Why is the Oil Price falling and whats the Global and Local Response ? - Nicholas Morris. With the price of oil down 28 percent in recent months, financial analysts and political pundits are all asking the same questions: What are the reasons behind this drop and why isn’t OPEC taking steps to stop the bleeding? It’s Economics 101. When the price falls, you cut supply. OPEC nations are amongst the world’s top oil exporters. It’s certainly within their capability. If there was even a hint they would slow production, prices would certainly jump from current lows of about $82 a barrel. According to recent estimates, Saudi Arabia needs the price at $99.20 to break even. Even at that point, many OPEC nations would still be in the red. So why is OPEC sitting on its hands? Global oil prices have fallen sharply over the past six months, leading to significant revenue shortfalls in many energy exporting nations, while consumers in many importing countries are likely to have to pay less to heat their homes or drive their cars. From 2010 until mid-2014, world oil prices had been fairly stable, at around $110 (£68) a barrel. But since June prices have almost halved.Brent crude oil has fallen below $60 a barrel for the first time since July 2009 and US crude is below $55 a barrel. The reasons for this change are twofold - weak demand in many countries due to insipid economic growth, coupled with surging US production. A number of theories have emerged. OPEC itself posits that the declines are due largely to speculation in the market and that demand isn’t as low as many may think. Others contend that increased competition—in the form of increased U.S. shale oil production—provides incentives for OPEC to keep prices down. However, some studies suggest that oil prices have to fall to $60 or even lower to halt shale production growth. Both would explain the recent move by U.S. driller Continental Resources Inc. to monetize its hedges in the oil market. Not only does it show great confidence that demand will recover; it also provides Continental with added liquidity ahead of a potential price war with OPEC.Some argue that Saudi Arabia, the world’s largest producer defending its market share by cutting prices rather than production. Others would go so far as to say that Saudi Arabia is pushing prices down to hit its regional rival, Iran, where it hurts most; the economy. Some estimate that Iran needsoil at $136 a barrel to finance its growing spending plans ? But who are the winners and losers ? Russia is one of the worlds largest oil producers, and its dramatic interest rate hike to 17% in support of its troubled rouble underscores how heavily its economy depends on energy revenues, with oil and gas accounting for 70% of export incomes. Russia loses about $2bn in revenues for every dollar fall in the oil price, and the World Bank has warned that Russias economy would shrink by at least 0.7% in 2015 if oil prices do not recover. Despite this, Russia has confirmed it will not cut production to shore up oil prices. If we cut, the importer countries will increase their production and this will mean a loss of our niche market, said Energy Minister Alexander Novak. Venezuela is one of the worlds largest oil exporters, but thanks to economic mismanagement it was already finding it difficult to pay its way even before the oil price started falling. Inflation is running at about 60% and the economy is teetering on the brink of recession. The need for spending cuts is clear, but the government faces difficult choices. The country already has some of the worlds cheapest petrol prices - fuel subsidies cost Caracas about $12.5bn a year - but President Maduro has ruled out subsidy cuts and higher petrol prices. Alongside Saudi Arabia, Gulf producers such as the United Arab Emirates and Kuwait have also amassed considerable foreign currency reserves, which means that they could run deficits for several years if necessary. Other Opec members such as Iran, Iraq and Nigeria, with greater domestic budgetary demands because of their large population sizes in relation to their oil revenues, have less room for manoeuvre. Trinidads line of attack thus far has been one of continuously monitoring the situation and preparing to make changes where needed. However the Honourable Prime Minister Kamla Persad Bissessar has given a commitment that social programmes and those which affect the poor and vulnerable would not be affected. PM Kamla’s quote at the UNC’s annual Christmas dinner: Despite the fall in oil prices, we continue to manage the economy professionally while protecting the vital social programmes we have created to help the poor and less fortunate, including the monthly $500 grant for deserving mothers. A society thrives when we treat all our citizens as equals, when we eliminate discrimination and care for the most vulnerable among us. While the Honourable Minister of Finance Larry Howai recently told the Parliament . “There is, however, no room for complacency and the ministry will continue to monitor what is happening in the global environment and to refine our remedial fiscal measures to ensure that the country can respond appropriately to changes in the market for oil and gas.” With regard to the HSF, the Government and Prime Minister has not shown an intent to withdraw from the fund but did say It’s there as a “budgetary support should the prices continue to fall” The Heritage and Stabilisation Fund does not operate like a normal bank account but in fact is guided by an act. · The withdrawal is limited to 60 per cent of the amount of the shortfall of petroleum revenues for the relevant year; or 25 per cent of the balance of the Fund at the beginning of that year, whichever is the lesser amount · The Act precludes any withdrawal where the balance standing to the credit of the Fund would fall below one billion US dollars if such withdrawal were to be made. · The Fund commenced the year 2012/2013 with a Net Asset Value of US$4,712.3 million. As per the HSF Act (2007), the Government made a deposit of US$42.5 million in respect of the quarter ended June 30, 2013 Nicholas Morris.
Posted on: Tue, 06 Jan 2015 20:53:48 +0000
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