Oil has been the world’s major commercial energy source for many decades and will maintain the same position in the coming years of the century as well. Hence, it is said to be the ‘Engine of the World Economy’. The increase in the production of oil has been running parallel with the massive economic advances. It has been estimated that industrial production grew by 50 times during the last century and the demand for oil has been rising at an unprecedented rate as well. Certainly, no one can underestimate the necessity of oil, despite the world transitioning to renewable sources of energy, and even after the oil crisis of 1990, people never imagined that another oil crisis can occur.
Being one of the most important and watched trends in the world economy, the graph of oil prices has always been unpredictable. With per-barrel prices rising from $25 to more than $160, the period from 1990-2008 witnessed increasing prices with a simultaneous increase in the demand from emerging economies like India and China. The prices were further driven up because of the production cuts by the Organization of Petroleum Exporting Countries (OPEC) in the Middle East.
But by the end of 2008, the prices plunged down to $53 per barrel due to a deep global recession. The price went up again to $100 and hovered between $100 and $125 till 2014, all thanks to the economic recovery. Following the rollercoaster ride, the prices went down in 2014 from a peak of $115 per barrel in June to less than $35 at the end of February 2016, a level where it started the Oil Crisis, again.
Emerging countries, who had this unquenchable thirst for oil in the first decade of the new millennium, lowered their demand for oil. Reduced demand for oil in countries with an immense population like China and India, who were once the only drivers of the price level, had significant negative ramifications on the prices. Other large economies like Russia and Brazil had witnessed a similar trajectory as that of China and India- a higher level of growth rate in the first decade, followed by a much slower growth after 2010. The same countries who were responsible for the huge demand for oil were being blamed for the oil crisis.
The efforts of countries like the U.S. and Canada to produce oil further aggravated the oil crisis. Private companies began extracting oil in North Dakota, the U.S. from shale formations, using a process called fracking, while Canada started extracting oil from the world’s third-largest crude oil reserve, Alberta’s oil sands. As a repercussion, the two countries significantly lowered their demand for oil by meeting them from their domestic sources. That further put heavy downward pressure on the world prices of oil.
Faced with a dilemma of letting the prices drop or giving up on market share by cutting the production of oil in an effort of reducing the world supply of oil, and hence pulling the price upwards, the Middle Eastern country of Saudi Arabia kept the production stable. It capitalized on offering a long-term benefit by not giving up on the market share because with all the largest reserves of oil in the world, Saudi could easily withstand an oil crisis by keeping the prices low for a long time without any significant threat to its economy. While Saudi could produce oil very cheaply, it was very difficult to produce oil from extraction methods like fracking at a competitive price for countries like the U.S. and Canada. Keeping its price low, Saudi ensured that these countries would abandon the production of oil due to negative profits.
The falling oil prices ultimately led to a major short-term drop in the investment in the oil industry, with $700 billion worth of global investment in production and exploration in 2014 dropping down to $550 billion in 2015. While it was a stimulus for the oil-importing countries with emerging economies to strengthen their fiscal resilience against capital outflows, this steep decline in the investment hindered the world economic growth at large.
Hence, it becomes imperative to understand and to be aware of the fact that despite the difference of effect in oil-importing and exporting countries, the fluctuations in the oil prices affect the global economy as a whole and with as unpredictable changes in the price level as there have been and will be, the only step we can take towards preventing any such oil crisis is to increase the long-term growth potential for the future while optimizing the use of resources in the present.
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Anirudh Arya, a not so typical kid from a very typical commerce college, can be found giggling at any and every hour of the day, especially when he most definitely shouldn’t. Currently trying to write whenever a small window of time presents itself, while constantly seeking his solace in solitude.