As Oil Prices Fall, Who
Wins And Who Loses?
by Greg Myre
October 16, 201412:26 PM
ET (npr.org)
Saudi Arabia's oil
minister, Ali Al-Naimi, shown in Kuwait last month, has played down the drop in
oil prices. The country continues to pump oil at high levels, saying it wants
to preserve its market share. But this has also contributed to a 25 percent
drop in oil prices since June.
With oil around $85 a
barrel and tumbling to its lowest levels in several years, here's the upside:
Gasoline prices are down, the U.S. is feeling less dependent on foreign crude,
and serious economic pressure is growing on oil producers such as Iran and
Russia.
Here's the downside: The
low demand for oil reflects a fragile global economy that's vulnerable to
additional shocks, like falling stock markets around the world.
Oil is still a uniquely
influential commodity. Whenever prices move sharply in either direction, they
unleash ripples around the globe that are both economic and political.
"We've had a
three-year period of very stable oil prices," Michael Levi of the Council
on Foreign Relations told NPR's All Things Considered.
"Three years is a long time. People were starting to believe that this was
permanent. And they were wrong. So the big news is that volatility is back,
that big swings are what we should expect."
With the prices down
around 25 percent since hitting $112 a barrel in June, here's a roundup of the
impact worldwide:
Political Turmoil,
Falling Prices: Something strange is
happening. Three key oil producers (Iraq, Libya and Nigeria) are mired in
domestic turbulence, and Iran's oil exports have been dramatically reduced by
international sanctions.
In years past, trouble
in these countries might have instigated panic in the oil market, driving up
prices dramatically. But today, there's plenty of oil to go around for several
reasons. Production in the United States is surging, Saudi Arabia and other
OPEC countries have continued to pump at high levels, and overall global demand
is weak.
While these conditions
may not last, they do reflect what's been the steady loss of clout among big
oil producers, particularly those in the Middle East.
The U.S. is producing
more of its own oil and is buying the remainder from a wide range of mostly
stable countries. The leading foreign supplier is Canada. Middle Eastern
nations account for just three of the top 10 exporters to the
U.S., and they account for around 10 percent of U.S. oil needs.
Russia's Lukoil launched
this oil field in western Siberia on Oct. 8. Russia is heavily dependent on its
oil exports and is now facing financial problems as world oil prices drop
sharply. The country is also facing Western economic sanctions.
Russia And Iran: From the U.S. perspective, one of
the benefits of falling oil prices is the pressure they place on Russia and
Iran. Both countries are heavily dependent on oil exports at high prices. They
face the double whammy of Western sanctions that are also biting.
Russia needs an oil
price of $100 a barrel and Iran needs around $130 a barrel to balance their
budgets, according to The Economist.
The financial hurt these
countries are facing could have political implications.
Russia is at odds with
the West over its annexation of Crimea and its ongoing role in Ukraine's
turmoil. Russian President Vladimir Putin has
consistently opted for confrontation, but the price for that position is
getting steeper. Putin pushed back against a request for higher government
spending this week, citing reduced government revenue from energy production.
"You know that
energy prices have fallen as well as for some of our other traditional
products," Putin said. "Due to that, would we not, on the contrary,
reconsider the budget toward reducing some spending?"
Iran, meanwhile, is
negotiating on its nuclear program with the international community and is also
waging a proxy war with Saudi Arabia for power and influence throughout the
Middle East.
This is one likely
reason the Saudis have been willing to pump oil at high levels even though that's
contributing to low prices. The Saudis publicly cite a business motive, saying
they want to maintain their current share of the oil market. But the Saudis are
also well aware that low prices mean less money for archrival Iran
Oil wells near
McKittrick, Calif., one of the places where hydraulic fracturing, or fracking,
is on the rise. The U.S. became the world's largest oil producer this year,
surpassing Saudi Arabia and pumping some 11 million barrels a day.
U.S. Production: Despite soft demand, U.S. oil production is
rising again this year due primarily to hydraulic fracturing, or fracking. The
U.S., which became the world's largest natural gas producer in 2010, is now the world's largest oil
producer this year, surpassing Saudi Arabia this year and pumping
around 11 million barrels a day.
The average U.S. gas
price is $3.17 a gallon this week, down around 15 percent since June, according
to GasBuddy.com. The lower price at the pump
effectively serves as a stimulus for consumers that can encourage increased
spending to stimulate the economy.
"It's quite
possible that Christmas shopping will be much better this year because
consumers will be spending less for gasoline," economist Philip Verleger
told NPR's Morning Edition.
While lower energy
prices benefit most of the country, they could deliver a blow to oil-producing
states like Texas, Oklahoma and North Dakota. If prices go down and stay down
for an extended period, energy companies could cut back on production and
investment.
Rolando T. Dy, Ph.D.
Professor
School of Management
Executive Director
Center for Food and Agri Business
University of Asia and the Pacific
Pearl Drive, Ortigas Center
Pasig City, Philippines 1605
Tel: +632 634 2819
Fax: +632 633 8349
Email: rolando.dy@uap.asia
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