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Good or Bad? What Does Low Oil Prices Really Mean?
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Unprecedented fall in the price of oil

During the past two years we have seen oil prices ranging from 120 dollars per barrel to recently as low as 28 dollars per barrel. January 2016 and oil prices are around 30 dollars per barrel, having dropped steadily over the previous 18 month period from 115 dollars. The previous 3 years to this oil prices had held steady around 100 dollars per barrel.

crude oil prices

But despite low oil prices meaning cheaper petrol at the pump for UK consumers, does this slash in prices necessarily mean good savings in the long run?

Oil has long been a large-scale global commodity, where oil-rich nations such as Saudi Arabia have relied heavily on liquid gold to fuel their economic growth in the global market. Market leaders USA, Saudi Arabia, China and Russia have enjoyed a substantial era of wealth and domination, which began to plateau in the mid 2000s. This is when analysts believe the decline in oil prices that we are seeing now, and the impact on the world economy, all began.

Why have oil prices dropped so much?

As one of the largest import/export countries in the world, a slowdown in the Chinese economic market in 2014 meant that there suddenly became less of a global demand for oil, and with Europe also facing financial issues, there was suddenly less money to spend on any commodities. This then allowed for carefully constructed power plays by two of the largest players in the oil market – Saudi Arabia and the USA.

Fracking is a relatively new form of oil extraction which sees the use of hydraulic fracturing drills to tap oil from shale formations. According to Daniel Yergin, an energy expert who recently spoke at the World Economic Forum in Davos:

"It takes $10 billion and 5 to 10 years to launch a deep-water project.  It takes $10 million and just 20 days to drill for shale".

This demonstrates how large US-based fracking players have introduced a cheaper and abundant new supply of oil, dominating the market with a product that can be produced quickly and cheaply, which the USA has copious amounts of due to lavish shale formations across the continent. Not only has the US claimed the monopoly on shale oil production, but due to its oversupply of oil, it currently imports less crude oil, further impacting the global economic market.

Saudi Arabia, on the other hand, gained a large share in the market over recent years. With added pressure from other nations such as Russia, Iraq, and now also Iran, who want to increase their market share, Saudi Arabia are refusing to cut their supply in order to boost oil prices. Rather than decrease supply, Saudi Arabia have instead lowered the price of oil by around 77%, and keep their oil taps fully open. The fear is that if the supply continues to exceed demand, the only thing left to do is sell the excess oil at an even cheaper rate, pushing oil prices down even further.

The cost of producing a barrel of oil via fracking is much more than other methods, meaning at the current low prices the fracking companies are making a loss on every barrel of oil they sell. Therefore the fracking companies are at serious risk of going out of business!

The negative effect that low oil prices is having on some industries

It isn’t just the oil industry that’s suffering due to this ambiguous fuel fiasco.  Here in the UK, the plastics reprocessing industry is being hit hard by the recent fall in oil prices, with several large recycling plants being forced to close down in the last 12 months.  Crude oil contains ethylene, a main ingredient in the manufacturer of plastics.  The lower the oil prices fall, the less recycling companies are able to charge for their plastics, leading to large UK companies such as Loop Recycling closing down – a major blow for green companies, and the UK’s stance on environmentally friendly commerce.

What could low oil prices mean for the future?

This excess in oil and its low monetary value has more far-reaching negative impacts than previously considered. The Organisation of the Petroleum Exporting companies (OPEC) warns that investment projects within the oil industry are being axed at an alarming rate. Amidst talks with Russia about the possibility of joining forces to protect founder members of OPEC, as well as Russian exportation, OPEC’s chief Abdullah al-Badri made an impassioned warning:

"It is vital that the market addresses the stock overhang".

If his advice is not heeded, further problems will almost certainly arise when the market stabilises, with the shelving of new crude oil propositions!

It is a battle of extremes then, too much oil at low prices now could mean not enough oil resulting in soaring prices in the not-so-distant future!

So what does this mean for us as UK consumers? Oil helps the world go round. Cheaper oil prices means cheaper production and transport costs, which is passed onto us not only at the fuel pumps but also in the cost of everyday products. This means we have more money to spend elsewhere, which can only be a good thing for the UK economy.

However in the long term, if Saudi Arabia manage to put the US fracking companies out of business and increases the price of oil in the future, it is us who will eventually pay the price for what has become an increasingly nebulous situation.


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