March 9, 2016    3 minute read

The Oil Price Decline

   March 9, 2016    3 minute read

The Oil Price Decline

During the times of the Gulf Wars, we witnessed how international turmoil can hit the global economy particularly if oil prices are affected. During the Gulf Crises, countries like Iraq and Kuwait got involved in direct warfare across their territories, including their precious oilfields. Consequently, oil prices started hitting record highs since both of Iraq, and Kuwait were major oil producing countries. Throughout the 1990s and also during the beginning of the 21st century, major international crises hit the nations of the Middle East region, one by one. Oil prices skyrocketed while the world had to look for other viable energy options that would be less volatile. However, things are now turning around in the global economy. In the recent years, oil prices are falling instead of rising. According to Hiscock (2012), many rural countries in the past have transformed themselves into leading energy economies. During the beginnings of this trend in the 1980s, very few oil-producing countries had modern infrastructure and extensive transportation capabilities. But with the lapse of time, competition has increased.

Crude Oil Prices

Recent Competition

As of now, several countries have emerged along with alternative energy resources like the shale gas, gas-to-liquid (GTL) fuel, and so forth. This is probably one of the major reasons that have caused current oil prices to fall. According to the US Department of Energy, market volatility has affected the energy sector so very deeply, and there are no signs of a quick recovery. Hence, the short-term forecast suggests that investments in oil may not prove to be a very lucrative option. It is simply the supply-and-demand situation which has caused the slump of petroleum economy. Today, global oil supplies are healthy, but oil consumption is stable. According to Krauss (2016):

“Saudi, Nigerian and Algerian oil that once was sold in the United States is suddenly competing for Asian markets, and the producers are forced to drop prices. Canadian and Iraqi oil production and exports are rising year after year. Even the Russians, with all their economic problems, manage to keep pumping.”

So, oil prices appear to be heading south all through the near future as well. As far as the oil-importing countries are concerned, falling oil prices ensure better foreign exchange reserves for them. Average people are financially relieved. However, low oil prices may also encourage people to consume more energy than necessary; and emissions due to combustion of petroleum are harmful to the environment. Since market behavior is rather whimsical regarding the new developments, the global energy economics has come under scrutiny. Now it is more important to ensure that both of the oil-producing and oil-importing countries become more careful about their mutual benefits. In a globally inter-connected world, it is now becoming very crucial to understand the expectations of the countries that do not produce enough oil for their use.

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