KM #3 : So the economics of oil have changed off lately. International Oil markets has not been doing a very good job. In June this year the price of a barrel of oil, then almost $115, began to slide, it now stands close to $65. This near-40% plunge is thanks partly to the sluggish world economy, which is consuming less oil than markets had anticipated, and partly to OPEC(Organization of the Petroleum Exporting Countries) itself, which has produced more than markets expected. But the main culprits are the oilmen of North Dakota and Texas. Over the past four years, as the price hovered around $110 a barrel, they have set about extracting oil from shale formations previously considered unviable. Fracking, in which a mixture of water, sand and chemicals is injected into shale formations to release oil, is a relatively young technology, and it is still making big gains in efficiency. Due to their manic drilling—they have completed perhaps 20,000 new wells since 2010, more than ten times Saudi Arabia’s tally—has boosted America’s oil production by a third, to nearly 9m barrels a day (b/d). That is just 1m b/d short of Saudi Arabia’s output. The contest between the shalemen and the sheikhs has tipped the world from a shortage of oil to a surplus. This shake-out will be painful. But in the long run the shale industry’s future seems assured. Cheaper oil should act like a shot of adrenalin to global growth. A $40 price cut shifts some $1.3 trillion from producers to consumers. Big importing countries such as the Euro area, India, Japan and Turkey are enjoying especially big windfalls. Oil-producing countries whose budgets depend on high prices are in particular trouble. The rouble tumbled this week as Russia’s prospects darkened further. Nigeria has been forced to raise interest rates and devalue the naira. Venezuela looks ever closer to defaulting on its debt. The spectre of defaults and the speed and scale of the price plunge have unnerved financial markets. But the overall economic effect of cheaper oil is clearly positive. It is estimated that this reduction in fuel price globally will boost cheaper airfares across the world in 2015. Airlines accross the globe will see 39% increase in their profit by early next year due to cut in fuel cost resulting in lower airfare for the consumers which in turn will increase tourism across the globe and boosting the economy for countries. Emirates airline has estimated to increase their profit by 56% due to this change in oil price which is about 1.4billion dollars. Oil and finance have proved themselves the only two industries able to tip the world into recession. At least one of them should in future be a bit more stable. Lets hope for the best!
Posted on: Thu, 11 Dec 2014 06:59:37 +0000
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