August 11, 2017    4 minute read

Here’s Why Oil Prices Are Likely to Remain Low

Trickling Down    August 11, 2017    4 minute read

Here’s Why Oil Prices Are Likely to Remain Low

Introduction

West Texas Intermediate (WTI) is a variation of the natural resource, crude oil. WTI gained recognition due to the vast quantity of crude oil contracts being traded and the historic significance of it being near the Cushing Oil Field in Oklahoma, which in 1915 produced 20% of oil sold in the United States and in May 1917 produced 66% of oil in the West. WTI is used worldwide as the benchmark of all oil prices to such a degree that whenever the phrase “oil prices” is used, it is most likely referencing the West Texas Intermediate.

Historically, rising oil prices in long run have been an almost foregone conclusion due to an ever-rising population requiring more of it for plastics and fuel.  This rising demand has also been accompanied by an apparent fall in a finite natural resource mostly controlled by the 12 countries responsible for 41% of the world’s oil production (OPEC). With these two major factors regarding oil, it should be a match made in heaven for those with a vested interest in the production and agony for those involved with consumption because of the rising prices.

Fracking

However, the tide has ever so slightly changed due to one effective, but controversial method of oil extraction: hydraulic fracturing. What is hydraulic fracturing Hydraulic fracturing (fracking) in its most simplistic terms the process in which rocks deep underground are broken into small pieces using a liquid. This often involves water (mixed with sand and other abrasive substances are injected into the rocks at a high pressure. This, in turn, creates a tunnel like structure underground once pressure falls once the process is halted allowing for crude oil and natural gas trapped within the rocks to be released and collected.

This provides more of an alternative from traditional oil sources e.g. deep-sea drilling, which will allow greater quantities of all to be extracted as shown in the data as recent oil production is as reached the levels of the 1980s. However due to the well documented negative effects such as induced seismic activity due to the shifting in rock formation the and a fall in crop yield in the surrounding areas, as crops die dues to spillages and leakages of the process, fracking remains highly stigmatised.

 

Fracking and Oil Markets

Increased fracking on United States soil has critically damaged OPEC’s market power over the oil market. Traditionally if oil prices were becoming uncontrollably high, OPEC could increase the supply it was responsible for producing, resulting in a fall in the oil price, and if the oil prices were too low for its own internal standard, OPEC could reduce its production until oil prices returned to its acceptable level. However, fracking provides a near perfect alternative to the oil derived from OPEC controlled countries, therefore, oil can drop to nearer the true equilibrium price for the first time.

This is reflected in the markets with oil prices today ($49.58 per gallon as of 04/08/17) being more than 50 % less than the oil prices from 2014. However,  countries in which the exportation and domestic selling  of oil represents a significant percentage of GDP (e.g. oil and gas usage makes up  17% of GDP in 2013 In Nigeria) will experience tougher economic conditions, which is reinforced by the statistic that at least 5 Countries in which oil represents more than  15% of the economy have experienced or are in a recession since the day the bill has passed (Brunei, Venezuela, Nigeria , Russia , and Ecuador).

With continuously falling oil prices, OPEC met in April 2016 in order to find a viable solution towards this problem, such as reducing oil production in the short term to simulate falling global oil production, however this proved to be ineffective in the long run due to oil prices failing to return to their original range before mid-2014 .

However, the next strategic move occurred in July 2017 in which OPEC produced 140,000 additional barrels than its standard rate per day as a form of price war with the United States oil refineries.  This resulted in WTI prices reaching monthly and yearly lows.

Conclusion

In conclusion, the United States has emerged as a powerhouse and a legitimate threat to the monopoly over the oil prices set and controlled by OPEC, which will likely lead to in the short run a more volatile and unpredictable oil market as the two powerhouses battle it out for control. In the long run, a consensus will be reached or one of the two parties, however, external factors such as France’s and the UK announcing their decision to ban petrol and diesel fuelled vans and cars by 2040 Which has the potential to decimate the oil industry.

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