7 January 2015 - 09:38
  • News ID: 232396
Price War Has No Winner

TEHRAN Jan 07 (Shana)--OPEC members are not the only countries that the falling oil prices will inflict damage on their economies but the U.S and European countries are expected to have hard days ahead as well.

While OPEC has decided not to cut its production and Non-OPEC producers keep raising their output, the price of oil has hit its lowest level in five years.

Figures released by IEA show that world oil demand will edge down to 92.56 million barrels per day during the first quarter of 2015 and if world oil supply it to continue at the current level of 93.22 million barrels per day, the market will face 660 thousand barrels surplus per day.

Provided that the IEA maintains its forecast unchanged, world oil demand over the second, third and fourth quarters of 2015 is estimated to hit respectively 92.71, 94.18 and 94.71 million barrels per day implying that in case of maintaining the current level of production, the market will face shortage of 0.96 and 1.42 million barrels of oil per day.

In the meantime, it is noticeable that despite maintaining production unchanged by most members of OPEC, some oil producing countries including Russia and Iraq have continued pumping more oil and at the same time the U.S has renounced banning oil supply beyond its borders which have put more pressure on falling oil prices.

So, while raising oil production by Russia and Iraq has boosted overhang in the market on the one hand and economic slowdown in a number of countries has lowered demand on the other hand, oil prices are expected to plunge more and more reaching 40 to 45 dollars which in itself will put more pressure on cost-effectiveness of tight oil projects, leading to falling investments in oil industry projects across the globe.

The downward trend of falling oil prices is projected to result in falling the price of fuel, energy and consumer commodities. Similarly we should keep in mind that falling oil prices will be followed by the fall of revenues in oil exporting countries, cutting excise duties on oil products in the oil importing countries and lower level of international trade.

For example falling oil prices from 100 to 40 dollars will be followed by:
-Oil revenues in A country, as an oil exporting country, will plunge from 100 billion dollars to 40 billion dollars. These developments could reduce budget revenues and available funds for investment in the A country leading to resorting to tight economic policies by the country.

We should also take into account that falling oil prices will follow by falling gas prices, falling foreign exchange and tax incomes as well and more pressure on budget earnings reducing welfare and social services as well as investment.

-In B country, as an oil importing country, the revenues the government makes mainly through excise duties on fuel consumption will fall to a great extent. This change leads in itself to disequilibrium in budget and result in some problems in providing social security and welfare in the country.

For example falling oil prices by sixty percent will lead to falling excise duties on selling gasoline by similar percentage point.

To prove this, it should be noticed that in 2010, 28 members of EU earned 250 billion dollars through excise and duties on fuel which is forecast to come down to 150 billion dollars after falling oil prices now.  

The same is true on excise duties on petrochemical products and other oil derivatives not only in EU but in the U.S. which should be compensated by raising tax on other products and services.

It seems raising taxes on other services and products won’t be able to make up for the falling revenues these countries used to collect and consider in their budget once oil prices were between 100 to 120 dollars. The sequence of falling oil prices and its impact on the chain of oil derivatives makes total economy of oil exporting and oil importing countries smaller and smaller and reduces the excise duties and taxes the governments could earn from exports accordingly. Consequently, a smaller world economy will reduce demand for oil as well as demand for industrialized countries’ products and shrinking financial markets.   

We could see now the consequences of falling oil prices in developments of financial markets. The wave of pressure on the oil producing countries, economic slowdown and budget deficit will hit the economies of the industrial countries and in a closed circle, the problems will swing from one side of the spectrum to the other side.

In these circumstances, tight oil projects will experience higher risks for investment and regarding lower level of available funds which is the result of smaller markets,  some banks will find no way but to quit the markets which in turn will jeopardize availability of enough resources for investment.  

One solution to get rid of this situation is reaching a deal between conventional and non-conventional oil producers so that they commit themselves to quota and comply with it. Otherwise, OPEC countries won’t be the only countries that will suffer from falling oil prices but the U.S and EU will inflict losses as well.

To this end, the U.S has decided to abandon bans on oil exports because oversupply in domestic market of the country has put downward pressures on fuel prices which in turn will lead to some challenges in setting federal budget in the future.

Now the U.S is waiting to force OPEC and conventional oil producers to cede their market share before it has to abandon its own shale oil projects.

But the question is that how far OPEC and conventional oil producers should retreat and shale oil advances? For example, doses cutting oil production by OPEC by 2 mb/d is a right solution or it should repeat cutting the same amount after several months and continue the process until it loses its market share?

By Peyman Jounobi
News ID 232396

Your Comment

You are replying to: .
0 + 0 =