In recent weeks the oil price has dropped substantially.
Is this a good thing for the world or is it not? It depends whether you are an oil producer or not and if so, whether you are in a position to find oil in your territory through hydraulic fracturing or not.
The oil price has lost more ground than it did during the 2008 financial crisis. With the oil producing countries voting earlier this month to let the market decide where the oil price will go, those producers who have high input costs, e.g. Nigeria and Iran amongst others, are becoming concerned about the sustainability of their oil industries.
Russia, the world’s largest oil producer needs the revenue from a strong oil price to keep its ailing economy going. Both Iran and Russia are struggling under US and EU sanctions and a sustained lower oil price could bring them to their knees.
Why has the oil price lost ground? The US has started to bring even larger amounts of oil onto the world market than before, due to the benefits of through hydraulic fracturing. This new technology enables miners to free up huge amounts of oil which were not previously available. This means that with the current Brent crude price at around US$64 per barrel, the average Opec member is forced to sell their oil at a discount of 33% to their cost price.
This situation could lead to large scale suffering amongst those oil producing nations who haven’t positioned themselves to participate in the benefits of the new technology. This could have dire socio-economic consequences for their people and potentially for their neighbours and trading partners.
For non-oil producing countries, this sudden fall in price means some relief as they go through the northern hemisphere winter and the festive season.
Ironically, if this developing situation is allowed to unfold without intervention by Opec, it could lead to a surge in the oil price as high cost producers fall away and the demand/supply situation becomes skewed.
In the interim, analysts watch and wait as they prepare for their holidays with more anxiety than they would like. By the last week in January after analysts have returned to their Reuters screens, we will have a better idea of where this situation is going to lead markets in 2015.
