Oil price: Bottoming out
Probably, the best Christmas gift we had, so far, was the rock-bottoming oil price. To recall, in the second half of December, global prices went below US$60 per barrel. Then, as we welcome year 2015, the prices went further down below US$50 per barrel, at US$47.93, last January 6, 2015. Considering that in the first seven months of 2014, prices were hovering around US$100 per barrel, it provided a five-month respite and enabled businessmen, employees and individuals to save for their Christmas celebrations.
Historically though, this pricing scenario has been repeated several times. For instance, in July 3, 2008, oil prices almost breached US$150.00 per barrel. With such seemingly irreversible trend, oil prices reaching the US$200.00 per barrel was then viewed as unquestionable. The question was - when? Contrary, however, to most expectations, oil prices dropped sharply and were hovering around US$40.00 per barrel (was at its lowest at US$30.81 per barrel in December 22, 2008) by the end of 2008. This decline was due primarily to the USA’s economic situation. Then, the USA was in dire economic crunch and the consequences of such turmoil traversed all over the globe. Accordingly, the demand for oil substantially decreased, thus, the price decline.
The 2014’s decline in prices, however, was far different. This time, the USA’s economy is on the rise and the demand for oil is steadily increasing. Why then? It is because the USA, the world’s largest consumer, has increased its own oil production and, thus, has become less dependent on imports. This fact was confirmed by the U.S. Energy Information Agency. The agency reported that, “in 2013 the U.S. imported approximately 33% of the petroleum consumed, the lowest since 1985. It also means, “net crude oil imports are down over 25% in the last five years while the country is still more than 20% below its peak production of 1970”. Moreover, they are now less dependent on oil imports from the Middle East. They are now importing most of their requirements from Canada.
Moreover, in the second half of the year 2009 and the entire year of 2010, we saw oil prices swinging between US$60.00 and US$90.00 per barrel. Without much changes in the political and economic arena in 2009 when compared to 2008, people were wondering why oil prices went up to such level. Why? The fact is, oil producing countries have different preferential prices. Deutsche Bank, for one, in 2008, calculated how high oil prices have to be for OPEC countries to maintain their budgets. Iran and Venezuela, two of the most vocal and seemingly arrogant countries who are often the first to call for production cuts, need the highest price per barrel of US$95. Russia needs about US$70, while Saudi Arabia, OPEC's largest producer and de facto ruler, needs about US$55 a barrel.
So that, to achieve their desired prices, OPEC, being the world’s biggest cartel and where Saudi Arabia, Venezuela and Iran are members, opted for production cuts, as usual, and moved prices slowly but surely around US$90.00 per barrel in 2011. Then, in 2012, with the political turmoil prevailing in most oil producing countries in the Middle East, production was severely affected and prices breached US$100.00 per barrel once again. Then, as the USA slowly recovered, we saw prices steadily hovering around US$100.00 per barrel in 2013 and most of the months in 2014.
The question now is, will the same scenario or price increases happen again in 2015? Yes, but for a different reason and for a different approach. For one, the USA is still the major influence. They have an ally right at the middle of all these in Saudi Arabia. Remember that Saudi Arabia needs to sell its oil at US$55 to sustain its economy. The USA wouldn’t care much about Iran and Venezuela (both countries need to sell at US$95 per barrel) or even Russia (which needs to sell at US$70 per barrel).
More importantly, Saudi Arabia made a great decision that pleased major consumers, including the USA, by not heeding the call of Iran and Venezuela for production cuts among OPEC member countries. Secondly, we should factor in the oil drilling activities in the USA and the companies’ expected returns on investments and operating costs. The oil price collapse could be unbearable and would send some producers packing. Reportedly, in 2009, for these oil producers to sustain their operations, oil price should not go down below US$75 a barrel. They find no sense to maintain their wells with oil prices below this level.
So that, with these figures on hand and the ability of the USA and Saudi Arabia to impose their will, oil prices will certainly move upwards. In understanding these numbers and influences, we must prepare for the effects on our economy of oil prices this year to be swinging between US$55.00 and US$75.00 a barrel.
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