Oil. Black Gold. The precious energy source that powers our cars, buses, airplanes, and even factories. Call it whatever you want, but you know what it is and you know it is expensive. Or used to be, at least. This limited resource has been baffling the world with surprisingly low prices all through 2015 – and economists expect we are to see new lows in the near future. All of this seems counter-intuitive, so how is it possible?
Let’s take a step back and go into the basics of economics – the forces of supply and demand. A high demand means many people want to acquire a limited resource. This allows the resource’s producers (suppliers) to raise the selling price because given the big demand, it is very likely there will be people willing to acquire the resource at a higher price. Conversely, if the demand is low we have a situation where not enough people want to buy the good. To stimulate them, suppliers will try to lower prices. Bear in mind, however, that for the producer to make a profit, the price cannot sink below the cost of production; if it does, they will be at a loss.
Now back to the current state of the global economy. China, the world’s largest consumer of oil, has been demanding less and less due to its economic slowdown. The European Union and Russia have had their own economic struggles as well, causing an even lower demand. This forced oil suppliers, mainly OPEC and the US to cut prices in order to correspond better to the lower demand for oil. They insisted, however, on keeping production levels high.
This is where things get interesting. OPEC countries sell crude oil (petroleum), and some members of the organization, namely Saudi Arabia, derive it at relatively low costs of production. Saudi politicians deemed that since they can easily handle a price cut, it was a good time to get rid of the competition – the US. The States sell shale oil which is derived differently and is generally more costly to produce. OPEC states assumed the American economy would not be able to compete at such low prices. That is how in essence Saudi Arabia and the United States entered into, for a lack of better descriptions, a game of chicken.
As we already noted, however, the US has been doing quite well in recent years. So well, in fact, that they had time and money to perfect their shale oil production methods. Not only did they meet the bar set by Saudi Arabia; they drove it lower than expected, hitting new lows in oil prices. Despite the low price and the smaller demand, both OPEC and the US keep oil supply high – to the point when they are over-supplying the market. While Saudi Arabia keeps the pressure of high production up, other, poorer OPEC member states like Venezuela have been complaining that it is no longer cost-efficient for them to produce so much and sell it so cheaply.
So as it turns out, it is the race between Saudi Arabia (and OPEC) and the United States that is driving oil prices down day after day. This is reflected on the stock market for oil futures which has been confusing analysts for a while, making them set lower and lower expectations each day. SuperForex recommends you to follow the issue with eyes wide open as the oil market is quite volatile right now and will continue being so. With the possibility of an interest hike, the US might finally start lagging behind OPEC in the price war.