The price of oil has fallen by more than 50% since June, 2014 when it was hovering around $110 a barrel. It is now below $50. This comes after nearly five years of relatively steady price growth and supply stability. However, at the November 27th meeting of the Organisation of Petroleum Exporting Countries, which controls nearly 40% of the world market, the parties failed to reach agreement on production curbs, sending the price of oil tumbling. This continuing price decline is having a large and tageted impact not only on Middle East oil producers but on a range of American and Environmental “Most Reviled” lists. Especially hard hit are nearly all of the oil-exporting countries that generally oppose the U.S, including Russia (where the rouble has hit record lows), Nigeria, Iran and Venezuela, and many of the U.S. corporate Oil & Gas interests which deny climate change and which have spent heavily on lobbying activities to push back on environmental regulations and to influence the outcome of the last few elections, such as the Koch brothers.
Why is the price of oil falling? For this, we go to the Economist article of December 8th, entitled “Why the Oil Price is Falling” for its explanation:
The oil price is partly determined by actual supply and demand, and partly by expectation. Demand for energy is closely related to economic activity. It also spikes in the winter in the northern hemisphere, and during summers in countries which use air conditioning. Supply can be affected by weather (which prevents tankers loading) and by geopolitical upsets. If producers think the price is staying high, they invest, which after a lag boosts supply. Similarly, low prices lead to an investment drought. OPEC’s decisions shape expectations: if it curbs supply sharply, it can send prices spiking. Saudi Arabia produces nearly 10m barrels a day—a third of the OPEC total.
Four things are now affecting the picture. Demand is low because of weak economic activity, increased efficiency, and a growing switch away from oil to other fuels. Second, turmoil in Iraq and Libya—two big oil producers with nearly 4m barrels a day combined—has not affected their output. The market is more sanguine about geopolitical risk. Thirdly, America has become the world’s largest oil producer. Though it does not export crude oil, it now imports much less, creating a lot of spare supply. Finally, the Saudis and their Gulf allies have decided not to sacrifice their own market share to restore the price. They could curb production sharply, but the main benefits would go to countries they detest such as Iran and Russia. Saudi Arabia can tolerate lower oil prices quite easily. It has $900 billion in reserves. Its own oil costs very little (around $5-6 per barrel) to get out of the ground.
It is clear that this dramatic price decline is having the biggest impact on the marginal producers and highest-cost providers, which tend to be “the riskiest and most vulnerable bits of the oil industry.” These include the companies setting up fracking operations, which have come under increasing opposition and litigation from local activists and environmental organizations and many of these groups have borrowed heavily on the expectation of continuing high prices. Also severely impacted are those Western oil companies with high-capital cost projects including those involved with deep-water drilling, which is the target of much opposition and which have had to bolster their safety expenditures in the wake of the BP Gulf drilling disaster, or those considering Arctic drilling, with its rugged weather and particular access risks.
For now, the decline of oil prices has caused the greatest pain in those “rogue” countries “where the regimes are dependent on a high oil price to pay for costly foreign adventures and expensive social programmes” including Russia which is under international sanctions pressure for its invasion and meddling in Ukraine and Iran, which has been shouldering most of the financial and political burden of keeping the abusive Assad regime afloat in Syria. Those Oil and Gas producers in the U.S. that environmentalists most despise are also feeling the pinch, which suits those who oppose companies, like Chevron, Mobil, BP and the Koch Industries, entities that continue to engage in environmentally damaging activities such as shale oil extraction or fracking. Optimists hope that they get the message that there are expectations that they begin to act more responsibly regarding climate change and the need to reduce carbon emissions. Although the price reduction may well result in the increased burning of cheaply priced fuel, optimists see these price declines as the beginning of a new era of decreased demand for dirty energy and increased insistence on the use of renewable energy sources.