crude LCOG7, -0.14% on London’s ICE Futures exchange climbed 13 cents, or 0.2%, to $56.22 a barrel — the highest finish since July 22, 2015.

Most market participants are waiting to see if major oil producers inside and outside the Organization of the Petroleum Exporting Countries will deliver on pledges to curtail production beginning next month. The deal, if carried out as planned, should reduce global supply by about 2 percent.

Venezuela, an OPEC member whose economy has suffered greatly due to low oil prices, committed to cutting 95,000 barrels a day in line with the pact.

The World Bank announced last week that it is raising its 2017 forecast for crude oil prices to $55 per barrel from $53 per barrel. The move comes in response to a decision by the Organization of the Petroleum Exporting Countries (OPEC) to limit production after a long period of unrestrained output.

Although the World Bank recognizes that OPEC’s ability to affect oil prices will be tested by the expansion of supply from unconventional sources, such as shale producers, the organization’s latest Commodity Markets Outlook is still predicting that oil prices will jump almost 25 percent next year while natural gas and coal will follow suit.

Check Also

Kamyab Jawan key scheme for youth development

Kamyab Jawan: key scheme for youth development

The Government of Pakistan (GoP) has launched ‘Prime Minister’s Kamyab Jawan SME Lending Program’ aimed …

Leave a Reply