Declining oil prices may not be all good news

Declining oil prices may not be all good news

The long-awaited fall of global oil prices has been greeted with a lot of huzzahs and hurrahs from around the world, particularly from those in oil-consuming economies.

It was only five years ago when oil prices were floating around the US$100 per barrel level, due to the increased demand in China and the decrease in supply due to conflicts in oil-producing nations such as Libya. Because of the spiking oil prices, corporations in the US and Canada soon found it profitable to start drilling for hard-to-extract oil in remote areas.

Soon enough, demand for oil in Asia plateaued and conflicts in oil-producing regions came to an end. Supply of oil began to rise above its demand, and prices began to slide.

The “problem” was exacerbated by the Organisation of the Petroleum Exporting Countries’ (OPEC) decision to keep their rate of production at the status quo, rather than cutting back on production in order to drive the prices back up. A collapse in oil prices ensued.

Of course, nations which rely on oil exports are suffering. Russia’s economy came crashing down and Venezuela’s economy decided to kick the bucket.

So far, everything appears to be all hunky-dory for an oil-consuming economy like China. However, things may turn for the worse if prices continue to plummet at such a sharp rate.

To understand why things may not turn out so well in the future, we have to take another look at the reasons behind OPEC’s surprising decision to maintain oil output at 30 million barrels a day.

The cartel is comprised of nations such as Qatar, Saudi Arabia, and the United Arab Emirates. Together, they contribute approximately forty per cent of the global oil supply. Although they will all lose out from the falling prices, many of the countries involved have indicated that they will be able to deal with them in the short term as they have foreign-exchange reserves large enough to cover the deficits.

OPEC hopes that keeping production at current levels and intentionally allowing prices to fall would make it unprofitable for North American drillers to continue their operations, forcing them out of the market. They are, in essence, engaging in a “price war” with the American producers. The cartel’s members hope that prices will begin to stabilise when those companies collapse.

This would mean that we consumers would have less choice, allowing OPEC to raise prices beyond reasonable levels once again. Of course, North American producers may choose to re-join the market once prices rise above their cost of production, but its effect would be limited unless a significant amount of oil can be extracted at a consistent level for a long period of time.

The other, more obvious downside to the falling oil prices is the effect that it would have on our environment. Lower prices would cause consumers to be less conservative about their fuel usage. Some may even go all the way and buy a gas-guzzling SUV. We’d end up depleting our oil reserves more quickly whilst causing an unnecessary amount of pollution.

Although it is still too soon for us to access the future course of the oil industry, we need to be wary of the consequences that may come in the future before we start getting overly ecstatic. 

Henry Lui won the Best Workshop Report in the 2014 Young Post Junior Reporter of the Year Awards

This article appeared in the Young Post print edition as
Be wary oflow oil prices

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