Sunday, August 23, 2015

Oil Price Tumbling

Oil price is in free fall. Close to $40 a barrel. A shocking downfall from its peak hovering way above $100 a barrel not too long ago. Fear has impact on market. A few factors seem to be behind the oil price fall.

First the supply glut. This is possibly pushing the price down steadily. What is surprising to me is the path that OPEC has taken so far by not cutting the production level. Only plausible reason could be that OPEC is putting pressure on the "unconventional" oil producers, a calculated move to push the competitors away.

Second is the lowering of demand. Because of low oil prices many businesses are affected, directly or indirectly, thus reducing the demand for oil. That's the conventional wisdom. However, some observers pointed out that this time around the "lowering" demand may not be the significant problem, it is the supply glut that has overwhelmed the demand. Here is a quote from the International Energy Agency:
Global oil demand in 2015 is expected to grow by 1.6 mb/d, up 0.2 mb/d from our previous Report and the fastest pace in five years
Oil is a finite resource. Eventually we will run out of it. Alternative energy source will fill the vacuum. However, before that inevitability, our world is not prepared to have any other major energy source than the carbon based fuel. Yes, it has the devastating impact on climate change via increasing the green house gas. But for now the world does not look to be prepared to embrace the alternative energy sources entirely without building the right infrastructure first. 

Fareed Zakaria has some timely observation, troubling but may prove to be true in the long run. First he quotes his conversation with a few oil insiders: 
Nick Butl former head of strategy for the Italian energy giant Eni, says, “There is no way to stop this phenomenon.” He predicts er, former head of strategy for BP, told me, “We are in for a longer and more sustained period of low oil prices than in the late 1980s.” Why? He points to a perfect storm. Supply is up substantially because a decade of high oil prices encouraged producers throughout the world to invest vast amounts of money in finding new sources. Those investments are made and will keep supply flowing for years. Leonardo Maugeri,that prices could actually drop to $35 per barrel next year, down from more than $105 last summer.
The impact from the sustained downward progression of oil price is uncertain, though there is already economic repercussion in the forms of jobs layoffs, shrinking profit margins of big to small businesses, not only oils but the retail sectors are affected too. Globally, it may also bring political instability in some of the most volatile regions of our world. Last time the oil price tumbled it was in 1980s. As Fareed Zakaria observed, then the former Soviet Union collapsed, though it is possibly debatable whether the oil price was the sole reason for its collapse.

No one is certain how low the oil price would go in its current slide. Some say it has almost reached its bottom most price and some say no, it would go further down, even may hit $10 to $15 range. These are all guesses like the extreme guesses of oil price to reach $250 or $300 not too long ago.

Alternative energy sources have a long way to go before becoming the mainstream suppliers of energy. However, in recent years the advancement in solar, wind and battery energy technologies is astounding. Perhaps this chaotic oil price and the volatile market may open more opportunities for the alternative energy producers to grab hold of more market share. That can be a positive outcome out of this tragic economic slide.


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