Much discussion and column inches have been devoted to the recent slump in oil prices without much clarity being offered to the three most important questions: why the price is dropping, who is causing it and who the big winners and losers will be.
There is currently a glut of supply in the oil market, which in turn is naturally driving down the price. The impetus was initiated by Saudi Arabia who refused to cut supply in the face of oversupply and falling prices, partly accounted for by the expectations of a falloff in economic growth in China. The position was exacerbated further in July when Iran brokered a deal with six major world powers in regards to lifting sanctions on their production and exporting of oil in exchange for limitations being put in place on Iran’s nuclear testing program. The sanctions were officially lifted on 16 January 2016 and since then Iran has introduced just under 4 million extra barrels per day into the global market. This is a global market which is already oversupplied on a daily basis by around 1 to 1.5 million barrels. This has seen the price of barrel of crude oil plummet from a peak of around €100 dollars to its current level of around €30.
Saudi Arabia are the driving force behind the current oversupply, with the main theory being that they are trying to force the United States fracking oil and gas operations out of business. The Organisation of the Petroleum Exporting Countries (OPEC), of which Saudi Arabia is the de facto leader, accounts for 73% of the oil reserves in the world so they can afford to account for a decrease in margin due to their sheer volume of production. Russia has thus far refused to come to the table to negotiate and without their support for striking a deal to reduce the supply of oil from OPEC and NonOPEC countries, the oil market is likely to remain depressed with very low prices. The low prices certainly do not suit Iran which was hoping for large inflows of cash following the lifting of the sanctions against them
Winners & Losers
Business and customers the world over would seem to be a position to benefit from lower oil prices while producers large and small scale will suffer if we enter a prolonged period of low oil prices. There may be indirect effects on many other organisations as well. The Irish government use taxes on fuel as a major component to supplement their struggling returns during the recession. While the tax base has broadened somewhat since, this could leave a hole in exchequer receipts which may eventually end up being passed back to individual customers in Ireland again one way or another through tax increases in other areas. The longer term strategy of the Saudi’s is believed to be to weather the present low price period, despite the economic difficulties this is creating within their own borders, until the marketplace becomes less competitive. l Either way interesting times lay ahead for oil producers, consumers and just about everyone else.
- Conor Leaden, Business Writer