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Nowadays, the situation in the oil market is the subject of the concerns for many countries, both, the importers and the exporters of oil. The decrease in oil prices may cause a world economic crisis. The purpose of this essay is to identify the reasons for this phenomenon and presuppose its effect on the development of global economy. In this research, I will use the data from the latest business news on the decrease in oil prices and its influence upon Middle East countries.
Today many of the world’s economic analysts and ordinary citizens are interested in the question – why oil price is decreasing? The problem is very urgent; after all, oil is a source of energy on which all modern human civilization is based: gasoline, kerosene, diesel fuel. Pricing policy in the oil industry is dictated by the supply and demand. Energy demand also depends on economic processes.
It increases in cold seasons in Northern countries and in hot weather in the regions using the air conditioning. The weather and geopolitical problems connected with the possibility of safe delivery may also influence the price. Manufacturers invest if they believe that the cost will remain high (Rubeis, 2015). Thus, the decrease of the costs may cause the lack of investments. OPEC’s decision forms expectations: if they abruptly stop the proposal, it may lead to a sharp turnabout in prices.
A Slump in Oil Prices. Reasons
The overall picture today is influenced by the following aspects: the decrease of the demand that is proportional to the decline of the prices, investment draught caused by the instability of the economy and the heightened interest in the alternative types of fuels. In addition, the instability in Iraq and Libya, major oil manufacturers did not influence their productivity in the industry. Market avoids geopolitical risks. Today, The USA occupies leading position in the international oil market. Middle East countries could even stop the production of oil, but the primary benefits would go to the competitive countries. Middle Eastern producers can easily survive even bottom oil prices as the cost price of the production of their oil is very low (Rubeis, 2015).
The Consequences of a Slump in Oil Prices
A decrease in oil prices influences the most vulnerable particles of the oil production and distribution process. They include American Hydraulic fracturing, fracking that actively borrow funds in anticipation of the continued tendency of high prices. Western companies with their high-cost projects that work in the expensive regions are also at risk. However, the countries, which regimes depend on the oil industry, are even at a more severe danger as their prosperity is influenced by the changes in oil prices.
Investors are concerned about the enormous oversupply in the market that complicates the immediate supply of “black gold” and replenishment of stocks worldwide. Usually, countries-importers of oil benefit from lower prices, and most of the exporting countries, on the contrary, suffer from the decrease in oil price. Nevertheless, even here there are nuances. The countries such as the USA, Norway and the Gulf states can protect themselves by using diversified economy and reserves of hard currency (Rubeis, 2015). However, other countries may be affected by low oil prices in such a way that they will be on the verge of default and political crisis.
Rubeis, M. (2015). Opportunities and challenges for the downstream oil sector in the Middle East. The National Business. Web.