The consequences of declining oil prices

6 12 2014

“There’s a simpler explanation, which would suggest that we’re facing a significant period of crises in the coming years. Instead of oil prices crashing because of excessive production or puppet-masters behind the scenes, oil prices have remained at an unsustainable elevated level for the past few years, as a result of speculation on further price rises in the future due to rising extraction costs.”

The Seneca Effect

There’s a lot of attention currently on falling oil prices. Today oil prices dropped below 66 dollar, at the fastest pace since 2010. One recurring theory we hear is that falling oil prices are aimed at hindering the Russian economy. Despite being a conspiracy theory, this can be considered a reassuring theory, because it would indicate that the Western world has control over oil prices. The theory implicitly assumes that there are no real limits to oil production, as OPEC nations can simply ramp up production to harm competitors if need be.

There are a number of issues with this explanation. It’s questionable whether OPEC nations would really be willing to risk harming their own economies in an effort to attack Russia. OPEC nations are plagued by domestic instability and depend on high oil prices to manage their budgets. At 70 dollar a barrel, practically all OPEC nations are dealing with…

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3 responses

7 12 2014

it may also show that the cartels have over inflated the product form decades, and now they can play their political games, we want honesty not speculation. the barrel price drop still has not reflected in bowser prices here so the companies like banks are making more cream by only giving a tickle.

we need a gov’ who will step in and stop the rip off.

7 12 2014

Here in Qld, petrol’s come down 10c/L. You need to also realise that as the price of oil comes down, so does our dollar, and as we now import over 90% of all our fuel, the import cost goes up somewhat tempering the oil price reduction. We still have some of the cheapest fuel in the world, so I wouldn’t complain myself…

8 12 2014
Chris Harries

The most common theory is that Saudi Arabia is using its strength in the oil markets and its dominance in OPEC to kill off or maim the shale oil boom in the U.S. Economic impact on Russia is not the main game.

There are various opinions on how long the unconventional oil businesses can stay afloat and how far the Audis are prepared to go, though they seem determined and confident.

Aside from Russia the country most hurting at the moment is Nigeria, since domestic hydrocarbon production in the U.S. has virtually killed off its imports of Nigerian oil.

Meanwhile for Allan Kohler, and those of his ilk, the low pil prices are simply a reflection that there is too much oil and thins further debunks Peak Oil theory in the eyes of mainstream economists and politicians. I think we have to sit it out and tread water for the time being because that easy message is so simple and wished for – it’s like the mantra that Australia’s carbon emissions are so minuscule let’s not worry about it.

But….if global oil prices stay low for a long period it will definitely alleviate economic stress in dozens of oil importing economies around the world and I wonder if this may stave off the looming global recession for a period. I’m not au fait enough with economics to think that one through.

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