Nov 2, 2014

Oil prices have been falling for the past two months. The OPEC basket price has ranged between $80 and $90 a barrel compared to the $100-$115 range of the past four years. This recent drop happens at a time when oil-producing countries will draft their 2015 budget and try to adopt an average oil price for the upcoming year. The drop in oil prices is expected to adversely affect their budgets. Markets usually expect OPEC countries to cut production when prices fall. This time, however, OPEC is looking to US shale oil to contribute to price stability, because the increase in shale oil production has impacted the markets.

Oil prices have dropped for several reasons. They include increasing supplies while demand is on the decline due to the continuing economic crisis. Asian markets have been affected, especially China, where growth reached 7.31% during the third quarter. Although this rate is relatively high compared with those of other industrialized countries, it is China’s lowest in five years. Asian countries, China in particular, are major importers of crude oil. Most oil from the Gulf and some African countries, especially Nigeria, now goes to Asian countries after some African countries lost their US market as a result of increased production of shale oil, which is of light quality, like Nigerian oil. There is also the competition among oil producers to maintain their share in the Chinese market.

Also, reactions from major oil-producing countries in the Gulf contributed to the rapid price decline. Normally, these countries take the initiative and lower production when demand is low and raise it when demand is high. However, this time, major producing countries have decided to wait and not cut production. Gulf states usually take the first step and then ask the other OPEC countries to also cut production. Nevertheless, there is a clear difficulty in reaching consensus to cut production among OPEC countries. A consensus is required in accordance with OPEC regulations and is essential for the decision to be credible and effective.

Libya, for example, is about to increase production. The country is expected to refuse lowering production after production fell by about 200,000 barrels per day in recent months. Despite the political turmoil, Libya is trying to increase production from its current level of about 900,000 barrels per day.

Iran is also trying to lift the international embargo imposed on it, which reduced exports to less than 1 million barrels per day from about 2.5 million before the embargo. Iraq is trying to increase production to compensate for many years of low or halted production. It is in urgent need of reconstruction, as the country has to pay its contracts with international oil companies.