What does more Oil Supply mean for US and other Emerging markets? Will it fuel growth for Emerging Economies?
Oil prices have fallen again. Now there is one question on everybody’s mind, what is happening? Last June a barrel of oil had costs of more than $100 and; now, it has plummeted over 30 percent below $70. Excessive supply is meeting lesser global demand and driving down prices.
The supply and demand explanation
To explain the supply side of the equation, we must look no further then the recent US shale boom. The US has become one of the major world oil producers and is effectively using new technology to extract oil from shale deposits that they previously could not. The same technology is boosting production in Canada.
All the while, Organization of the Petroleum Exporting Countries (OPEC) has announced that it will not cut down oil production, leading to a glut of supply and causing a significant drop in oil prices. The organization recently opted to maintain output at 30 million barrels per day.
To explain the demand part of it, the slumping economies in the major parts of the world such as Japan, Europe along with slow downs in faster growing China and Emerging Markets have reduced oil consumption.
The real story
There is more to the story to the drop in fuel prices. The oil market has lost its value by one-third since June, worried with the glut of supply, stronger USD, and fears of falling demand from global economy.
Saudi Arabia and Kuwait, which dominate OPEC, have the highest tolerance for low fuel prices because of the economies of scale which are generated by their huge oil fields. These economies of scale and low production costs allow them more options in fighting the supply risk. Thus in order to fight the low demand and new supply threat, the trick of lowering the fuel price is played. This is good news for Emerging countries like India as they import oil and it would definitely reduce its Current Account Deficit (CAD).
Drop in Prices May Force Shale and Deep-Water Projects to Halt Production for OPEC
As oil falls many of the Shale projects in the US and Canada are getting closer or below their break even point forcing them to cut production. Saudi Arabia and Middle Eastern Countries have the lowest cost of production, while Shale and Deep Water projects can come to a halt from these plummeting prices. Many Shale and Deep Water projects have break even points above $75/barrel.
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