Why do oil prices keep falling?

CCTV.com | 作者: Shi Ze, Gong Ting | 时间: 2014-12-09 | 责编: Li Minjie
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Shi Ze

Gong Ting

Global oil prices have rapidly declined in the second half of 2014. But on Nov. 27, the Organization of Petroleum Exporting Countries (OPEC) decided to maintain its joint crude oil production target at 30 million barrels per day. 

Immediately after the OPEC decision was announced, crude oil futures prices in New York fell, and they closed at US$66.15 per barrel — the lowest closing price since September 2009. Brent crude oil price, the global benchmark, has dropped more than 39 percent, down from the highest point of US$115.06 per barrel in June to US$70.15 per barrel on Nov. 28.

There are many interpretations of the oil price slump.Two of the most popular are that the slump was caused by the joint efforts of the US and Saudi Arabia to drag down Russia’s economy, which relies heavily on oil exports, and that Saudi Arabia, which has great crude oil exploitation advantages, is attempting to drive down oil prices with stable production, so as to squeeze the market share of the US, whose oil production has increased recently. 

Irrespective of whether the theories are correct, it is clear that abundant oil supplies and weak demand growth are the main reasons for the excessive supply in the global oil market and have caused the latest oil price slump. 

Oil demand growth remains slow. In the past year or two, the International Energy Agency (IEA), the US Energy Information Administration (EIA), and the OPEC have successively lowered the expectations of global oil demand growth. According to a latest IEA report, the global oil demand forecasts for 2014 and 2015 were lowered to 91.56 million and 92.96 million barrels per day respectively.

The forecast cuts are attributable to energy consumption growth slowdowns in developed economies, such as Japan and major European countries, and newly-emerging oil consumption countries, such as China, committing to improving energy efficiency and developing alternative energy.

In terms of oil supply, the US has benefited from its massive exploitation of shale oil, increases its crude oil production. According to the Key World Energy Statistics 2014 released by the IEA, the US ranks third in crude oil output, behind Saudi Arabia and Russia, and it ranks highest in the production of petroleum products, leaving Russia and China — the second and third largest production countries — far behind. 

According to the short-term energy outlook released by the IEA in October, the average daily output of the US crude oil in September was 8.7 million barrels — the highest since July 1986.

In 2015, US oil production is expected to match the peak that it achieved before the 1972 oil crisis. Owing to its energy revolution, the US crude oil output has attained sound market expectations.

The World Energy Statistics in 2014, released by British Petroleum in mid-June, show that since 2013, the oil production increase in non-OPEC countries comes mostly from North America and Russia, and the US’s proportion is five times that of Canada and Russia combined. The US oil resources continue to improve in terms of production, consumption and net exports, and the US will become the world’s major source of new oil resources in the future.

In addition, recently, media around the world said that the rapid expansion of ISIS in the Middle East and several rounds of US airstrikes exacerbated the market’s concerns over strained crude oil supplies. But Libya's oil production has nearly tripled since June, and Iraq's oil export rate remains at 2.5 million barrels a day. 

At the same time, this round of oil price slump was fueled by Saudi Arabia and Russia. Because of the oversupply of oil, the global market was startled by OPEC’s decision on stable production on Nov. 27, and Russia’s refusal to cut oil production further drove down prices.

Even though the price of Texas light sweet crude oil, or West Texas Intermediate, (WTI) in New York fell to its lowest point since May 2010, Saudi Arabia and Russia refused to cut production to offset the influence of output growth from other countries.

Not all OPEC members were on the same page. The losses from oil price slump varied among these countries, so some of them doubted and even opposed the stable oil production. Compared with other OPEC countries, such as Venezuela and Iran, Saudi Arabia has solid economic strength, large foreign reserves, and great resilience against oil price slumps, which will keep its budgetary situation from deteriorating.

The slump in oil prices will certainly influence investors in US shale oil. Given that shale oil exploitation is valued between US$50 and US$70 per barrel, if oil prices continue to fall, the investors’ confidence will decline sharply. The poor performance of US oil stocks in recent days can better reflect such influence.

For some time, the US has been expected to become “the next Saudi Arabia” because of the shale oil revolution. If oil prices remain at a lower level, the global oil market will increasingly depend on the Middle East, and oil producing countries in the area, such as Saudi Arabia, are expected to dominate the market, while the US shale oil revolution will face a new round of setbacks.

Geopolitical factors should not be excluded in analysis of the oil price slump, because the market and geopolitical factors are always connected.

The recent deterioration of Russia-Ukraine ties is direct causes of the stalemate between Russia and the US and the EU, which have imposed a series of sanctions on Russia. And the political turmoil affects oil-producing countries in West Asia and North Africa. These geopolitical factors greatly impact the expectations of the  international community of the stability of the global oil market.


Shi Ze is the Director of the Center for International Energy Strategic Studies at China Institute of International Studies. 

Gong Ting is a Research Assistant of the Center for International Energy Strategic Studies at China Institute of International Studies. 

Source: CCTV.com