Falling oil prices

Question 1

Reasons for fall in the Oil prices :

1. The strong US dollar - Global commodity prices are usually dollars and fall when the US dollar is strong.
2. OPEC, cartel of oil producers is unwilling to stabilise the oil markets. Venezuela and Algeria have wanted to cut production to firm up prices but Saudi Arabia, UAE and other Gulf allies refuse to do so. The result is oversupply of oil ,placing downward pressure on crude all prices for the long term.
3. Oversupply of crude oil - Global oversupply is increasing oil stockpiles. The US commercial to do inventory is have also risen substantially, This shows that not only is the market power supplied but the supply is actually increasing.
4. Declining demand - The economies of Europe and developing countries are weakening and at the same time, the vehicles are becoming more efficient. China’s Devaluation of it’s currency suggests that its economy is worse off than expected. With China being the world’s largest oil importer this is a huge hit to global demand.
5. Iran nuclear deal - Well after the countries remove their sanctions of Iran community is fearing an even further increasing oversupply of oil.

Answer 1

Effects around the world :

1. The price fall has reduced the revenue of the Opec states by over 60 per cent. None have fully adapted to that loss of income. Most have assumed that the price change would be temporary and some have even borrowed to cover the shortfall of revenue against current spending — thereby storing up even more problems for the future.
2. Other oil exporters, such as Saudi Arabia and UAE have built up substantial foreign currency reserves; they can afford temporary falls in oil prices because they have substantial reserves. This is why Saudi Arabia has so far not responded by cutting output.

Question 2

3. Usually falling oil prices would be welcomed by oil importing countries. However, many are deeply fearful about prospects for the European and global economy.

Firstly, the fall in oil prices is largely a reflection of weak global demand. Continued low growth around the world, is holding back demand. Thus the falling price of oil is a reflection of weak global growth – rather than the harbinger of economic recovery.

Answer 2

4. Deflation nightmare. The biggest fear in Europe at the moment is the slide towards deflation and the fear of a ‘Japan-style’ lost decade.