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    Yearenders: Crude Oil Prices Slump

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    Economics in 2014 (10)
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    The oil price shock has probably become the biggest upheaval of 2014, at least for the business world.

    Amid a massive supply excess fuelled by surging US shale output, the price of crude has slumped by nearly 50 percent since mid-June, while November’s announcement by the Organization of Petroleum Exporting Countries (OPEC) that they would hold output steady at 30 million barrels a day has sent prices into a tailspin.

    The Saudi oil minister Ali al-Naimi, who is considered the cartel’s de facto leader and the most influential figure in the global energy industry, said in a recent interview with the Middle East Economic Survey that OPEC will not cut production, even if the price of oil falls as low as $20 a barrel.

    “It is not in the interest of OPEC producers to cut their production, whatever the price is. Whether it goes down to $60, $50, $40, or even $20, it is irrelevant. If Saudi Arabia reduces its production the price will go up and the Russians, the Brazilians, and US shale oil producers will take my share.”

    The minister also said the world might never see $100 per barrel oil again. Analysts view this as a fundamental shift in the cartel’s policy, which is aimed at defending its market share at all costs. Whether the new policy works out remains to be seen, says Joerg Doerler, A.T. Kearney Principal and Head of Oil and Gas Practice in Russia and the CIS.

    What Saudi Arabia is currently doing is basically testing the market. Saudi Arabia and some other OPEC nations are very much afraid that if they cut back oil production and prices remain at a high level then other producers will jump in. And audibly they’re looking at the US shale and unconventional resources, which have led to a very considerable increase in production.

    The question is how far oil prices need to fall in order to squeeze out other market players. On the other hand, there’s a queue of brand new market players, or those willing to re-enter the big oil business. Lucio Vinhas de Souza, Moody’s Chief Economist and Managing Director, says they shouldn’t be overlooked.

    We should remember that we still have free very large oil producers, which could re-enter the markets relatively easily. Namely, we’re talking about Libya, Iraq, which includes Kurdistan, and Iran – depending on the regularization of the economic relations of Iran with the rest of the world. All those countries have very cheap oil, and they have existing infrastructure for production and exploration, so for them it would be relatively easy to significantly increase their production to global energy markets.

    Now, the dramatic movement in crude oil prices means a scary time for the global oil market and  for quite a few existing crude producers. Venezuela, Iran, Russia, Ecuador and Nigeria are just a few of those which are immediately impacted; all of them are heavily dependent on oil revenues, which they use to fund government programs. A slump in oil prices most definitely poses a challenge for the shale oil story. According to the Energy Information Administration, right now the United States produces almost twice as many barrels a day of crude oil as it did in the mid-2000s – all thanks to the shale oil revolution. In recent years, the US has become a fully-fledged competitor in the oil market, with its pros and cons. The accepted wisdom that falling oil prices is good for the US no longer works, and the big question on everybody’s mind is at what point do the US shale oil drillers decide to stop drilling.

    Economics in 2014 (10)


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