The markets were surprised to see that OPEC decided to stay put to its current production levels of 30 million barrels a day. Regardless of what the main stream media reports that there continues to be a disconnect between the OPEC members and non-OPEC members, namely Iran, Russia, Venezuela, if history teaches us something, then it has to be the fact that being the grand old daddy of conventional energy, OPEC’s moves are more of strategic, thinking in the long term rather than looking to address the short term issues at hand. Although some of the oil producing nations will have to bear the brunt of falling crude oil prices, which in turn tends to have a negative effect on the nation’s budget deficits. Russia for example is being widely touted to experience a major shortfall, having priced crude oil around $100 during its latest budget preparation.
Of the many reasons for falling Crude Oil prices, the one reason that stands out in current times has to be growth of the rise of shale oil production in the US. Known as fracturing or fracking, the growth of the domestic crude oil production companies has definitely ensured that the world’s largest economy rely less on Crude oil imports.
It is widely estimates that the average cost of production for one barrel of crude oil costs approximately between $55 – $70 according to a Reuters report, way back in 2012. With prices trading well below the $70 handle, it is anyone’s guess as to who will blink first.
Secondly, cheaper fuel prices could also see the market share improve as reliance on green energy, which is often plagued with huge start up costs could see the demand continue to work in the favor of OPEC.
However, the downside to this game of bluff comes from the short term risks posed by falling crude oil prices. Although the behemoths such as Saudi Arabia and Kuwait and other Middle-East countries enjoy lower cost of production and have enough reserves to buffer the short term slump, it does come at an expensive cost to other Oil producing nations, especially in the Northern Sea where it is estimates that cost of production is very high in comparison.
Should Crude oil prices continue to fall, we could possibly see the US shale oil companies start to consolidate their high cost business in an effort to at the very least break-even. It is therefore not surprising to hear comments, the most recent coming from Leonid Fedun who calls the ‘US Shale oil’ similar to the dot-com bubble. For the moment however, the shale oil companies do have some time considering the past month’s crude oil futures contracts were trading at a higher price in comparison to the current slump. But this might change once we step into Q1 of 2015 and beyond which is when the falling prices will start to hurt and potentially weed out the weaker players in the game.
For the moment however, the falling crude oil prices would see a potential rebound in the global economy’s GDP according to the IMF, which should help most consumer nations to find help from the falling prices, but at the cost of producer nations where the GDP is likely to take a hit. Another factor to bear in mind is inflation. Cheaper oil tends to result in lower prices as the cost of transportation falls dramatically and thus tends to make goods and produce cheaper. For struggling economies such as the Eurozone, this would mean an additional downside pressure on inflation, which isn’t quite welcome at a time when the region is struggling with stagflation.
No matter what, it seems quite clear that this is not the end but rather the start of a new beginning and of course, the question that everyone will be asking is who will blink first. To learn more about the impact of crude oil prices, this article gives a regional tour.
