Monthly Archives: December 2014

The Collapse of Oil Price

After around 5 years of stability in the market of oil, the prices have been on a drastic decline, dropping roughly 40% in cost, since June. In the time period of about 6 months, the price of a barrel of oil dropped from $115 to below $70 and continues to decrease!

The price of oil is configured by three main factors: demand, supply and expectation. Demand is arguably the most significant factor in the price of all, because if there is high demand of something, more of it is supplied and the expectations are raised.

However, all of these factors can be upset or affected easily; for example, the levels of demand can vary, depending on economical statuses, the time of year, as more energy is used in the winter, due to it being cold and heating being required.

Supply on the other hand, relies on the demand, but also is affected by the weather. There is also a limited supply of oil and in the long future, as there becomes less of it, it will become more valuable.

The reason why the price of oil is currently collapsing, is because there is weak economic activity, more alternative and efficient ways are being discovered to create energy, like shale oil, which are sedimentary rocks. Also, factors such as restricted trading and political issues are also contributing towards to collapse of oil price.

Firstly, Iraq and Libya, two large oil producers, producing over 4 million barrels a day combined, are not safe to trade with, because of risk due to terrorism and political instability. Furthermore, the Saudi Arabians, along with several other countries located near them, have refused to sacrifice their own market share to restore the price.

This is a big issue, because combined, they produce about a third of all oil produced in the world. Their reasoning for this is that some countries that they particularly hate, such as Russia, would benefit from this the most, as they rely on a high oil price to pay for costly foreign adventures and other things. Besides, Saudi Arabia has over $900 billion worth of oil reserves and it is cheap for them to get it out of the ground, so they wouldn’t be too negatively affected by lowered oil prices.

Overall, countries which are reliant on large amounts of oil to carry out foreign advantages, such as Russia and Iran, will suffer the worst from this. Also, western oil companies which have made big investments and have high-cost projects under way are being negatively affected.

However, the Saudi Arabians and their gulf allies benefit quite well from the drop of oil price, due to their mass reserves. The Chinese also have a massive influence in the change of oil price, as they are one of the biggest oil importing countries in the world and have many overhanging investments in the industry of oil.

Nevertheless, they are starting a big project to extract 30 billion cubic centimeters worth of shale oil from their own land, believed to be one of the biggest shale oil resources in the world. As a result, they needn’t to worry about the drop in oil prices at all.