Plunging Oil Prices Spark Global Response
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Is this yet another episode of price changes, or could this be a serious indicator of what's to come for world oil? At the moment, signs point to the latter. With ISIS making over US$3 million a day in oil sales vis-a-vis the black market, and the market getting shaken up with the boom of the fracking industry, international oil prices this year have plummeted to an all-time low since 2009, a massive 49% drop.
The United States and Russia aren't relishing the challenge, and OPEC's member states (of which a third belong to the GCC) are more divided than ever. Each OPEC state has a different budget, which means that the members have different oil producing and exporting goals for economic stability- larger countries like Iran and Nigeria require higher oil prices to balance their budgets (over $100 a barrel), as opposed to smaller states like Kuwait and Qatar (less than $80 a barrel).
But even before reaching a consensus on a solution to fix this problem, there is another dilemma OPEC (Organization of the Petroleum Exporting Countries) needs to sort out: not all of its member states consider these price drops to be an issue to begin with. GCC OPEC states Kuwait, Qatar, the UAE, and Saudi Arabia have shrugged off concerns about these lower prices, claiming that there is no need to reduce oil production and output, despite daily demand dropping to about one million barrels less than OPEC's production target.
With respect to Saudi Arabia, the world's biggest oil exporter, businessman HRH Prince Al Waleed bin Talal has been quite vocal about the Kingdom's oil policy. He released an open letter to the Minister of Petroleum and Mineral Resources H.E. Ali Al Naimi, expressing his concern on how the Kingdom has downplayed the significance of the decreased prices, noting that the 2014 budget relies almost entirely on oil revenues at 90%. Another factor that needs to be considered are the existence of influential oil-producing states that aren't part of OPEC: the United States and Russia.
Over in the United States, where hydraulic fracturing or fracking has been the key technique of extracting oil, it isn't a matter of whether to maintain current production or to cut back. In fact, it's the opposite. Oil production is at its highest in about three decades, and with fracking being more cost-heavy than conventional extraction methods, they have to keep on with the practice to cover costs and debts. In fact, many analysts claim that fracking has played a significant role in causing the oil price to plummet. Whether the U.S. fracking industry gets through this or not, most will agree that its "boom" period is slowly coming to an end.
Finally, there's Russia. It's only getting worse for them, and the U.S.-European sanctions played a huge role in making it happen. Add that to plunging oil prices, and you have a currency crisis, rapid inflation, and a recession. This is obviously a huge problem to this massive oil producer, relying on oil and gas for 70% of its export incomes. While Russia is preparing for a worsening recession in 2015, President Vladimir Putin has been adamant about not cutting production, claiming that it will be an opportunity for competitors to increase their share in the market.
Despite all the grey areas in this interesting chapter of the world's most valuable fossil fuel, there are countries that will benefit from the price cuts, notably China and India. While China's economy is starting to slow down, cheaper oil is something that they will definitely benefit from, and it could ease a few hardships they may face. India relies heavily on oil imports, importing about 75%, and it too will welcome lower prices, to ease costs that it faces. 2015 will be an interesting year for black gold.